Apartment Lending Glossary
Below is a glossary of financing terms that will help you become familiar with Multifamly lending. Simply click a letter and it will take you straight to that alphabetically listed section.
A 2 dimensional measure of land equaling 160 square rods, 10 square chains, 4,840 square yards, or 43,560 square feet.
Adjustable Rate Mortgage
A mortgage with an interest rate that is subject to change periodically, usually upon certain mortgage anniversary dates is known as an Adjustable Rate Mortgage. The interest rate is a formula that includes an index rate, which is determined and documented when you close the loan, plus a spread to cover the lenders costs, risk premium and profit. The index rate is always a well known, public, transparent interest rate like the 10 Year US Treasuries or the 3-Month London Interbank Offered Rate or LIBOR. The initial interest rate is lower with an Adjustable Rate Mortgage than is the interest rate for an equivalent Fixed Rate Mortgage, because the lender is exposed to interest rate risk only until the next adjustment date. Mortgage payments can increase or decrease as the interest rate is adjusted.
The period of time between changes in the interest rate for an adjustable-rate mortgage. Typical adjustment intervals are 6 months and one year.
In appraisal, the non-monetary benefits derived from property ownership.
The period or length of time over which the principal portion of a mortgage loan is scheduled to be paid down through periodic payments.
Refers to a piece of commercial real estate property, which will serve as the main tenant in a shopping center.
A long term, credit worthy tenant. The presence of one or more “anchors” enhances the value and the ability to obtain financing for a shopping center.
An estimate of the value of a property, made by a qualified professional called an appraiser.
Type of senior housing that is typified by independent living and limited assistance to its renters.
A mortgage loan which can be transferred to another person without a change in the terms of the loan.
Average annual occupancy
Percentage of currently rented units in a building, city, neighborhood or complex.
Average daily rate
One large payment for the remaining principal balance of a mortgage, due at a time specified in the contract.
Borrowing entity type
The legal form under which property is owned.
Bridge/short term loan
A short-term or interim loan for borrowers who need more time to find permanent financing.
A document, issued by government regulatory authority that allows a builder to construct or modify a structure.
The maximum, which an adjustable-rate mortgage may increase, regardless of index changes. An interest rate cap limits the amount the interest can change, while a payment cap limits the increase in monthly payment to a specific dollar amount.
Line items on a profit and loss statement that would not be expensed on an annual basis. This category would include replacement of major building systems, such as roofs, etc.
The ratio of the first year NOI to the asking price (NOI/asking price). Not the rate of return.
The definition used for the inclusion of recourse in loan documents for fraud and misrepresentation.
When the principal amount of a new mortgage involved in refinancing is greater than the principal amount outstanding of the existing mortgage being refinanced, and all or a portion of the equity is converted to cash.
The distance between the building’s floor and effective storage ceiling.
An industrial and self-storage term that represents temperature controlled commercial space.
The last step in the transaction where the legal transfer of ownership goes the buyer and the seller receives their funds legally.
The costs and fees associated with the official change in ownership of the property and with obtaining the mortgage, that is assessed at the closing.
CMBS (Commercial Mortgage Backed Security)
A bond or other financial obligation secured by a pool of mortgage loans.
COFI (Cost of Funds Index)
Index used to determine interest rate changes for adjustable rate mortgages. It is based on the cost of funds of the 11th district of the federal home loan bank.
Development and transitional land acquired for investment use: land for lots, site selection and assemblage of parcels.
Comparative market analysis
An estimate of the value of a property based on an analysis of sales of properties with similar characteristics.
The financial intermediary that sponsors the conduit between the lender(s) originating loans and the ultimate investor. The conduit makes or purchases loans from third party correspondents under standardized terms, underwriting and documents and then, when sufficient volume has been obtained, pools the loans for sale to investors in the cmbs market.
A type of senior housing that typified by a central eating facility, smaller rooms, and a higher level of care for its tenants.
Constant maturity treasure (CMT)
An index based on the u.s. Treasury that is used in the pricing of debt for banks.
A short term loan to pay for the construction of commercial buildings. These loans typically provide periodic disbursements to the builder as each stage of the building is completed. When construction is completed a take-out or permanent loan is used to pay off the construction loan.
