St. Cloud Financial
~ Terms and Definitions ~
Many of the terms we use in Lending, specially Commercial Lending are not widely know outside of our industry, if you are unfamiliar with any term please feel free to purpose below. Should the terms you are looking for is not below, or the explanation does not make it completely clear please feel free to Contact Us for a better and more thorough description. If you feel that a term should be listed that is not described please Let Us Know.
Disclaimer: This is a modified glossary, used with permission, from a book by one of our Lending Specialists. This is provided for your information in understanding the jargon or specific phrases used in our industry - these cannot be taken as complete descriptions as many of the terms and topics defined have entire books (or more) written on them. For further information please feel free to contact us.
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- Adjusted Gross Income (AGI):
- Taxable Income, Income after adjustments, used to determine income tax owed.
- AGI (Adjusted Gross Income):
- Taxable Income, Income after adjustments, used to determine income tax owed.
- Appraisal:
- An informed and educated opinion of value based on thorough research.
- Ballooning Note:
- A loan in which a lump-sum payment is required, at a predetermined time, to satisfy the note.
- Basis Point:
- one one-hundredth (1/100) of one percent.
- Brownfield:
- A Commercial or Industrial Site that is underused as a result of Real or Perceived environmental contamination. Financing for a Brownfield can be challenging as site assessment and clean-up can be prohibitively expensive. There are Local and Federal Programs designed to assist in the Clean-up and Development of these properties.
- C-Corp (Sub-Chapter ‘C’ Corporation):
- The Standard Form of Incorporation; a separate legal and taxed entity with a perpetual life.
- CAM (Common Area Management):
- Charges to maintain the common areas (areas of public use) of a building or property.
- Cap Rate (Capitalization Rate):
- A measure of profitability used by Real Estate Investors to compare different investments. The Cap Rate equals Net Income divided by Value.
- Carve-Outs:
- Under a non-recourse loan, exceptions allowing the note holder to go beyond the pledged property for reparations in the case of fraud, misrepresentation, theft, misappropriation of funds, or other actions/inactions which violate the fiduciary responsibility of the borrower or borrowing entity to the Lender or Note Holder.
- Certified Operating Statement:
- An Operating Statement signed by the issuer (Property Owner or Property Manager) certifying that it is true and correct.
- Certified Profit and Loss:
- A Profit and Loss Statement signed by the issuer (Property Owner or Property Manager) certifying it is true and correct.
- CDC (Community Development Corporation)
- An affiliate of the SBA (usually a non-profit entity) responsible for underwriting/ administering the SBA 504 Loan in a specific area.
- CLTV (Cumulative Loan to Value)
- The total of all debt against a property divided by the Appraised value or the purchase price, whichever is lower. Typically used when there is seller carried financing or a second loan against the property.
- Community Development Corporation (CDC):
- An affiliate of the SBA (usually a non-profit entity) responsible for underwriting/ administering the SBA 504 Loan in a specific area.
- Complete Appraisal:
- An Appraisal containing all three approaches to Value (the Appraiser does not invoke the Departure Rule). A Complete Appraisal can be presented in any format. Complete Appraisals are generally required for Commercial Lending - As opposed to a Limited Appraisal.
- Conduit Lender:
- An issuer of Commercial Backed Mortgage Securities (CMBS) who underwrites specific Commercial Mortgages instead of just loan pools.
- Corporation:
- A separate legal entity created to perform a specific function.
- Cost Approach:
- One of the three approaches to value (Cost, Income, Market) used in an appraisal. The appraiser determines the Replacement Cost or Reproduction cost, subtracts depreciation, and adds the value of the land.
- Cumulative Loan to Value (CLTV):
- The total of all debt against a property divided by the Appraised value or the purchase price, whichever is lower. Typically used when there is seller carried financing or a second loan against the property.
- Debt Service Coverage Ratio (DSCR, DSC, or simply Debt-Service):
- A measurement to determine a property’s ability to service its own Debt. the simple formula is NOI divided by P&I - Also referred to as Debt Service Coverage, DSC, or simply Debt-Service
- Debt to Income Ratio (DTI):
- Usually reserved for use in residential lending, a measurement of an entity or individuals ability to cover financial obligations. Total Payments divided by total income.
