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***Financial Glossary***

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Adjustable Rate Loan - A loan with a coupon rate which is adjusted periodically over the life of the loan. Usually, the rate is derived by adding a fixed amount (the "spread") to a base or index, such as the Prime Rate or LIBOR (London Interbank Offering Rate).

Application/Processing/Underwriting Fee -A fee charged by some lenders/investors for processing a deal submission; terms and conditions of these fees vary widely.

Auto Service - A retail property configured for and leased to auto service tenants, which might include a "quick lube" shop, muffler/brake repair, car detailing, etc.

BAAGGL - Bay Area Association of Government Guaranteed Lenders. Located in Northern California

Basis Point - One basis point = 1/lOOth of 1%.

Commitment Fee - A fee charged by some lenders/investors for issuing a commitment which satisfies the terms of the application or is otherwise acceptable to the applicant.

Community Enclosed Mall -An enclosed retail shopping center without drive-up access to each individual store,l arguer than most strip centers but smaller than a regional mall. Draws shoppers primarily from the immediate community in which it is located. Tenancy is typically more localized than in a regional mall.

Condo Office - An office property which is operated under the condominium format, with individual unit owners paying condo fees to fund their proportionate share of specified common expenses.

Construction and Takeout Package - A construction and permanent loan from the same lender.

Construction Loan -A short-term loan to finance the construction of real estate. Typically, the loan is due upon completion of construction or achievement of a predetermined level of leasing.

Construction Loan if Takeout Waiting - A construction loan which will be provided only if a permanent loan commitment has been secured in advance from a different lender.

Convertible Mortgage Loan - A loan which is initially a debt instrument but which may be converted into an equity interest at some pre-negotiated point in the future.

Correspondent - A mortgage banker responsible for originating business for another source of funds in a designated territory.

Corresponding Treasury Yield - The return obtainable from investment in a U.S. Treasury security with the same term as the subject loan.

Credit Company - An institution which raises funds for investment in real estate financing by accessing the capital markets. Profit is derived from a combination of loan fees and the spread between the rate at which these firms can borrow (based on their or their parents’ strong corporate credit ratings) and property financing rates.

Credit Enhancements - Risk reduction/transfer mechanisms (letters of credit, guarantees, surety bonds, etc.) provided r a fee, the purpose of which are to facilitate the financing of real estate.

Day Care - A retail property configured for and operated as a temporary child care (or in some cases, adult care)
facility.

Debt Service Coverage - The ratio of the property’s net operating income to the annual sum of payments required to service the loan.

Direct - The lender or investor accepts deal submissions from and negotiates directly with prospective borrowers or sellers.

Equities - Outright purchases of property. Also may incorporate other transactions involving the acquisition of an equity interest in property (such as joint ventures, sale/leasebacks, etc.).

Exclusive Correspondent - A mortgage banker responsible for originating deals for a principal within an exclusive territory. Typically, all submissions must be routed through the appropriate correspondent.

First Mortgage Loan - A loan secured by a mortgage which has priority as a lien over other mortgages on the property.

Fixed Prepayment Penalty - A type of prepayment penalty calculated as a fixed percentage (perhaps declining as the loan approaches maturity) of the loan balance, or a fixed dollar amount.

Fixed Rate Loan - A loan with a coupon rate which is fixed at or before funding and does not vary over the term of the loan.

Fixed Rate via Rate Swap - An adjustable or floating rate loan which, via the purchase of an interest rate hedging device, is modified to achieve the security of a fixed rate.

Forward Commitment - A commitment by a lender to fund a permanent loan at some specific time (often one to two years) in the future.

Freestanding Retail - An individual retail property which is not attached to other stores.

Furnished Apartments - A multifamily rental property, garden or high-rise, leased with furnishings. Typically rented for shorter lease terms than unfurnished apartments. Commonly used as "corporate rentals" for extended stay business travelers.

Garden Apartments - A multifamily rental property, typically with units grouped into one to three-level buildings situated in a landscaped setting. In contrast to hi-rise apartments, access to units above ground level in most garden apartment complexes is via stairs, rather than elevator.

Health Club - A retail property designed for use as an exercise facility, often including weightlifting equipment, aerobics area, showers, sauna, etc.

Heavy Manufacturing - An industrial property used as a manufacturing facility for more extensive and strenuous production work than in "cleaner" warehouse/distribution and light manufacturing properties.

Hi-Rise Apartments - A multifamily rental property with multiple stories and elevator access, usually found in urban areas where space limitations and prohibitive land costs do not allow for garden-style apartments.

Independent Hotel/Motel - A hotel or motel property which is not affiliated with a national chain. (A "mom and pop" motel.)

Independent Restaurant - A property configured for and occupied by a local restaurant tenant without a nationally recognized name. (A "mom and pop" restaurant.)

Joint Venture - An agreement between a developer and a "money partner" to acquire, develop or rehabilitate a property. Typically, the money partner either provides funds to facilitate the procurement of the construction and permanent financing, or provides the financing itself. In exchange, the money partner receives an equity interest and participates in cash flow and appreciation.

LIBOR - London Interbank Offering Rate (a common loan pricing index similar to the "Prime Rate").