A condition of an agreement that must be satisfied before the agreement can be completed.
The coupon on U.S. Government securities expressed as an annual percentage of face value, is the interest rate the U.S. Government promises to pay to the holder on an ongoing basis until maturity.
Credit Facility, in this case, is a term used by Fannie Mae. In Fannie Mae vernacular, a Credit Facility or Facility utilizes a single pool of cross-collateralized and cross-defaulted mortgages as collateral for intermediate and long term financing, as well as short term borrowing, at a competitive price.
The periodic payments (principal and interest) made on a loan.
Debt Service Coverage Ratio (or debt coverage ratio)
Measures a mortgaged property’s ability to cover monthly payments defined as the ratio of net operating income over the periodic payments (principal and interest) made on a loan. A DSCR of less than 1.0 means that there is insufficient cash flow generated by the property to cover required debt payments.
A clause in a mortgage that gives the borrower the right to prepay a commercial mortgage by purchasing us treasuries in an escrow account to pay off ongoing debt service.
The number of buildings or persons occupying a certain area of land, generally an acre.
Allocating the cost of an asset over its estimated useful life.
A charge against the reproduction cost (new) of an asset for the estimated wear and obsolescence. Depreciation may be physical, functional or environmental.
The rate of interest that the federal reserve charges member banks for loans.
The legal definition: a measure of prudence, activity or assiduity, as is properly to be expected from, and ordinarily exercised by, a reasonable and prudent person under the particular circumstances. In CMBS due diligence is the foundation of the process because of the reliance securities investors must place on the specific expertise of the professionals involved in the transaction.
Delegated Underwriting and Servicing (DUS®)
Fannie Mae’s principal line for purchasing individual multifamily loans. Fannie Mae delegates the processing and approval of the loans to DUS Lenders, who retain a percentage of the risk.
The Delegated Underwriting and Servicing Commitment is a contractual agreement between Fannie Mae and the lender in which Fannie Mae agrees to buy a mortgage at a future date at a specific price. The lender in turn agrees to deliver a mortgage that meets Fannie Mae’s requirements and other terms of the commitment.
DUS/Mortgage-Backed Securities (DUS/MBS)
Fannie Mae’s Multifamily mortgage-backed securities offer highly competitive yields, liquidity, and quality. Offering prepayment protection, they suit diverse investment strategies. Properties must be income-producing multifamily rental or cooperative, with a minimum of five units.
Typical DUS properties range from premium to modest, large to small, garden to high-rise. Nearly 80 percent of the mortgages purchased under our DUS product line are backed by properties over 10 years old, and 57 percent by properties over 20 years old. Nearly all of our mortgages are backed by properties that are affordable to families making the median income of the area.
Effective gross income
Gross income of a building if fully rented, less an allowance for estimated vacancies.
Report generated by an architect or engineer describing the current physical condition of the property and its major building systems, i.e., hvac, parking lot, roof, etc. The report also determines an amount for calculating replacement reserves, if needed.
A right to benefits specified especially by law or contract.
Report generated by qualified environmental firms to determine potential environmental hazards in a building’s region or within the building itself.
Risk of loss of collateral value and of lender liability due to the presence of hazardous materials, such as asbestos, pcb’s, radon or leaking underground storage tanks (lusts) on a property.
The difference between the fair market value and current indebtedness, also referred to as “owner’s interest.”
A loan for an equity position which represents an ownership position in a property or a loan for the participation in the profits of the commercial property
1. A special account set up by the lender in which money is held to pay for taxes and insurance. 2. A third party who carries out the instructions of both the buyer and seller to handle the paperwork at the settlement.
Fair Market Value
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.
Federal Funds (Fed Funds)
Fed funds is the interest rate charged by those banks with excess reserves on hand (reserves over and above the minimum required by the federal reserve) to those banks in need of overnight loans to meet reserve requirements. Since it is set daily, the federal funds rate is the most sensitive indicator of the direction of interest rates.
A mortgage with an interest rate that remains constant for the life of the loan.