- DSC (Debt Service Coverage)
- A measurement to determine a property’s ability to service its own Debt. the simple formula is NOI divided by P&I. - Also referred to as Debt Service Coverage Ratio, DSCR, or Simply Debt-Service.
- DTI (Debt to Income Ratio):
- Usually reserved for use in residential lending, a measurement of an entity or individuals ability to cover financial obligations. Total Payments divided by total income.
- Effective Gross Income (EGI):
- Total Potential Income minus a vacancy and collection allowance (Typically 5% of the Total Potential Income).
- Estoppel Letter (Estoppel Certificate):
- A Statement signed by Tenants of a commercial property attesting to the accuracy of the lease provided by the Landlord; The Letter also generally allows the Lender to begin collecting rent from the Tenants in the case of a default on the loan.
- Expense Ratio:
- Operating Expenses divided by Gross Income.
- Fannie Mae Form 71A or B (FNMA 71)
- A Form-based appraisal report for multi-tenant housing (5+ Units). Typically only acceptable for loans guaranteed or to be sold to Government or Quasi-Government organizations. The FNMA 71a is the most widely used of these forms; the FNMA 7b is only acceptable for Properties of 12 units and less and loan amounts below $750,000.
- Full Service Lease:
- A lease under which the Tenant makes a set, predetermined payment, the Landlord pays Real Estate Taxes, Maintenance and Property Insurance - Also Know as a Gross Lease (As opposed to a NNN Lease)
- Fully-Amortizing Loan (Self-Amortizing):
- A loan in which at the end of the term the debt has been repaid in full - Also Know as a Self Amortizing Loan. (As opposed to a Ballooning Note).
- Global Debt Service Coverage Ratio:
- Generally used for Owner-User or Income Assisted Loan evaluations, Business NOI plus any additional income divided by the proposed Principle and Interest Payments - Also known as Universal Debt Service Coverage Ratio.
- Gross Income:
- Income before any expenses. The total of all Rent Payments or Income before Expenses.
- Gross Lease:
- A lease under which the Tenant makes a set, predetermined payment, the Landlord pays Real Estate Taxes, Maintenance and Property Insurance - Also Know as a Full Service Lease (As opposed to a NNN Lease)
- Gross Potential Income (GPI):
- The rent that would be received if the property were fully rented at market rent.
- Gross Rent Multiplier (GRM):
- Typically only used by investors to quickly compare different investment opportunities. Unlike the CAP Rate, the GRM does not take Operating Expenses or Vacancy Allowance into consideration, therefore it is much less reliable (but quicker) than the CAP Rate. The GRM is equal to the Sales Price divided by the Potential Gross Income; conversely, an estimate of a property’s value could be determined by multiplying the prevailing GRM by the Gross Potential Income. This valuation tool is rarely used anymore.
- Income Approach:
- One of the three approaches to value (Cost, Income, Market) used in an appraisal. The Income Approach is reached by using the prevailing Cap Rate of properties with like utility in the same subject area.
- Letter of Explanation (LOE or LOX):
- A letter clarifying any derogatory or complex items.
- Limited Appraisal:
- An Appraisal in which the Appraiser invokes the Departure Rule, according to the USPAP (Uniform Standards of Professional Appraisal Practices), to not include some information, such as an Approach to Value, that the Appraiser deems unnecessary to understanding the particular Value of the Property being appraised. Limited Appraisals can be presented in any format. Note: generally speaking, Limited Appraisals are not acceptable for Commercial Lending Purposes. (As opposed to a Complete Appraisal).
- Limited Liability Company (LLC):
- A Separate Legal Entity formed for a specific purpose with a limited life that provides Protection from Personal Liability for its “Members;” income generated under the LLC passes through the company to the “Members” where tax is paid, thus avoiding “Double-Taxation.”
- Limited Liability Limited Partnership (LLLP):
- LLLPs are an extension of the Limited Partnership, they are an extremely rare form of Incorporation as many States do not recognize them; they are nearly exactly the same as an LLP except that there are Partners who are specifically designated as non-participants in business operations.
- Limited Liability Partnership (LLP):
- LLPs are an Entity that more closely resembles an LLC than a partnership. A LLP is incorporated and provides protection from personal liability. LLPs can only be formed in a limited number of States.
