1031 Exchange: A real estate transaction involving the sale of one property where the tax on the capital gain is deferred because of the qualified purchase of another like-kind property in exchange. For 1031 exchange purposes, the term like-kind property is interpreted as any type of investment property, rather than property owned for personal use.
144A: A fixed income security is a private placement bond available only to qualified institutional investors.
30/360: An interest formula used for calculating interest on notes, where interest accrues as if the year has 360 days and the month has 30 days. The effective interest rate with a 30/360 formula is always less than Actual/360.
Actual/360: An interest formula used for calculating interest on notes, which uses the actual number of days from the last payment date and a 360 day year to calculate the dollar amount of interest payments owed to an investor. The effective interest rate with an Actual/360 formula is always greater than 30/360.
Actual/Actual: An interest formula used for calculating interest on notes, which uses the actual number of days from the last payment date and a 365 day year to calculate the dollar amount of interest payments owed to an investor. The effective interest rate with an Actual/Actual formula is always less than Actual/360.
All in Cost of Capital: The effective pretax cost of borrowing based on the coupon of the note, adjusting the cost of capital for such considerations as, without limitation, the note pricing at a premium or discount to the issuer/borrower, fees paid to third parties, closing costs, insurance related to the financing and required as part of the structure, type of interest calculation (30/360, actual/360, etc.), the cost of credit enhancement, and the payment frequency (monthly, quarterly, semiannual, etc.).
Average Life: A measure of how long it takes, on average, for a note to repay its principal. It is calculated by multiplying each portion of principal received by the time it is outstanding, and then summing and dividing by the total amount of principal. Read an article about Average Life here.
Balloon Payment: Amount of principal due at the note maturity date when loan amortization is longer than loan term.
Bond Equivalent Yield: The semi-annual rate of return that would provide the same overall return as a given bond whose interest payments are not made semi-annually.
BP or Basis Point: One one-hundredth of a one percent (.01%). 100 bps are equal to 1%.
CTL: Credit Tenant Lease transactions are based primarily in reliance on the credit rating of the tenant and the structure/type of lease. CTL's are structured with an assignment of the rental payments to a trustee for the benefit of the noteholder, with real property pledged as collateral in the form of a first lien.
Credit Enhancement: Provisions in addition to the mortgage collateral to support a desired credit rating and/or to serve as a mitigant for certain risks. Forms include, but are not limited to, a corporate guaranty, cross-collateralization/cross-default provisions, direct lease assignment, letter of credit ("LOC"), over collateralization, reserve funds, and third party pool insurance.
Creditworthiness: A creditor's measure of an individual's or company's ability to meet debt obligations.
Date Certain: A specified date in a lease when rent will commence not subject to any postponement or contingencies.
Direct Obligation Bond: Debt that is backed by the full faith and credit of the issuer. This type of debt typically contains certain covenants such as requirements for net worth, debt to equity, etc.
DSCR: Debt Service Coverage Ratio - a financial ratio determined by dividing cash available from a property's NOI, (income after deducting any expenses or reserves and the annual trustee fee) by the annual debt service of the note.
EBITDA: Earning before interest, taxes, depreciation and amortization.
Face Value: The stated value of an investment at maturity, or note amount.
Fee Simple Interest: The most complete form of ownership of real property; absolute ownership. Commonly used to denote ownership in a property where the owner has undivided title to the land and bundle of rights.
Fully Amortizing: Loan in which the loan term is the same length as the loan amortization (a.k.a. self-liquidating).
Gap Insurance: In the event of a loss by casualty or condemnation, insurance coverage that will cover any difference (gap) between the proceeds received as a result of the casualty or condemnation and the amount of the outstanding principal balance of the loan.
Interest Rate Cap: A contract whereby the seller agrees to pay to the purchaser, in return for an upfront premium, the difference between a reference rate and an agreed upon strike rate when the reference exceeds the strike. Commonly, the reference rate is three- or six-month LIBOR. A cap protects the purchaser against a rate increase above the strike rate.
Interest Rate Swap: A contract whereby two parties agree to exchange periodic interest payments based on a predetermined notional principal amount. In a typical interest rate swap one party to the transaction will pay a fixed interest rate, while the other party agrees to pay a floating rate. Swaps are frequently used to transform the payment of interest for a transaction from a floating to a fixed rate. For example, one counterparty pays a fixed rate and the other pays a floating rate based on a reference rate, such as LIBOR.
Investment Grade: Investment grade refers to the quality of a company's credit. In order to be considered an investment grade issue, the company must be rated in the top four rating categories (AAA, AA, A, BBB); or, at a minimum, "BBB-" or higher by Standard & Poor's, "BBB_" or higher by Fitch or "Baa3" or higher by Moody's.