Personal property which for some reason, such as the manner of attachment, has become realty. Such property is also referred to as chattel real.
The process by which a lender takes back a property on which the mortgage has defaulted. A service may take over a property from a borrower on behalf of a lender. A property usually goes into the process of foreclosure if payments are more than 90 days past due.
Forward Commitment Product
This product serves both targeted affordable housing and new construction of market-rate apartments. It provides the borrower with a locked-in rate for the permanent loan in advance of the property being made available to tenants, and allows developers to know what their debt service will be in advance of construction.
The concrete slab beneath the property, which holds the property in place.
Includes all of business assets and equipment, may include property or land.
In a partnership, a partner whose liability is not limited. All partners in an ordinary partnership are general partners. A limited partnership must have at least one general partner.
Good faith deposit
A deposit made by a purchaser of real estate to evidence an honesty.
Rents that are partly paid by the government (e.g. Section 8 residential subsidies).
Housing Revenue Bond
An economic indicator, usually a published interest rate.
The sum paid for borrowing money, which pays the lender’s costs of doing business.
The sum charged for borrowing money, expressed as a percentage
Interest rate cap
Joint Fannie Mae / Lender Workout
A workout negotiated between the borrower, the lender, and Fannie Mae and approved by Fannie Mae.
An agreement between the commercial property owner and the lender that assigns lease payments directly to the lender.
Gross, Triple Net (NNN), Net Net (NN), Hybrid, etc.
The cost of improvements for a leased property, often paid by the tenant.
An amount earned by a real estate broker or leasing agent for his services.
Tenant in a building.
LIBOR or London Interbank Offered Rate
LIBOR is a benchmark rate that some of the world’s leading banks charge each other for short-term loans. LIBOR is an acronym which stands for London Interbank Offered Rate and serves as the first step to calculating interest rates on various loans throughout the world. LIBOR is quoted in five currencies, the US dollar, Euro, pound sterling, Japanese yen and Swiss franc, for seven different maturities, overnight, one week, and 1, 2, 3, 6 and 12 months. There are a total of 35 different LIBOR rates each business day. The most commonly quoted LIBOR rate is the three-month US dollar rate, making it, at least informally, the current LIBOR rate.
The primary function of LIBOR is to serve as the benchmark rate for debt instruments, including government and corporate bonds, mortgage loans and derivatives such as currency and interest swaps, among many other financial products.
Limited Liability Company (LLC)
The restriction of one’s potential losses to the amount invested. The absence of personal liability. Provided to stockholders in a corporation and limited partners of a limited partnership.
One in which there is at least one partner who is passive and limits liability to the amount invested, and at least one partner whose liability extends beyond monetary investment.
Loan Processing Fee
The fee charged by a lender, to prepare all the documents associated with your mortgage.
Loan–To–Value Ratio (LTV)
The ratio between the principal amount of the mortgage balance, at origination or thereafter, to the current value of the underlying real estate collateral. The ratio is commonly expressed to a potential borrower as the percentage of value a lending institution is willing to finance. The ratio is dynamic, and varies by lending institution, property type, geographic location, property size, etc.
A period of time after loan origination during which a borrower cannot prepay the mortgage loan.
Total square footage of the land.
Low Income Housing Tax Credits (LIHTC)
As the largest investor in LIHTC, Fannie Mae increases the availability of funds for affordable multifamily housing by making equity investments in qualified properties. Legislated into existence in the 1986 Tax Reform Act, low income housing tax credits serve as incentives for corporations to invest in low-income rental housing. Fannie Mae serves previously under-served markets characterized by very low incomes, HOPE VI public housing replacements, and persons with special needs.
The agreed-upon compensation paid to a property management company for managing a real estate project. The fee is usually based on a percentage of effective gross income.
The amount that is added to an index rate to determine the total interest rate.
Expenses accrued to market commercial properties.
Market Rate Forwards
Fannie Mae finances new construction of multifamily properties with affordable rents for moderate-income families without rent restrictions. The Market Rate Forward product is targeted for financing construction of moderately priced new rental units.
