Knowledge Base

A mortgage with an interest rate that changes periodically, according to an index that is selected when the mortgage is issued. The initial interest rate is lower than that of fixed rate mortgages but monthly payments can go up and down as the rate is adjusted.

A payment plan which enables the borrower to reduce his debt gradually through monthly periodic installments of principal and interest.

A written report by an appraiser containing an unbiased opinion as to the value of a property and the reasoning leading to this opinion. Factual data supporting this value will be set forth.

The transfer of ownership rights, or interests in property, as in a mortgage, lease, or deed of trust.

The act of taking over the previous borrower’s obligation of a mortgage note.

A form of mortgage with a promissory note that calls for the minimum payment of principal and the payment of interest at regular intervals, usually for 10 years or less. This type of note requires a substantial final payment, which represents the entire remaining principal.

A mortgage that covers more than one property owned by the mortgagor.

An action where the borrower pays a fee at closing to reduce the interest rate.

The Cap Rate, used in commercial real estate financing and sales transactions, is used to determine debt service coverage for a loan or potential return on investment. Appraisers use an estimated Cap Rate based on market conditions to determine the value of a property.

The cap rate is found by dividing the income generated from the use of the property by the value of the property.

A loan whose proceeds exceed the outstanding principal balance of the existing liens plus reasonable and customary closing costs, and therefore the borrower is owed money at the closing.

Debt Service refers to the amount of required principal and interest payments on a loan.

DSCR is the amount of cash flow available to meet annual principal and interest payments on real estate loans.

DSCR is calculated by adding Net Operating Income by the Debt Service.

Defeasance is a type of Prepayment Penalty on commercial mortgage loans whereby a prepayment is substituted by some type of collateral, such as treasury bonds.

Condition that when it exists, causes the property’s condition to be inferior to that of typical properties in the market. Cost to cure represents the repairs necessary to put a property back into good condition to avoid physical depreciation and loss of value to the property.

A report generated by qualified environmental firms to determine potential environmental hazards in a building’s region or within the building itself.

The risk of loss of collateral value and of lender liability due to the presence of hazardous materials, such as PCB’s or leaking underground storage tanks on a property.

An appraisal term for the price which a property would bring in a competitive market, given a willing seller and willing buyer, each having a reasonable knowledge of all pertinent facts, with neither being under any compulsion to buy or sell.

A mortgage having a rate of interest that remains the same for the life of the mortgage. As payments are applied to the loan, the interest payment decreases and the amount applied to the principal increases.

A light industrial property type is a warehouse where use is limited to management tasks for the storage and distribution of goods or clean manufacturing. Office build out is typically no more than 15% of total space. Building size is limited to <25,000 square feet with no heavy manufacturing or specified industrial processes. Examples of eligible types are cabinet making, home service industries, assembly processes, etc.

LTV is the relationship between a property’s value and the amount of loans against it. Lenders use LTV as a tool to assess the risk of a loan before approving a mortgage.

LTV is calculated by dividing the loan amount by the sales price or the appraised property value.

Refers to how easily a property will sell in a normal marketing period. This is a necessary consideration should a borrower default on a loan.

Development that allows for more than one type of use in a building or set of buildings

• Can be combination of residential, commercial, industrial, office, institutional, or other land uses.
• Common types include a ground floor retail, restaurant, or office space with rental or owner-occupied apartment upstairs.

Structures which contain five or more dwelling units and may possess common areas and facilities.

The amount of income remaining after deducting operating expenses and principal and interest payments from the gross rents.

Buildings designed for general business use without a retail component. Offices may be either single user or multi-tenant.

The recurring expenditures necessary to maintain the real property and continue production of the effective gross income (e.g. taxes, salaries, insurance, maintenance, management, etc).

A property where the borrower’s business property resides or where the property is leased to a related entity and the majority of the underwriting qualifying income comes from the business owned by the borrower.

Typically found in commercial mortgage loans, prepayment penalties provide protection for the lender against loss of expected income if a loan is paid off before its maturity date. Prepayment penalties can be paid by a fee or by points to the lender and are calculated based on a percentage of the remaining balance on the loan at the time of prepayment.

A recurring mortgage payment comprised of the interest charged by the lender and a portion of the principal balance. The actual amount depends on the loan’s amortization schedule.

A financial statement provided by the applicant which reports the income and expenses for a business during a certain time period. This statement would be required if the applicants are self-employed or for the subject property.

A Rent Roll is used to determine the monthly income from leases of income producing rental properties and is useful in determining the value and stability of a property. A Rent Roll is a register of rents that includes the names of tenants, amount of rent due and the start and end date of a lease.

A warehouse subdivided into a mix of smaller units to be rented for the storage of personal items or business inventory. The individual units must be demised traditionally and not merely by chain-link fence. No outside storage income is to be included.

A business which is owned by a single individual as a self-employed person. He/She can have any number of employees, but he/she is not considered to be an employee of the business.

The period of time between the commencement date and termination date of a note, mortgage, legal document, or other contract.

Tier 1 includes multifamily and mixed-use properties:

Multifamily – Must have 5 or more residential units

Mixed-Use – May have a Tier 2 commercial component but the residential space must generate more than 50% of the gross income

Tier 2 properties includes all other property types not classified under the Tier 1 definition:

Mixed-Use – Property with more than 50% of the gross rental income generated by the commercial space. Mixed-Use property tier may increase depending on the use of the commercial space.

Mixed-Use Automotive – May only be considered Tier 2 as a component of a multi-tenant property with less than 25% of the property’s gross income derived from the auto-related tenant(s)

Office (may include a medical office with no surgical procedures component)

Light Industrial (no heavy/dirty manufacturing)

Retail/Wholesale Store/Strip Center

Mobile Home Parks (no park-owned trailers or their income must be included in value)

Daycare Centers

Warehouse/Self-Storage Facility (traditional self-storage only with no credit to outside storage income)

Standalone Automotive

Parcels of land zoned and developed for use by occupants of mobile homes

• Can sometimes include amenities such as pools and laundry facilities.
• Should be fairly well-maintained and provide on-site water and waste management services.

Can be a single, free-standing structure or a multi-tenant strip center that may or may not include anchor stores

• Typically includes a mix of small inline stores that focus on conveniences like nail and hair salons, bank branches, dry cleaners, liquor stores, and sandwich shops
• Can be owner-occupied or bought as an investment
• Must be occupied and stabilized

Primarily used for the storage or distribution of goods and materials

• Can also be used for manufacturing, assembly, and research and development
• Characterized by a small-sized facility (usually less than 25,000 square feet)
• May include office space
• Cold storage and transit warehouses with truck terminals are included in this category

Includes tint shops, tire stores, and mechanic property types

• Can be a stand-alone facility or located in a retail center or warehouse

Used for early childhood, handicapped, and adult or senior care or development centers

• Include kindergartens, nurseries, or children’s preschools
• Contain light kitchen facilities, activity rooms, and multiple restrooms
• Properties are more residential in style than schools

Constructed for the purpose of preparation and the sale of food and/or beverages

• Includes cafeterias, bars, and taverns where the design is of restaurant type
• Adult entertainment is not considered eligible in this category

Consists of establishments that may or may not have an alcohol license and may serve some light food options

• Adult entertainment is not considered eligible in this category