Leasehold Interest: A form of ownership in which a tenant is allowed to construct permanent structures upon a parcel of leased land not owned by the tenant, and derive some use or income from the structure during the period of the lease term which is typically very long. The land owner retains its rights to the land, while receiving an income stream from the tenant. The tenant saves the initial land acquisition costs and gains access to property that might be otherwise unavailable.
Lease Structure *
Modified Gross: A modified gross lease is a lease where the base rent includes building expenses like a Gross lease (landlord pays all expenses out of the rent received), but the landlord recaptures expense increases from the tenant via a pass-through provision such as an operating expense, tax, or utility escalation.
NN: A double net (Net-Net) lease is a lease agreement where the tenant or lessee is responsible for operating expenses of the property including real estate taxes and insurance. The lessor or landlord is responsible for limited expenses incurred for items such as structural repairs, roof, parking lot and common area maintenance.
NNN: A triple net lease (Net-Net-Net) is a lease agreement where the tenant or lessee agrees to pay all real estate taxes, building insurance, and maintenance (the three 'Nets') on the property in addition to any normal fees that are expected under the agreement (rent, etc.). In such a lease, the tenant or lessee is responsible for all costs associated with repairs or replacement of the structural building elements of the property.
Bondable Lease: A bondable lease (a.k.a. "hell-or-high-water lease") requires the tenant or lessee to perform all the obligations related to the leased premises. The general concept is that regardless of what occurs, including casualty, condemnation or obsolescence, the lessee is obligated to continue to pay rent. These leases are not terminable by the tenant, nor are rent abatements permissible. The concept is to make the rent absolutely net under all circumstances, equivalent to the obligations of a bond.
Letter of Credit: A letter of credit is a document issued by a financial institution which provides an irrevocable payment to a beneficiary based on conditions set forth in underlying documents. Letters of Credit are a common form of credit enhancement used in real estate transactions during construction, for floating rate notes, or used as a replacement for a cash reserve.
LIBOR: The London Interbank Offered Rate is the rate charged by one bank to another for lending money. It is also used as a reference point for the majority of overnight and/or future interest rate levels and is the financial index to which many adjustable rate mortgage loans are tied when they have short-term adjustment periods.
NAIC: The National Association of Insurance Commissioners is a not-for-profit association of state insurance commissioners designed to promote consistent regulation of the insurance industry. As it relates to Credit Tenant Lease financing, the NAIC sets the parameters of a loan that will determine the treatment of the loan as a CTL by an insurance company for reserve purposes (Schedule D treatment).
Noteholders: Lenders under the terms of a note.
Private Placement Bond: A bond sold directly to institutional investors, such as banks, mutual funds, insurance companies, pension funds, and foundations. Private Placement bonds do not require SEC registration, provided the securities are bought for investment purposes rather than resale.
RVI: Residual Value Insurance ("RVI") is used to insure the balloon payment on a loan at maturity in the event of a monetary default. It is a lender's policy used in Credit Tenant Lease transactions to extend the amortization beyond the lease term and either increase loan proceeds or cash flow to the borrower.
Serial Maturities: A bond issuance made up of a series of bonds issued at the same time but having staggered maturity dates. Tax exempt bonds are often issued as serial maturity bonds.
Tax-Exempt Organization: A legal entity which has been determined by the federal Internal Revenue Service to be exempt from taxation under federal tax law. Tax exempt entities include federal, state and local agencies as well as religious institutions, colleges, hospitals or charitable organizations that are typically organized as a 501(c)(3) organizations under the IRS Tax Code.
Trustee: One who, as agent for others, handles money or holds title to their land. In the case of a Credit Tenant Lease, the trustee receives the lease payments directly from the tenant or lessee, pays the principal and interest to the noteholder, and returns the balance, if any, of the lease payment to the borrower.
Yield Curve (U.S. Treasuries): A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity dates. The most frequently reported yield curve compares the on-the-run U.S. Treasuries with differing maturity dates; typically the three- six- and twelve-month, two-year, five-year, ten-year and 30-year U.S. Treasury debt. This yield curve is used as a benchmark for other debt in the market and is commonly used to price other bonds at a spread over U.S. Treasuries. The U.S. Treasury curve is also used to predict changes in economic output and growth.
Yield Maintenance: A prepayment premium that allows investors to attain the same yield as if the borrower had made all scheduled loan payments until maturity. Yield maintenance premiums are designed to make investors indifferent to prepayments.
Zero Coupon Bond: A bond without a coupon issued at a deep discount from its face/maturity value. There are no payments made during the term of the bond until maturity when the face amount is due and payable.