Monthly Average Treasury
1. The termination period of a note (e.g., a 25-year mortgage has maturity of 25 years.) 2. In sales law, the date a note becomes due.
Max Contiguous SF
The amount of available connected square feet.
Max Lease Rate
The highest asking lease rate.
A loan secured by a mortgage or trust deed, in which the lien is junior, or secondary, to another mortgage or trust deed.
A clause included in a lease of residential property, which allows the tenant to terminate the lease without penalty if and when the tenant is transferred to another location.
Min Lease Rate
The lowest lease rate available.
Min. Divisible SF
The smallest amount of available square feet.
A real estate development that contains two or more different uses all intended to be harmonious and complementary. An example would include a high-rise building with retail shops on the first two floors, office space on floors three through ten, apartments on the next ten floors, and a restaurant on the top floor.
Mobile Home Park
A parcel of land zoned and developed for use by occupants of mobile homes.
The market for short-term debt instruments.
Multifamily Affordable Housing
Properties with rent and occupancy restrictions which meet or exceed the following requirements: 1) at least 20 percent of all units have restricted rents affordable to households earning no more than 50 percent of area median income as adjusted for family size; or 2) at least 40 percent of all units have restricted rents affordable to households earning no more than 60 percent of area median income as adjusted for family size.
A residential property composed of five or more dwelling units and in which no more than 20 percent of the net rentable area is rented to, or to be rented to non-residential tenants.
Multi–Family Property Class A
Properties are above average in terms of design, construction and finish; command the highest rental rates; have a superior location, in terms of desirability and/or accessibility; generally are professionally managed by national or large regional management companies.
Multi–Family Property Class B
Properties frequently do not possess design and finish reflective of current standards and preferences; construction is adequate; command average rental rates; generally are well maintained by national or regional management companies; unit sizes are usually larger than current standards.
Multi–Family Property Class C
Properties provide functional housing; exhibit some level of deferred maintenance; command below average rental rates; usually located in less desirable areas; generally managed by smaller, local property management companies; tenants provide a less stable income stream to property owners than Class A and B tenants.
Neighborhood Center (including Community Center)
A shopping center anchored by a supermarket and/or drugstore, that provides convenience goods and services to a neighborhood. It is usually between 30,000 – 100,000 square feet, and draws from a one to three mile radius.
Net Effective Rent
Rental rate adjusted for lease concessions.
Net Operating Income (NOI)
Total income less operating expenses, adjustments, etc., but before mortgage payments, tenant improvements and leasing commissions.
A mortgage or deed of trust securing a note without recourse allows the lender to look only to the security (property) for repayment in the event of default, and not personally to the borrower. A loan not allowing for a deficiency judgment. The lender’s only recourse in the event of default is the security (property) and the borrower is not personally liable.
Notice Of Default (NOD)
To initiate a non-judicial foreclosure proceeding involving a public sale of the real property securing the deed of trust. The trustee under the deed of trust records a Notice of Default and Election to Sell (“NOD”) the real property collateral in the public records.
Periodic expenses necessary to the operation and maintenance of an enterprise (e.g., taxes, salaries, insurance, maintenance). Often used as a basis for rent increases.
An assessment and report prepared by a professional environmental consultant who reviews the property – both land and improvements – to ascertain the presence or potential presence of environmental hazards at the property, such as underground water contamination, PCB’s, abandoned disposal of paints and other chemicals, asbestos and a wide range of other potentially damaging materials. This Environmental Site Assessment (ESA) provides a review and makes a recommendation as to whether further investigation is warranted (a Phase II Environmental Site Assessment). This latter report would confirm or disavow the presence of an environmental hazard and, should one be found, will recommend additional review and/or mitigation efforts that should be undertaken.
Points (Loan Discount Points)
Each point is equal to 1% of the total amount of a mortgage.
Potential Gross Rent
Gross income of a building if fully rented.
To obtain lease commitments in a building or complex prior to its being available for occupancy.
Fees paid by borrowers for the privilege of retiring a loan early.
The rate at which banks lend to their most credit-worthy customers.
1. The amount of debt, not including interest, left on a loan. 2. The face amount of the mortgage.
Pro Forma (from Latin pro forma, “according to form”)
Financial statements showing what is expected to occur.