- Limited Partnership (LP):
- Is a Partnership where there are two classifications of partners: General Partners and Limited Partners; General Partners have personal liability and Limited Partners are essentially just investors and have no Personal Liability beyond their initial investments provided that they are passive in their participation (any active participation by a Limited Partner (with few exceptions) automatically cancels their limited liability protection).
- Liquid Assets:
- Cash and Near Cash Equivalents. Near Cash Equivalents include those items that can be readily converted to cash such as: Stocks and Bonds; Notes and stock in Closely Held Companies are not generally included as Liquid Assets.
- LLC (Limited Liability Company):
- A Separate Legal Entity formed for a specific purpose with a limited life that provides Protection from Personal Liability for its “Members;” income generated under the LLC passes through the company to the “Members” where tax is paid, thus avoiding “Double-Taxation.”
- LLLP (Limited Liability Limited Partnership):
- LLLPs are an extension of the Limited Partnership, they are an extremely rare form of Incorporation as many States do not recognize them; they are nearly exactly the same as an LLP except that there are Partners who are specifically designated as non-participants in business operations.
- LLP (Limited Liability Partnership):
- LLPs are an Entity that more closely resembles an LLC than a partnership. A LLP is incorporated and provides protection from personal liability. LLPs can only be formed in a limited number of States.
- Loan Fractionalization:
- Spreading the risk and sourcing of funds across several lending/investing organizations - Also known as Loan Syndication or Loan Participations.
- Loan Participation:
- Spreading the risk and sourcing of funds across several lending/investing organizations - Also known as Loan Syndication or Loan Fractionalization.
- Loan Syndication:
- Spreading the risk and sourcing of funds across several lending/investing organizations - Also known as Loan Participations or Loan Fractionalization.
- Loan to Value (LTV):
- The proposed Loan amount divided by the appraised value or the purchase price, whichever is lower.
- LOE (Letter of Explanation or LOX):
- A letter clarifying any derogatory or complex items.
- LOX (Letter of Explanation or LOE):
- A letter clarifying any derogatory or complex items.
- LP (Limited Partnership):
- Is a Partnership where there are two classifications of partners: General Partners and Limited Partners; General Partners have personal liability and Limited Partners are essentially just investors and have no Personal Liability beyond their initial investments provided that they are passive in their participation (any active participation by a Limited Partner (with few exceptions) automatically cancels their limited liability protection).
- LTV (Loan to Value):
- The proposed Loan amount divided by the appraised value or the purchase price, whichever is lower.
- MAI:
- The highest Designation for a Member of the America Institute of Real Estate Appraisers; typically the designation required by Commercial Lenders.
- Market Approach:
- One of the three approaches to value (Cost, Income, Market) used in an appraisal. The Market Approach is reached by comparing recent sales of like properties in the same subject area.
- Market Rent:
- The Rent that is paid by a tenant in a competitive market, free from inducement or obligation.
- Mortgage:
- An obligation to pay a debt or financing secured by Real Property (Real Estate).
- Narrative Appraisal:
- An Appraisal Report that is written out as though the Appraiser were having a conversation with the Reader. (As Opposed to a Form-Based Appraisal)
- Net Income Multiplier (NIM):
- A measure of profitability used by Real Estate Investors to compare different investments. Similar to the CAP rate (the inverse of the same equation), but much less commonly used. NIM equals Value divided by Net Income.
- Net Lease:
- A Lease under which terms the Tenant is responsible for Maintenance, Real Estate Taxes, and Property Insurance - Also known as a Triple Net (NNN) Lease (As opposed to a Gross Lease).
- NIM (Net Income Multiplier)
- A measure of profitability used by Real Estate Investors to compare different investments. Similar to the CAP rate (the inverse of the same equation), but much less commonly used. NIM equals Value divided by Net Income.
- Net Operating Income (NOI)
- Income after operating expenses, not including Income Tax, Finance charges (Interest), Depreciation, or Amortization. (Also known as EBITDA)
- Net Worth:
- Total Assets minus Total Liabilities.
- NNN Lease (Triple Net Lease, Net Lease):
- A Lease under which terms the Tenant is responsible for Maintenance, Real Estate Taxes, and Property Insurance (As opposed to a Gross or Full Service Lease).
