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Lending Glossary
Capitalization Rate.
The conversion of a future net income stream into present value by using a specified desired rate of earnings as a
discount rate. This capitalization rate is divided into the expected periodic income to derive a capital value for
the expected income.
Carve Outs.
Specific items that a Lender will require the Borrower to personally guarantee for the life of the loan. Typically
include, but not limited to, environmental, fraud, misappropriation of funds and theft.
Correspondent.
A specialized type of mortgage banker whose function is limited to the origination of mortgage loans which are sold to
other mortgage bankers or investment bankers under a specific commitment.
Cross Collateralization.
Net income shortfalls on one property are offset by excess cash flow from other properties in a pool of crossed loans.
This significantly enhances a transaction from the viewpoint of investors and rating agencies.
Defeasance.
In defeasance, the lender replaces the cash flows of the original loan with actual Treasury Securities. The borrower
pays the lender enough money to buy these securities and the lender goes out in the bond market and gets the right
combination of bonds. After this is done and the lender has a security interest in the treasuries, the property is
released as collateral for the loan and the treasuries become the new loan collateral.
Equity Participation.
The right of a Lender to a share in the gross profits, net profits or net proceeds in the event of a sale or refinance
of a property on which the Lender has made a loan. Also known as an "equity kicker."
Interim Financing.
A loan, including a construction loan, used when the property owner is unable or unwilling to arrange permanent
financing. Generally arranged for less than 3 years and used to gain time for operations and/or market conditions
to improve.
Index.
A published interest rate, such as prime rate, LIBOR, T-Bill rate or the 11th District COF. Lenders use indexes to
establish interest rates charged on mortgages or to compare investment returns.
LIBOR (London Interbank Offered Rate).
The rate that international banks dealing in Eurodollars charge one another for large loans. Some domestic banks and
other lenders use this rate as an index for adjustable rate mortgages. The LIBOR rate quoted in the Wall Street Journal
is an average of rate quotes from five major banks. Bank of America, Barclays, Bank of Tokyo, Deutsche Bank
and Swiss Bank.
Mezzanine Debt.
Mezzanine financing is the "level" of financing between Senior Debt and Common Equity. When there is a gap to fill
between senior debt and the equity, a mezzanine piece may be a vehicle for accomplishing financing. Mezzanine financing
includes a broad array of financing vehicles including various forms of debt and various forms of equity.
Non-recourse Loan.
No personal liability of the Borrower. Upon default, a Lender may take the property pledged as collateral to satisfy
a debt, but have no recourse to other assets of the borrower.
Prime Rate.
The lowest commercial interest rate charged by banks on short-term loans to their most credit-worthy customers. The
primate rate is not the same as the long-term mortgage rate, thought it may influence long-term rates. Mortgage rates
are generally higher than the prima\e rate but exceptions occur at times.
Underwriting Criteria.
In mortgage banking, the analysis of the risk involved in making a mortgage loan to determine whether the risk is
acceptable to the lender. Underwriting involves the evaluation of the property as outlined in the appraisal report
and of the borrower's ability and willingness to repay the loan.
Yield Maintenance.
The prepayment premium which will equal the present day value of any costs to the lender resulting from the difference
in interest rates between the date of the note and the date on which the prepayment is made. In other words, the
borrower must pay the lender enough money so that the lender can theoretically replace the loan's future cash flows
using Treasury Securities.
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