Lending Terms
Cap. Rate
The cap rate is shorthand for Capitalization Rate. Often, an 8% Capitalization Rate will be referred to as an “8 Cap.” The Cap. Rate is the expected return on investment that equals value when divided into the Net Operating Income.
Example: An “8 Cap” on a property that earns $100,000 of net operating income would yield a value of $1,250,000. ($100,000 / 0.08 = $1,250,000)
Debt Service Coverage Constraint (DSC)
The minimum amount of Net Operating Income that can be earmarked for debt service expressed as a ratio of NOI/Debt Service.
Example: If minimum DSC is 1:25 and a property has 100,000 in debt service and the net operating income is $125,000. The DSC is NOI/DS or 125,000/100,000 =1.25 or it meets the required DSC.
Loan to Value (LTV)
Expressed as a percentage. Denotes the maximum loan amount as a percentage
of value.
Example: 75% LTV on a $10,000,000. Property is $7,500,000 Maximum loan.
Deferred Maintenance
Maintenance items that affect value – in that budgeted amounts for these repairs will be deducted from indicated value.
Example: An outdated roof is estimated to cost $125,000 to repair. The value would be reduced by that amount. A property with a value of $3,825,000 would have it’s appraised value reduced to $3,700,000 when deferred maintenance was taken into account.
Useful Life
A schedule of major building components with the remaining useful life of each. Used to determine reserve requirements or length of service for main systems that include appliances, carpeting, painting, parking lot surfaces, boilers, hot water heaters, etc.
Example: A property may have carefully-maintained washer and dryers that have held up well over the past 25 years, and they still work fine. Yet since they are 25 years old, they have outlived what an appraiser would deem is their “useful life” and would need to be replaced, as a deferred maintenance expense, with the requested financing. This is referred to as functional obsolescence.
Amortization/Balloon Payment/Term
The amortization of a loan is the length of time the payments will be based on. The term is the length of time the loan is carried. A balloon payment is usually the payoff of the mortgage at the end of the term. A self amortizing loan has both the term and amortization periods the same so there is no balloon payoff.
Example: A 30-year, fixed rate mortgage with a ten year balloon payment (term) means that in ten years the loan has to be paid off. The mortgage payments due are paid as if they loan amortization schedule was for 30 years.
GNMA Indemnity Escrow
A requirement for GNMA Securities is the posting of cash or a CD equal to 1.75% of the mortgage amount for 39 months. This is not financeable from the mortgage proceeds and is refunded with interest at the end of 39 months with any interest earned if there are no defaults. This helps mitigate risk during the initial term of the loan and reduces the interest rate.
The Financial Statements
Gross Potential Rent
The current rent roll before vacancies. The value of all leases for one month plus street rents for the vacant units equals monthly gross potential and annual rent when multiplied by twelve.
Net Operating Income
Total operating income less operating expenses. This is an indicator of value when divided by the Cap. Rate. Operating income and expenses do NOT include things like depreciation, late fees or debt service.
Net Potential Rent
Gross potential rent at full occupancy.
Net Rent
Is Gross Potential Rent less vacancies. Minimum underwriting is usually at 5% vacancies even if the property has a history of less than 5%.
Operating Income:
This is the gross collected income of the property to include rents, vending income, laundry income, parking and other operating income.
Operating Expenses
Those expenses required operating the property, usually categorized as Administrative, Operating, Maintenance, Taxes and Insurance expenses. Operating expenses do not include any debt service or debt expenses, depreciation or income taxes.
Street Rents
Usually a theoretical income potential if all leases were re-written at the current market rent rather than wait for them to expire. Some owners report this number as the gross potential in error.
Property Types
Assisted Living/Skilled Nursing
Both Assisted Living (ACLF) and Skilled Nursing facilities fall under the same lending category at GREYSTONE, however, there are differences between the two property types.
Assisted Living must serve three meals a day included in the rent (not a-la-cart). Assisted Living means that the facility fulfills help with at least three of the necessities of daily living. It is for help for the frail elderly and providing health care. Necessities of daily are things like help with cooking, help with housekeeping, help with dressing, transportation, dressing etc.
Nursing home facilities provide medical care including giving medicines, respiratory assistance etc. Most states require a CON (Certificate of Need) for ACLF and all require one for nursing facilities.
Skilled Nursing facilities offer a medical staff on hand that is allowed to administer medicine and treatment. Can accept Medicaid ad Medicare payments.
How TRUST Lends on Assisted Living/Skilled Nursing: TRUST views these properties similarly throughout the loan process.
HUD Section 202 Senior Living Facility
The 202 Communities are a special category of senior living, these are government-funded properties that accept Section 8 housing contracts.
How TRUSTLends on Assisted Living/Skilled Nursing: TRUST views these properties similarly throughout the loan process.
Age Restricted
Age-restricted developments are no different than conventional apartments with the exception that the residents must meet age requirements, generally 55 years or older. There are no services offered at Age Restricted communities. TRUST treats these properties no differently than regular apartments.
How TRUST Lends on Age-Restricted: TRUST views and underwrites these properties the same as a conventional for-rent development.
Mixed-Use
As the name implies, mixed-use real estate mixes several different uses into one development. Typical mixed-use developments include retail plazas with surrounding residential, or office space with an attached hotel and first-floor retail.
How TRUST Lends on Mixed Use: TRUST can lend on a residential development that has up to 10% retail or office. On other mixed-use properties, TRUST underwrites a loan for each component of the mixed use development, offering separate loans for each use.
Industrial
Industrial space is zoned with loading docks
Flex Space
Flex space denotes real estate that can flexibly used as different uses, often warehouse space that can also be used as light manufacturing or assembly space.
Flagged Hotels or Hospitality
Lenders such as TRUST only lend on “flagged” hotels. This is simply a national, recognizable chain that the completed property will be marketed as. For example, the Marriot Newport is a flagged hotel, while The Newport Inn is not. Full Service and Limited Service hotels either offer restaurants, health clubs etc or just rooms. Red Roof Inns are mostly limited service hotels and Hyatts are full service.
Anchored Retail
TRUST can lend on both anchored and un-anchored retail. An anchored center would have multiple retail tenants and a at least one large anchor, nationally recognized traffic draw.
Retail Pad
Many retail developments offer a satellite restaurant or single-store development that is detached from the rest of the development. This is considered a retail “pad” because the tenant typically leases or buys the land, and builds their own property on it.
HUD Definitions
HUD The Department of Housing and Urban Development is the federal agency that is charged with national housing and development issues. FHA The Federal Housing Authority is a division of HUD that deals specifically with mortgage insurance and lending. 223(d)4 This is the program that the FHA set up to help spur new commercial residential development. It is not government financing, it is simply an insurance policy that the FHA gives to lenders like GREYSTONE. Housing programs are identified by the section of the National Housing act they appear in. So the 221(d)4 program is Section 221(d)4 of the National Housing Act of 1922 as amended. 223(f) This is the acquisition refinance program of HUD for apartments. 232 This section of the act allows for new construction, refinance and acquisition of health care facilities including ACLF’s and Nursing homes. Mortgage Insurance Premium (MIP) This is the fee HUD charges borrowers for the mortgage insurance premium. It is adjusted annually by the remaining principal balance. Low Income Tax Credits (LITC) These are issued by state based on population and there is fierce competition to earn them. There are several guidelines that earn points such as the resume of the sponsors, the general contractor, does the entity own the land, is it already zoned, is financing in place etc. Fair Market Rent (FMR) These are the rents determined by HUD based on specific geographic locations and outline the subsidized rents to market based on bedroom size.