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Commercial loan terms can be
foreign to some, but it is important to understand these concepts and
terms. We have put together definitions for some of the most
important terms related to commercial loans, along with links to in-depth explanations and examples
of calculations that are commonly used.
Absorption Rate:
The rate at which rentable space is
filled. Gross absorption takes into account the total square feet
rented over a period of time with no negative consideration for space
vacated during that time. Net absorption does take
into account the space vacated during that time, and is the amount
occupied at the end of a period minus the amount occupied at the
beginning of that same period.
Amortization:
The repayment of principal using a
scheduled payment plan with payments that are more than the amount of
interest due. The amortization term dictates the length of time it
will take to pay off the debt in full, so a 20 year amortization would
pay off a debt in full after 20 years of making scheduled payments.
Anchor:
The tenant that is the main draw to a
commercial property, typically the largest tenant in a strip mall or
shopping center.
APR:
Annual percentage rate, this is the
actual cost of borrowing money. It can be higher than the actual
note rate as it takes into account the rate, fees, points and other
costs to give the actual cost of the money.
Cap Rate:
Capitalization rate, this is the rate at
which net operating income (NOI) is discounted to determine the value of
a property. The formula for finding cap rate is expressed as a
percentage - cap rate = NOI/FMV. For a detailed overview, read our
in-depth post -
what is cap rate.
Contract Rent:
Actual rent due as laid out in a lease or
rental agreement.
Cross Collateralization:
A blanket lien that encumbers multiple
properties.
Debt Service:
The money needed to make all interest and
principal payments, usually expressed as a monthly or annual figure.
DCR:
Debt coverage ration, the annual NOI of a
property divided by the annual cost of it's debt service. If this
number is below one, it means the property is not generating enough cash
flow to cover debt payments. Typically banks and institutions like
this number to be 1.15-1.25 or higher. For more on this, read our
post about
evaluating income on a commercial property.
Deferred Maintenance Account:
A reserve account that may be required to
provide for property maintenance.
EGI:
Effective gross income - the total income
from a property minus a pre-determined vacancy factor. This is
calculated before expenses and debt service costs. For more on
this, read our post about
evaluating income on a commercial property.
EGR:
Effective gross rent - the net rent after
adjustments for sales and lease expenses, tenant improvements and other
capital costs.
Estoppel Certificate:
A signed document that certifies
particular facts for a third party. An example would be a new
purchaser of a property obtaining estoppel certificates from the tenants
to verify their current rents.
Fixed costs:
Costs that are fixed regardless of the
level of sales or income. Debt service and taxes would be examples
of fixed costs.
FMV:
Fair market value, this is the price at
which a property would be reasonably expected to sell for on the open
market.
Gross Building Area:
The sum of all areas of a building, this
includes mezzanines, basements, etc. and is expressed in square footage.
Gross Leasable Area:
The portion of the gross building area
that is improved for tenants occupancy. This includes storage
areas, and is the total area that produces income from rents.
Gross Lease:
A lease where the landlord pays all
expenses such as taxes, insurance, maintenance, utilities, etc.
The tenant pays a flat amount in rent.
Hard Money Lenders:
Lenders specializing in non-institutional
loans. Typically money is derived from private or individual
investors. Known as hard money or private money interchangeably.
LTV:
Loan to value, this is the ratio of the
principal balance of a loan divided by the fair market value of the
property.
Market Rent:
The amount you would reasonably expect to
be able to rent a space for on the open market at the time of
evaluation.
NOI:
Net operating income - gross income minus
operating expenses (not including debt service). One of the more
important figures to have on a commercial property. For more on
this, read our post about
evaluating income on a commercial property.
Operating Expenses:
The actual costs associated with the
property, includes maintenance, repairs, utilities, management, taxes
and insurance.
Stabilized NOI:
Net operating income calculated using
projections that are based on other like property types in the area.
Stabilized Occupancy:
The optimum occupancy that a building is
likely to have after being marketed properly.
Triple Net Lease:
A lease in which the tenant pays all real
estate taxes, building insurance, maintenance plus rent. The
tenant is responsible for the cost of repairs, improvements and such.
In multi-tenant buildings, the tenant would pay their share based on
square footage or other agreed upon amount.
Vacancy Factor:
The amount of gross income that is
expected to be lost due to vacancies. Usually expressed as a
percentage of the total rentable square footage of a building.
Vacancy Rate:
The total amount of space vacant as
compared to the total rentable space expressed as a percentage.
Loan Type Quick Resource:
Apartment building financing
Residential hard money
Commercial hard money lending
Land Loans
Rehab Loans
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