Person in broker’s employ who is responsible for updating and renewing a property listing, if it is different from the contact name.
A stratification of property type that is indicative of the property’s ability to
command rental rates.
A property description that provides additional information to the lender.
Rehabilitation Product Line Initiative
A Fannie Mae product which offers permanent financing for multifamily properties in need of moderate or substantial rehabilitation. The Rehabilitation Financing product is available across all multifamily financing product lines, provided the transactions have 100 percent of the units affordable to low- and moderate-income tenants. The initiative provides for rehabilitation dollars in an amount not to exceed $15,000 per unit (minimum $3,000 per unit).
The Delegated Underwriting and Servicing Reserve Agreement. This is a contractual agreement among Fannie Mae, the custodian, and the lender, in which the lender agrees to establish a lender reserve and to pledge collateral to Fannie Mae to secure the lender’s obligations under Delegated Underwriting and Servicing. The Reserve Agreement also gives Fannie Mae contractual rights in the pledged reserve and provides Fannie Mae certain contract remedies to enforce the reserve requirements.
Whether the building is served by railroad.
An index used to adjust the interest rate of an adjustable mortgage loan (e.g., the change in U.S. Treasury securities (T-Bills) with 1-year maturity. The weekly average yield on said securities, adjusted to a constant maturity of 1 year, which is the result of weekly sales, may be obtained weekly from the Federal Reserve Statistical Release H.15 (519). This change in interest rates is the “index” for the change in a specific Adjustable Mortgage Loan).
To replace an old loan(s) with a new loan(s).
A list of tenants leasing a property, which details terms of lease, area leased, and the amount of rent being paid.
A lease agreement in which the rent increases every period for a fixed amount of time or for the life of the lease.
Rentable Square Feet (same as net leasable area)
In a building or project, floor space that may be rented to tenants. The area upon which rental payments are based. Generally excludes common areas and space devoted to the heating, cooling, and other equipment of a building.
An amount set aside from net operating income to pay for the eventual wearing out of short-lived assets. Monthly deposits that a lender may require a borrower to a reserve in an account, along with principal and interest payments for future capital improvements of major building systems; i.e., hvac, parking lot, carpets, roof, etc.
In CMBS, portion of the bond proceeds that are retained to cover losses on the mortgage pool. A form of credit enhancement (also referred to as “reserve accounts”).
A property type which sells goods to consumers.
Commercial real estate broker that represents client in the sale or purchase of commercial real estate property.
A mortgage that is second in priority because of the time of recording the mortgage or of the subordination of the mortgage.
Secondary Mortgage Market
The buying and selling of first mortgages or trust deeds by banks, insurance companies, government agencies, and other mortgages. This enables lenders to keep an adequate supply of money for new loans. The mortgages may be sold at full value (“par”) or above, but are usually sold at a discount. Not to be confused with a “second mortgage.”
Self–Storage – (also called mini-storage)
Provides personal storage for lease by consumers.
One that will retire itself through regular principal and interest payments. Contrast with balloon mortgage or interest-only loan.
Senior Housing – (includes assisted listing, congregate care, senior apartments and skilled nursing centers)
Multi-residential property specifically designed for care of senior citizens and/or physically disabled persons.
A mobile home consisting of one unit.
The location or place of a plot of ground set aside for a particular type of land use.
A type of senior housing which offers on-site medical care.
Ownership of a business, with no formal entity as a vehicle or structure.
Number of basis points over a base rate index.
Existence of fire suppression systems in the building.
Stabilized Operating Property
The income generated on an annual basis from the commercial property is stable, consistent and reliable.
A string of stores in a commercial area, totaling less than 30,000 square feet, without central leasing, management, or theme.
A property condition report that outlines the current structural stability or instability of a property. The report will outline immediate costs needed to repair the property, as well as a maintenance program to maintain the property at its current status.
Suburban describes a town or unincorporated designated area which is in a close proximity or commuting distance to a city. Suburban areas, known as the suburbs, are largely residential and are often dependent on the city for employment and support services. Suburban areas are generally characterized by low-density development relative to the city.