- NOI (Net Operating Income)
- Income after operating expenses, not including Income Tax, Finance charges (Interest), Depreciation, or Amortization. (Also known as EBITDA)
- Non-Recourse:
- A loan where, in the case of default, the most that may be claimed by the note holder is the pledged property/assets.
- Owner-User (also referred to as Owner-Occupied (O/O)):
- The Property Owner, or the owner’s business interest, occupies the property. If the Property Owner occupies 51% of the usable space it is generally considered an Owner-User property, some Programs require less or more occupancy.
- P&I (Principle and Interest):
- the mortgage payment. Sometimes a prorated amount of Real Estate Taxes and Insurance will be included (escrowed), however, this is more commonly seen in residential Lending.
- Partnership:
- An agreement between two or more individuals to cooperate in a business arrangement. This is a business arrangement between two or more individuals in a fashion similar to a Sole-Proprietorship, the arrangement is not incorporated - there is no protection of personal assets and the actions of one partner binds all.
- Phase One Environmental (Phase 1):
- An initial, Qualitative, Environmental report, more detailed than a Trans-Screen. This report typically includes: a Public Record search, Visual Site Inspection, and Interviews with people familiar with the property (past and/or present); this report may include some minor samplings.
- Phase Two Environmental (Phase 2):
- A Quantitative Environmental Investigation and Report. A Phase 2 is an in depth investigation, including Lab Testing and Reports, into a concern or concerns raised in a Transcreen or Phase 1 Study.
- Phase Three Environmental (Phase 3):
- A Detailed Site Clean-up Plan addressing all known Environmental concerns related to a specific property.
- PIP Report (Product Improvement Plan):
- A thorough report issued by the Franchiser stating improvements that need to be implemented for the franchisee to maintain their charter.
- Point:
- One percent of the loan amount.
- Potential Income:
- The Gross Income generated by a property if it were 100% occupied.
- Pre-Lim Title:
- A statement of intent to provide title insurance. A Title Binder will indicate any defects affecting the title - Also referred to as a Title Binder.
- QA Report (Quality Assurance Report):
- Annual or Semi-Annual Report provided to Franchisees by the Franchiser regarding the current state of the individual Franchise (these reports may occur at wider intervals, if at all, depending on the franchise).
- Real Estate Investment Trust (REIT):
- A Mutual Fund whose tenant is the investment in Real Estate, either direct ownership (most common), through mortgage notes (written or purchased), or through Real Estate Bond Securities.
- Recourse:
- The ability, and to which degree, of the note holder to seek reparations beyond the pledged asset (as opposed to Non-Recourse).
- REIT (Real Estate Investment Trust):
- A Mutual Fund whose tenant is the investment in Real Estate, either direct ownership (most common), through mortgage notes (written or purchased), or through Real Estate Bond Securities.
- REO
- Real Estate Owned.
- Restricted Appraisal:
- An Appraisal containing MINIMAL Information—Generally, only used for Client seeking very specific information, such as only one approach to value of a Particular Property. Note: Restricted Appraisals are generally NOT acceptable in Commercial Lending (As opposed to a Self-Contained Appraisal or a Summary Appraisal)
- S-Corp (Sub-Chapter ‘S’ Corporation)
- A corporation that meets the requirements of and is taxed according to Sub-Chapter “S” of the Federal Tax Laws; essentially the same as a Sub-Chapter ‘C’ Corporation except that profits pass through to the stockholders who pay tax, thus avoiding the “Double-Taxation” of Sub-Chapter ‘C’ Corporation (C-Corp).
- SBA (Small Business Administration):
- A government organization whose tenant is to assist small businesses in the United States, including preparation, start-up, organization, finance, and so-forth.
- Schedule of Real Estate Owned (SREO):
- A list of Real Estate Owned by an individual or Entity, and pertinent information relating to each. This is typically included in the Personal Financial Statement but lenders may require a greater degree of detail.
- Self Amortizing Loan
- A loan in which at the end of the term the debt has been repaid in full - Also Know as a Self Amortizing Loan - Also known as a Fully-Amortizing loan. (As opposed to a Ballooning Note).
- Self-Contained Appraisal:
- The Appraisal format providing the most detailed information - Extensively detailed, written so that the Opinion of Value can fully be understood by someone unfamiliar with the area and/or Property Type. As opposed to either a Summary or a Limited Appraisal.
