Commercial Real Estate Terms and Definitions You Need To Know

LoanBoss Dictionary: the training program we put new hires through. For part of the boot camp curriculum, we give recruits a "dictionary" of commercial real estate terms for them to get acquainted with. From A to Z (minus a few letters), here are a few important words to know in the commercial real estate industry.

Amortization: The action or process of gradually writing off the initial cost (principal) of an asset.

•   Mortgage Style: “Constant payment method” 
  • Borrower’s total installment payment remains the same throughout the loan period. Installment = principal + interest. Interest depends on the outstanding balance. However, installment payment will not change – the amounts applied to the principal and interest change so the payment goes towards interest in the beginning of the term.
  • Offers borrowers constant flat payments – makes budgeting easier.
  • Takes longer to reduce principal.
• Straight-line: “Constant amortization”: 
  • The portion that applies to the principal remains constant with each payment. The interest amount varies according to the outstanding loan balance. The installments also change, and higher installments occur at the beginning of the loan. Gradually the amount of each payment reduces because the interest applies to a lower outstanding balance. 
  • Offers borrowers a quicker reduction in the outstanding balance. For lenders, it ensures quicker recovery of interest income.
  • Higher cost up front.
  • Constant change in full payment amount makes budgeting more difficult.
•  Interest Only:
  • Borrower is only required to pay interest on the loan rather than pay down the principal.
  • Offers smaller payment amounts.
  • Better for projects that are to be sold ASAP.
•  Agency Floater: 
  • Floating rate - Agency loans (usually) with P&I payments.
  • Sometimes we use this Amortization type when building deals that do not specify another type of Amortization but the interest rate is floating.

Burndown: The ability for recourse liability to decrease based on certain conditions. For example, when a Guarantor’s liability can go from 50% to 25% upon the satisfaction of defined requirements.

CMBS (Commercial Mortgage-Backed Securities): A type of commercial real estate financing that is provided by lenders, pooled into groups of other loans in a process known as securitization, and sold on the secondary market to investors. 

• AKA “Conduit” loans.
• Will be sold and packaged along with other commercial mortgage loans into a trust called Real Estate Mortgage Investment Conduit (REMIC), turned into bonds, and sold on the secondary mortgage market to bond investors.  

Defeasance: A method for reducing the fees required when a borrower decides to prepay a fixed-rate commercial loan.

• Replacement of the collateral that generates the steam in debt service payments – “Substitution of collateral”

Download our eBook to learn more about CMBS and Defeasance.

EOD: Event of Default

Escrow: A bond, deed, or other document kept in the custody of a third party and taking effect only when a specified condition has been fulfilled. 

• Process where a neutral third party holds funds while the buyer and seller meet the various aspects of an escrow agreement. It offers all parties financial protection during the sale of property, as funds are withheld should either part fail to meet the requirements of the escrow agreement. 

Guarantor: The individual(s) or company who is being held responsible for the Recourse provisions.

Guaranty: Document outlining the Recourse provisions of a deal.

Hedges: Protects against interest rates raising too high.

Indemnity: A contractual agreement between two parties. One party agrees to pay for potential losses or damages caused by another party. 

• • Help identify legal entities on a global basis

Lockout Period: Time frame where a Borrower cannot prepay.

Modified Following: If a due date falls on a non-business day and the next business day falls in the next month, you push the due date to the preceding business day in the month where the due date originated. 

NOI: Net Operating Income

Occupancy: What percent of the property has paying tenants.

• Calculation used to analyze the profitability of income-generating real estate investments (before tax figure).

• Securitization.
• Where loans are packaged together and sold on a secondary market to investors.

SARM: Structured Adjustable Rate Mortgage 

Securitization: The conversion of an asset, especially a loan, into marketable securities, typically for the purpose of raising cash by selling them to other investors. 

Spread:  The difference between the average yield that a financial institution receives from loans – along with other interest-accruing activities – and the average rate it pays on deposits and borrowings.

Term Loan: A loan with a set Maturity date (I.E. 10yr loan = 10yr Term).

Yield Maintenance: A prepayment penalty that allows investors to attain the same yield as if the borrower made all the scheduled interest payments up until the maturity date.

Have any others you think we should add to our dictionary? Email us at theboss@loanboss.com. 

For more fun Commercial Real Estate content, check out our blog page!

Check out part 2 of our LB Dictionary!