Tax-exempt direct bond purchase
Fannie Mae will purchase up to $200 million of unrated, fixed-rate, tax-exempt bond issues from state and local housing finance agencies (HFAs) for small projects not exceeding $5 million. The Tax-exempt Direct Bond Purchase product helps the development of affordable housing properties that would otherwise not be able to access tax-exempt financing. Eligible properties must have 100% of the units at least 10% below comparable market rents.
Tax & insurance impound
monthly deposits that a lender may require to be included with principal and interest payments for the payment of taxes and insurance.
one who is given possession of real estate for a fixed period or at will.
Tenant improvements (Ti)
The expense to physically improve the property to attract new tenants to new or vacated space which may include new improvements or remodeling. May be paid by tenant, landlord, or both. Typically, tenants are provided with a market rate ti allowance ($/sq. Ft.) that the owner will contribute towards improvements. The tenant must pay for amounts above the ti allowance desired by the tenant.
The length of a mortgage.
Third party costs
Costs resulting from third party reports, whether it be appraisal reports, environmental reports or structural engineering reports.
The actual legal document conferring ownership of a piece of real estate.
An insurance policy that insures you against errors in the title search – essentially guaranteeing your, and your lender’s, financial interest in the property.
Total annual operating income
Total yearly income less operating expenses, adjustments, etc., but before mortgage payments, tenant improvements and leasing commissions.
The amount of incoming and outgoing traffic a retailer or self-storage building generates over a fixed period of time.
Triple–net lease (NNN)
A lease that requires the tenant to pay for property taxes, insurance and maintenance in addition to the rent (also referred to as “net net net lease”).
U.S. Treasury Bill
Treasury Bills, or T-Bills, are short term securities with maturities of up to one year. They are issued by the U.S. Government at a discount from face value. The price is quoted in yield, not dollars. At maturity, T-Bills are redeemed for full face value. T-bills are issued in three month, six month and 1 year maturities and are backed by the full faith and credit of the U.S. Government.
U.S. Treasury Bond
Treasury Bonds are long-term securities with maturities greater than 10 years. Treasury bonds are coupon bearing securities that pay interest on a semiannual basis. Treasury bonds are backed by the full faith and credit of the U.S. Government.
U.S. treasury note
Treasury Notes are intermediate term securities issued with 2, 3, 5, and 10 year maturities. Treasury notes are coupon bearing securities that pay interest on a semiannual basis. Treasury notes are backed by the full faith and credit of the U.S. Government.
A tenant in a shopping center, which doesn’t have an anchored tenant.
Unoccupied units as a percentage of the total number.
The percentage of all units or space that is unoccupied or not rented. On apro–forma income statement a projected vacancy rate is used to estimate the vacancy allowance, which is deducted from potential gross income to derive effective gross income.
The rate of return on a security, taking into consideration annual interest payments, purchase price, redemption value, and the time remaining until maturity.
A prepayment premium that allows investors to attain the same yield as if the borrower made all scheduled mortgage payments until maturity. Yield maintenance premiums are designed to make investors indifferent to prepayments and to make refinancing unattractive and uneconomical to borrowers.
Yield to average life
Yield calculation used, in lieu of “yield to maturity” or “yield to call,” where books are retired systematically during the life of the issue, as in the case of a “sinking fund,” with contractual requirements. Because the issuer will buy its own bonds on the open market to satisfy its sinking fund requirements if the bonds are trading below par, there is, to that extent, automatic price support for such bonds; they therefore tend to trade on a yield-to-average-life basis.
Yield to maturity (YTM)
Concepts used to determine the rate of return an investor will receive if a long-term, interest-bearing investment, such as a bond, is held to its maturity date. It takes into account purchase price, redemption value, time to maturity, coupon yield and the time between interest payments. Recognizing time value of money, it is the discount rate at which the present value of all future payments would equal the present price of the bond (also referred to as “internal rate of return”). It is implicitly assumed that coupons are reinvested at the YTM rate. YTM can be approximated using a bond value table (also referred to as a “bond yield table”) or can be determined using a programmable calculator equipped for bond mathematics calculations.