Light Manufacturing - An industrial property used for assembly, minimal manufacturing work, and/or "clean"production processes.

Limited/No Care Elderly - A residential rental property geared to elderly residents who do not require ongoing nursing care.

Loan-to-Value - The ratio of the loan amount to the indicated market value of the property to be pledged as security for the loan.

Low/Moderate Income Apartments - A multifamily rental property with rental rates designed to provide affordable housing for lower income residents. Often eligible for various tax and financing incentives.

Marina - A facility for the docking and storage of boats, typically offering supply, repair and related services.

Medical Office - A multi-tenant office property primarily leased to medical tenants (doctors, dentists, physical therapists, pharmacy, etc.), often located next to or near a hospital or major clinic.

Metal Warehouse - A warehouse/distribution property constructed primarily of steel (often with walls of corrugated steel sheeting). Sometimes referred to as a "Butler" building.

Mini-Storage - A warehouse property divided into small bays, often stacked, for storage of consumers’ extra furniture and other personal goods, business’ old files, etc. Usually rented on a monthly basis.

Mixed Use - A property which combines several uses, such as a hotel/office/retail complex, where each use is intended to complement and support the other(s).

Mobile Home Park - A community of "trailer homes", typically attached to leased pads with utilities hookups.

Multi-Tenant Office - An office property configured for and leased to more than one tenant.

NAAGGL -National Association of Government Guaranteed Lenders

National Chain Hotel/Motel - A hotel or motel property operated under a national brand name (Holiday Inn, Sheraton, etc.) Often referred to as a "flag" hotel.

National Chain Restaurant - A property configured for and occupied by a restaurant tenant operating under a national name (such as Pizza Hut, Red Lobster, Steak and Ale, etc.)

Non-exclusive Correspondent - A mortgage banker responsible for originating deals for a principal, typically within a specified territory, which might also be covered by other correspondents as well. Generally, deal submissions in areas covered by correspondents must be routed through a correspondent.

Nursing Home - A residential rental property in which the elderly tenants require on-going medical assistance. These facilities employ nursing aides and medical professionals with a higher level of patient responsibility than that required at limited/no care elderly properties.

Office Over Retail - Typically a multi-tenant office property with retail shops at ground level.

Outlet Mall - A retail property comprised solely or primarily of discount, factory outlet stores.

Owner-Occupied Office - An office property occupied by its owner.

Parking Garage - A multi-level concrete structure designed for pay parking.

Participating Mortgage Loan - A loan whereby the lender receives a percentage of cash flow generated and proceeds from subsequent refinancing or sale, in addition to regular debt service.

Pay Rate/Accrual - A loan whereby the negotiated payments based on the "pay rate" are lower than what would be required to amortize the loan at the actual coupon rate, such that the balance due on the loan increases. Also commonly referred to as a "bowtie" or "negative amortization" loan.

Permanent Loan - A loan for which debt service will be provided by the stream of income generated by the property after construction.

Phase I Environmental Review - Typically involves the review of previous uses of the subject property and of other properties in the immediate vicinity, a site inspection and report on findings by a qualified engineering/environmental firm. This report includes recommendations for further testing, if deemed necessary.

Phase II Environmental Review - Required if the Phase I review uncovers potential environmental problems. Among others, procedures typically included at this stage are subsurface soil and water sample tests.

Prepayment Penalty - A fee charged by the lender to allow the borrower to retire the loan earlier than its stated maturity.

Principal - A party which lends or invests its own funds.

R&D/Flex Space - An industrial property similar to warehouse/distribution but with a larger proportion of fitted out office and reception space (often up to 40%) and correspondingly higher rents per square foot. Popular with "high tech" users, such as a computer firm which may use the warehouse portion for storage, assembly and repairs and the more attractively built out portion for offices and customer service.

Raw Land with Development Plan - A parcel of raw land accompanied by a specific plan for its intended improvements (preferably with necessary approvals in place).

Raw Land without Development Plan - A speculative parcel of undeveloped land without a specific plan for improvement.

Recourse - Personal liability. (In some cases, other security may be substituted for personal liability.)

Refundable Good Faith Deposit - An up-front deposit which is typically returned in whole or part to the borrower at some predetermined point if there is no breach of contract by the borrower.

Regional Enclosed Mall - An enclosed retail shopping center without drive-up access to each individual store, which is larger than strip centers and community enclosed malls. Designed to attract shoppers not only from its immediate area but also from neighboring communities and towns. Includes three or more major anchors (typically national department stores) and other major name tenants.

REIT - Real Estate Investment Trust - Similar in concept to the mutual fund’s role in the securities market, the REIT provides for the pooling of individual investments in real estate equity and/or debt, while allowing its investors to avoid the double taxation of income.

Sale/Leaseback - A structure whereby an owner/user sells and simultaneously leases back (as lessee) the property. Some of the possible advantages of this structure for the original owner are the ability to generate more capital than through refinance, to pass the expenses of ownership to the buyer while retaining use of the premises, and to bolster reported earnings by booking any gain from sale.

