Lending Terms

Question 1

Acquisition Loan

Answer 1

A one-time loan given to a company to purchase a specific asset. The acquisition loan is typically only able to be used for a short window of time, and only for specific purposes.

Question 2

Construction Loan

Answer 2

A short-term, interim loan for financing the cost of construction. The lender makes payments to the builder at periodic intervals as the work progresses.

Will not be more than the permanent loan. Will often require a secured permanent loan or other additional security. Often has variable interest rate and will require an equity guarantee from the developer. Can also require a binding commitment from the provider of the permanent loan

Question 3

Permanent Loan

Answer 3

Will eventually be used to pay off the construction loan. Used once building is complete and project refinanced.

Standard permanent loan has fixed monthly payments, fully repaid over the loan period, each monthly payment includes interest, and a non-recourse mortgage. Lender will make sure that the NOI + Reserve Fund = Monthly payments.

Loan amount will be the smallest of either the Debt Coverage Ratio or Loan-to-Value Ratio.

Question 4

Mini-Permanent Loan (mini-perm)

Answer 4

Short-term financing used to pay off income-producing construction or commercial properties, usually payable in three to five years.

A developer will use this type of financing prior to being able to access long-term financing or permanent financing solutions.

Question 5

Balloon Loan

Answer 5

Standard in commercial transactions. Amortization schedule is longer than the loan term. Allows for lower level payments, and the lender does not have to keep their money out for so long.

A mortgage loan that requires the remaining principal balance be paid at a specific point in time. For example, a loan may be amortized as if it would be paid over a thirty year period, but requires that at the end of the tenth year the entire remaining balance must be paid.

Question 6

Recourse Loan

Answer 6

If the project goes under, the lender can take over the project and sue for the other borrower assets as per the amount of debt still owed.

Question 7

Nonrecourse Loan

Answer 7

If project goes under (developer goes bankrupt), the construction lender takes over the project and become the owner. Other borrower assets are protected. Higher interest rate, favored by the borrower.

Question 8

Loan Committment

Answer 8

A loan amount that may be drawn down, or is due to be contractually funded in the future. Loan commitments are found at commercial banks and other lending institutions and consist of both open-end and closed-end loans. Open-end loan commitments act like revolving credit lines, whereby if a portion of the loan is paid off, the principle repayment amount is added back to the allowable loan limit. Closed-end loans are reduced once any repayments are made.

Question 9

Loan Closing

Answer 9

A meeting between borrower and lender in which transfer of ownership is accomplished, funds and deed are exchanged, and all loan documents, including the promissory note and mortgage, are signed.

Question 10

Credit Enhancement

Answer 10

Credit enhancement is used to obtain better terms for an outstanding debt. Securitization, posting collateral and obtaining external credit enhancement such as a letter of credit are some basic forms of credit enhancement. Firms may also increase cash reserves or take other internal measures to uphold superior solvency ratios.

Question 11

Developer’s Net Worth

Answer 11

The amount by which their assets exceed liabilities. Net worth is a concept applicable to individuals and businesses as a key measure of how much an entity is worth. A consistent increase in net worth indicates good financial health.

Question 12

Liquid Net Worth

Answer 12

the amount of money that one has in cash. It also includes investments that can be easily and quickly liquidated and turned to cash.

Question 13

Letter of Credit

Answer 13

Promise by a bank that they will make payments to lenders if certain conditions are met. Letter of credit is purchased from the bank by the developer as assurance for the construction lender.

Question 14

Escrow Account

Answer 14

Escrow payment is a common term referring to the portion of a mortgage payment that is designated to pay for real property taxes and hazard insurance. It is an amount “over and above” the principal and interest portion of a mortgage payment.

Question 15

Mortgage

Answer 15

A debt instrument, secured by the collateral of specified real estate property, that the borrower is obliged to pay back with a predetermined set of payments. Mortgages are used by individuals and businesses to make large real estate purchases without paying the entire value of the purchase up front. Over a period of many years, the borrower repays the loan, plus interest, until he/she eventually owns the property free and clear. Mortgages are also known as “liens against property” or “claims on property.” If the borrower stops paying the mortgage, the bank can foreclose.

Question 16

Deed of Trust

Answer 16

A type of secured real-estate transaction that some states use instead of mortgages. See State Property Statutes. A deed of trust involves three parties: a lender, a borrower, and a trustee. The lender gives the borrower money.

Question 17

Recordation Tax

Answer 17

A fee charged in some states or counties to record a mortgage or a deed in the official registry.

The recordation tax is an excise tax imposed by the State for the privilege of recording an instrument in the Land Records (or, in some cases, with SDAT).

“a written instrument that:

(i) conveys [legal or beneficial] title to real property;
(ii) creates or gives notice of a security interest in real property; or
(iii) creates or gives notice of a security interest in personal property”

Question 18

Lien

Answer 18

The legal right of a creditor to sell the collateral property of a debtor who fails to meet the obligations of a loan contract.

Question 19

Operating Deficit Account

Answer 19

The operating deficit account is used in construction lending as a safeguard to assure that there will be enough money for interest to be repaid during the period between the end of construction and the time that either the units that were constructed are sold or they are leased.

The operating deficit guaranty is given to the grantee by one or more affiliates of the developer in order to assure the grantee that any initial cash flow deficits will be funded at no expense to the grantee, and to assure that any initial cash flow deficits will not reduce surplus cash.

Question 20

Amortization Schedule

Answer 20

Loans are paid back in installments over time.

showing the amount of principal and the amount of interest that comprise each payment so that the loan will be paid off at the end of its term. While each periodic payment is the same, early in the schedule, the majority of each periodic payment is interest. The percentage of each payment that goes toward interest diminishes a bit with each payment, and the percentage that goes toward principal increases.