- Small Business Administration (SBA):
- A government organization whose tenant is to assist small businesses in the United States, including preparation, start-up, organization, finance, and so-forth.
- SREO (Schedule of Real Estate Owned):
- A list of Real Estate Owned by an individual or Entity, and pertinent information relating to each. This is typically included in the Personal Financial Statement but lenders may require a greater degree of detail.
- Standard Carve-Outs:
- Under a non-recourse loan, exceptions allowing the note holder to go beyond the pledged property for reparations in the case of fraud, misrepresentation, theft, misappropriation of funds, or other actions/inactions which violate the fiduciary responsibility of the borrower or borrowing entity to the Lender or Note Holder.
- STAR Report:
- For Hospitality Information/ Lending (created by Smith Travel Research); Gives the condition of the Local Market and Compares like Hotels/ Motels to provide an indication of a particular Property's Market Placement.
- Sub-Chapter ‘C’ Corporation (C-Corp):
- The Standard Form of Incorporation; a separate legal and taxed entity with a perpetual life.
- Sub-Chapter ‘S’ Corporation (S-Corp):
- A corporation that meets the requirements of and is taxed according to Sub-Chapter “S” of the Federal Tax Laws; essentially the same as a Sub-Chapter ‘C’ Corporation except that profits pass through to the stockholders who pay tax, thus avoiding the “Double-Taxation” of Sub-Chapter ‘C’ Corporation (C-Corp).
- Summary Appraisal:
- An Appraisal Report providing moderately detailed information—Written for an audience familiar with the Property Type and General Area but still including all the approaches to value. As opposed to a Self-Contained Appraisal (more detailed) or a Restricted Appraisal (less detailed).
- Title Binder (Pre-Lim Title):
- A statement of intent to provide title insurance. A Title Binder will indicate any defects affecting the title.
- Title Insurance:
- Protects the insured (at a minimum the Lender) from undisclosed Liens, Encumbrances, Defects of Title, undisclosed Access Rights, and some Mechanics Liens. When Lender's talk about Title insurance they are typically referring to Lender's Insurance, a separate policy is available to the property owner, please discuss to the availability of Owner's Policies with the title company.
- Transaction Screen (Trans-Screen):
- The lightest initial Qualitative Environmental investigation. This report typically includes: a Public Record search, Visual Site Inspection, and Interviews with people familiar with the property (past and/or present).
- Trans-Screen (Transaction Screening):
- The lightest initial Qualitative Environmental investigation. This report typically includes: a Public Record search, Visual Site Inspection, and Interviews with people familiar with the property (past and/or present).
- Tri-Merge Credit Report:
- A Credit Report compiled from the Results of the three Top Factual Credit Reporting Agencies, Equifax, Experian, and Trans-Union.
- Triple Net Lease (NNN):
- A Lease under which terms the Tenant is responsible for Maintenance, Real Estate Taxes, and Property Insurance (As opposed to a Gross or Full Service Lease).
- Underwriting:
- The process of Due Diligence on the part of the Lender, verifying items in a loan package, weighing them against established lending criteria and approving (or disapproving) a loan scenario or recommending its approval to a signature power.
- Universal Debt Service Coverage Ratio:
- Generally used for Owner-User or Income Assisted Loan evaluations, Business NOI plus any additional income divided by the proposed Principle and Interest Payments - Also known as Global Debt Service Coverage Ratio.
- Yield Spread Premium (YSP):
- A common compensation method for Mortgage Brokers, this is a lump-some payment based on the incremental increase in note rate. Theoretically, but rarely in practice, this would be the discounted cash flow of the incremental increase for the expected life of the loan.
- YSP (Yield Spread Premium):
- A common compensation method for Mortgage Brokers, this is a lump-some payment based on the incremental increase in note rate. Theoretically, but rarely in practice, this would be the discounted cash flow of the incremental increase for the expected life of the loan.
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Disclaimer: This is a modified glossary, used with permission, from a book by one of our Lending Specialists. This is provided for your information in understanding the jargon or specific phrases used in our industry - these cannot be taken as complete descriptions as many of the terms and topics defined have entire books (or more) written on them. For further information please feel free to contact us.