SBA - Small Business Administration ( federal Agency)

Second Mortgage Loan - A loan secured by a mortgage which is subordinate to (i.e. lower in priority of claim than) a first mortgage. Also referred to as a "junior lien".

Servicing - The process of collecting loan payments and performing related loan accounting functions, usually in return for a fraction of the loan’s debt service.

Single-Tenant Office - An office property configured for and leased to a single user.

Site Inspection Fee - A fee charged by some lenders/investors to offset the costs of visiting and inspecting the subject property.

Special Purpose - A property, such as a bowling alley, recording studio, etc., which is specifically designed for one particular non-standard use.

Standby Commitment - A commitment by a lender to provide a loan on a property at some time in the future. It is usually used by a borrower to induce another lender to provide construction or other short term financing. As opposed to a forward commitment, neither the borrower nor the standby issuer typically expects the standby to be used for permanent financing, but rather as a contingency alternative in case other permanent financing is not obtained. (Note: The interpretations of and distinctions, if any, between a "forward" and "standby" commitment differ among users of the terms.)

Strip Retail with Anchor(s) - A non-enclosed retail shopping center offering drive-up access to each store, with one or more major name, larger space tenants, which act as important draws to attract shoppers (and other tenants) to the center. Who qualifies as an "anchor" and how strong the anchor(s) must be in order to secure financing differs widely among lenders.

Unanchored Strip Retail - A non-enclosed retail shopping center without a tenant which would be considered a major name draw for the center.

Uncovered Construction Loan - A construction loan made by a lender when there is no permanent loan already arranged.

Warehouse/Distribution - An industrial property designed and used for storage, distribution, light assembly or similar use, typically with a very small proportion (i.e. 5% -10%) of the total area fitted out as office space. May be occupied by a single tenant or divided into individual bays for multi-tenant use.

Wraparound Loan - A loan on a property with existing debt whereby the wraparound lender "wraps" a larger loan around the existing debt, with the wraparound loan typically subordinate to the original debt. The wraparound lender assumes the liability for repayment of the original mortgage note and advances to the wraparound borrower the difference between the remaining balance on the original debt and the face amount of the larger wrap note. The wrap lender then collects debt service based on the terms of the full wrap loan. A wrap loan provides an alternative to obtaining a second mortgage or prepaying the existing debt and refinancing.

Yield Maintenance Prepayment Penalty - A type of prepayment penalty calculated to compensate the lender for lost yield (if any). This penalty is based on the difference between the yield which the lender would receive on the loan if serviced until maturity and the yield obtainable by investing the outstanding note balance for the same length of time in Treasury securities.

Ratios Definitions

Banks have more ratios to play with than you have patience. However, there are only a few that are intensely important: Your business ratios are compared to business ratios of successful similar business as published in RMA Annual Statement Studies. Banks will calculate the ratios as though the requested loan were in effect.

LIQUIDITY RATIOS

Liquidity is a measure of the quality and adequacy of current assets to meet current obligations as they come due.

Current Ratio
Total current assets divided by total current liabilities.

Interpretation: This ratio is rough indication of a firm’s ability to service its current obligations. Generally, the higher the current ratio, the greater the "cushion" between current obligations and a firm’s ability to pay them. The stronger ratio reflects a numerical superiority of current assets over current liabilities. A 2 to 1 ratio would be ideal

Quick Ratio
Cash and equivalents + trade receivables divided by total current liabilities.

Interpretation: Also known as the "ACID Test" ratio, it is a refinement of the current ratio and is a more conservative measure of liquidity. The ratio expresses the degree to which a company’s current liabilities are covered by the most liquid current assets. Generally, any value of less than 1 to 1 implies a reciprocal "dependency" on inventory or other current assets to liquidate short-term debt.

Coverage Ratio
Coverage ratios measure a firm’s ability to service debt.

Debt Coverage Ratio
Net profit plus depreciation, plus depletion, plus amortization divided by the current portion of long term debt, which includes the current portion of the purposed new loan. Most bank prefer to see debt ratio of 1.25 to 1 or better

Net Profit + Depreciation + Depletion + Amortization
Current Portion of Long Term Debt + Current Portion of New Loan

Interpretation: This ratio expresses the coverage of current maturities by cash flow from operations. Since cash flow is the primary source of debt retirement, this ratio measures the ability of a firm to service the principal repayment of the new loan and is an indicator of additional debt capacity.

Leverage Ratios
Highly leveraged firms (those with heavy debt in relation to net worth) are more vulnerable to business downturns than those with lower debt to worth positions. While leverage ratios help to measure this vulnerability, it must be remembered that they vary greatly depending on the requirements of particular industry groups.

Debt/ Worth Ratio
Total liabilities divided by tangible net worth.

Interpretation: This ratio expresses the relationship between capital contributed by creditors and that contributed by owners. It express the degree of protection provided by the owners for the creditors. The higher the ratio, the greater the risk being assumed by creditors. A lower ratio generally indicates greater long-term financial safety. A firm with a low debt/worth ratio usually has greater flexibility to borrow in the future. 2 to 1 ratio would be very acceptable.

As a general rule, if the above ratios are in acceptable range, all the other ratios should be satisfactory.
More details on banking ratios and ratios standards

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