Question 21

Maturity Date

Answer 21

The date on which the principal amount of a note, draft, acceptance bond or other debt instrument becomes due and is repaid to the investor and interest payments stop. It is also the termination or due date on which an installment loan must be paid in full.

Question 22

Fully amortizing loan (Self-amortizing loan)

Answer 22

A loan for which the periodic payments consist of both principal and interest such that the loan will be paid off by the end of a scheduled term. These loans are made in equal payment installments throughout the entire term of the loan.

Each payment will apply some to principle and some to interest, with most of the early loan payments going primarily to interest. As the loan period moves along, more of the monthly payment goes to the principle of the loan,

Question 23

Partially amortizing loan

Answer 23

These loans are made in payment installments for the majority of the term of the loan. The difference here is that at either the beginning or the end of the loan, generally the end, a balloon payment of some sort must be made before the loan can be paid off. These payments are calculated using a longer loan term than there really is.

Question 24

non-amortizing loan

Answer 24

A type of loan in which payments on the principal are not made, while interest payments or minimum payments are made regularly. As a result, the value of principal does not decrease at all over the life of the loan. The principal is then paid as a lump sum at the maturity of the loan.

Balloon Mortgages are an example.

Question 25

Fixed-rate mortgage loan

Answer 25

A mortgage that has a fixed interest rate for the entire term of the loan. The distinguishing factor of a fixed-rate mortgage is that the interest rate over every time period of the mortgage is known at the time the mortgage is originated. The benefit of a fixed-rate mortgage is that the homeowner will not have to contend with varying loan payment amounts that fluctuate with interest rate movements.

Question 26

Level payment mortgage

Answer 26

A type of mortgage that requires the same dollar payment each month or payment period. Level payment mortgages allow borrowers to know exactly how much they will have to pay on their mortgages each pay period. This stability makes it easier for them to create budgets and stick to them.

Question 27

Adjustable rate mortgage

Answer 27

A type of mortgage in which the interest rate paid on the outstanding balance varies according to a specific benchmark. The initial interest rate is normally fixed for a period of time after which it is reset periodically, often every month. The interest rate paid by the borrower will be based on a benchmark plus an additional spread, called an ARM margin.

Question 28

Points

Answer 28

Basis points - every 1% of the loan is made up of 100 Basis points (1/100 of a percent). A way of describing increases/decreases in % without messiness.

An additional, one-time payment of interest, paid up front when the loan is made

Question 29

Commitment fee

Answer 29

The lender charges a commitment fee as compensation for keeping a line of credit open or to guarantee a loan at a specific date in future. The borrower pays the fee in return for the assurance that the lender will supply the loan funds at the specified future date and at the contracted interest rate, regardless of conditions in the financial and credit markets.

Question 30

Prepayment

Answer 30

The satisfaction of a debt or installment payment before its official due date. A prepayment can be for the entire balance or for any upcoming payment that is paid in advance of the date for which the borrower is contractually obligated to pay it. Examples of a prepayment come in the form of rent or early loan repayments.

Question 31

Prepayment penalty

Answer 31

A clause in a mortgage contract that says if the mortgage is prepaid within a certain time period, a penalty will be assessed. The penalty is usually based on percentage of the remaining mortgage balance or a certain number of months worth of interest.

Lenders write prepayment penalties into mortgage contracts to compensate for prepayment risk. As the incentive for a borrower to refinance a subprime mortgage is high, many subprime mortgages have prepayment penalties.

Question 32

Loan servicing

Answer 32

The administration aspect of a loan from the time the proceeds are dispersed until the loan is paid off. This includes sending monthly payment statements and collecting monthly payments, maintaining records of payments and balances, collecting and paying taxes and insurance (and managing escrow and impound funds), remitting funds to the note holder, and following up on delinquencies.

Question 33

Capitalized interest

Answer 33

An account created in the income statement section of a business’ financial statements that holds a suitable amount of funds meant to pay off upcoming interest payments. Furthermore, this type of interest is seen as an asset and unlike most conventional types of interest, it also is expensed over time.

Question 34

Percentage completion

Answer 34

The percentage of completion method of accounting requires the reporting of revenues and expenses on a yearly basis, as determined by the percentage of the contract that has been fulfilled. The current income and expenses are compared with the total estimated costs to determine the tax liability for the year. For example, a project that is 30% complete in year one and 45% complete in year two would only have the incremental 15% of revenue recognized in the second year.

Question 35

REIT

Answer 35

Real Estate Investment Trust - allows ordinary citizens to invest in certain projects. The REIT would own the project, reduces risk to each individual investor.

Question 36

Bonding

Answer 36

Performance Bond: Guarantee that the construction lender will perform.

Payment Bond: Guarantee that all subcontractors get paid. Construction lender would not want to risk default

Question 37

Underwriting

Answer 37

Assessment made by lenders to determine whether or not the loan is suitable for its line of business.

Question 38

Required Development Equity

Answer 38

If there are any expected operating deficits during the development’s start-up period, the lender will require, as a condition to closing the construction loan, that the developer provide the additional funds that will fill the gap.

Question 39

Operating Loss

Answer 39

The excess of operating expenses over revenue. As with operating income, operating losses exclude revenues and expenses from operations that are not considered a regular part of the business. Also called deficit.

The state in which a company’s operating expenses exceed its income for a given period of time, usually a quarter or a year. A company can carry back or carry forward operating losses for a certain number of years, reducing the company’s tax liability. This is positive, but an operating loss still means that the company is losing money, which cannot be sustained over the long term.