ABC's of CRE
Real estate dictionary.
PSA - The purchase and sale agreement (or PSA) is used to record the agreement that was reached between you and the seller. The terms of the agreement are negotiated between buyer and seller after a letter of intent (or LOI) has been signed.
Letter of Intent (LOI) - A letter of intent is a document declaring the preliminary commitment of one party to do business with another and outlines the terms of a specific deal. Usually a non-binding agreement among parties indicating their serious desire to move forward with negotiations.
DSCR – Stands for Debt Service Coverage Ratio. The DSCR shows whether a property has enough income to cover its debt – basically, the relationship of a property’s annual operating income (NOI) to its annual mortgage debt service (principal and interest payments).
NOI – Stands for Net Operating Income. NOI measures the property’s ability to generate a positive cash flow from operations. It is calculated by taking the gross operating income and subtracting the operating expenses of the property.
Yield Maintenance Prepayment Penalty – A yield maintenance prepayment penalty is a penalty that allows investors to attain the same yield as if the borrower made all the scheduled payments up until the maturity date. It dictates that the borrowers pay the rate differential between the loan interest rate and the prevailing market interest rate on the prepaid capital for the period remaining to loan maturity. Yield maintenance is intended to mitigate lenders’ prepayment risk or to discourage borrowers from settling their debts ahead of schedule.
Stepdown Prepayment Penalty – This type of prepayment penalty is a gradually declining penalty over the term of the loan. It is the most common type of prepayment penalty and the easiest to calculate. For example, on a 5-year loan, the bank may charge a 3%-2%-1% or 2%-1%-1%. The borrower pays the number (expressed as a percentage) times the loan amount corresponding to the year of prepayment.
Capital Expenditure (CapEx) – In simpler terms, this is rehab dollars. CapEx is funds used by the borrower to upgrade and maintain the asset such as roof repair, cabinet updates, and painting.
Capitalization Rate (Cap Rate) - The value given to the property when the Net Operating Income (NOI) is divided by the current market value or sales price. A cap rate can be used as a rough indicator of how quickly an investment will pay for itself. The higher the cap rate, the better.
TTM (Income Statement or T12) - Trailing 12 months (TTM) is a term used to describe the past 12 consecutive months of a property’s performance and is used for reporting financial figures.
Liquidity – The ease in which an asset can be converted into cash. Assets like stocks and bonds are very liquid since they can be converted to cash within days. However, large assets such as property and equipment are not as easily converted to cash.
Offering Memorandum (OM) - An offering memorandum is a legal document that states the objectives, risks, and terms of an investment. This document includes items such as a property's financial statements, management biographies, a detailed description of the business operations, and more.
Bridge Loan - Bridge financing, often in the form of a bridge loan, is an interim financing option used by companies and other entities to solidify their short-term position until a long-term financing option can be arranged. Bridge financing normally comes from an investment bank or venture capital firm in the form of a loan or equity investment. In short, it is financing that “bridges” the borrower from purchase to stabilization.
Agency Loan - Agency loans refer to Government-Sponsored Enterprises such as Fannie Mae, Freddie Mac, and the Federal Housing Authority.
Non-Recourse – Non-recourse means that the borrower is not personally liable for any lender’s losses associated with the foreclosure of the property. A non-recourse loan is essentially a mutual agreement between a borrower and a lender that in the event the borrower defaults on the loan the lender’s only legal recourse is for the sale of the property via foreclosure even if there is a loss.
LTV – Loan-to-value is an often-used ratio in mortgage lending to determine the amount necessary to put in a down-payment and whether a lender will extend credit to a borrower.
LTC – Loan to Cost - The loan-to-cost (LTC) ratio is a metric used in commercial real estate to compare the financing of a project (as offered by a loan) with the cost of building/rehabbing the project.
Real Estate Syndicate - When partners (either with or without unlimited liability) form a partnership to participate in a real estate venture.
Sources and Uses – A sources and uses analysis provides a summary of where the capital used to fund an acquisition will come from (the sources) and what this capital will purchase (the uses). The sources and the uses must equal each other, and they must total the total purchase price plus transaction costs.
GPR – Gross Potential Rent is the maximum amount of rent money an owner or investor can expect to make from a property during a specific time period. Unlike a rent roll, which compiles all current rents from a property, gross potential rent assumes 100% occupancy.
Sponsor – The borrower or lead key principals on the loan.