Index of Terms
1031 Exchange: A real estate transaction involving the sale of one property wherein recognition of a gain or loss 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. The real property that is sold (i.e. the relinquished property) must be replaced with real property, and as a rule of thumb, the value of the replacement property must be at least equal to or greater than the value of the relinquished property. The exchanger must close on the purchase of the replacement property within 180 days of the close date of the property sold. Replacement properties must be identified, in writing to a qualified intermediary, during the first 45 days of the 180 day exchange period.
144A: Rule 144A of the Securities Act of 1933 allows the sale/resale of privately placed securities that are without Securities & Exchange Commission (SEC) registration. These private placement securities are only available to Qualified Institutional Buyers. The SEC defines a Qualified Institutional Buyer as an entity, not individual, which owns and invests at least $100 million in securities; for a broker-dealer the threshold is $10 million.
30/360: An interest formula used for calculating interest on notes, where interest accrues as if the year has 360 days and each month has 30 days. The effective interest rate with a 30/360 formula is always less than the interest rate with an Actual/360 formula.
A1/A2 Notes: When an A1/A2 note structure is used in finance, the two notes are pari-passu, meaning that they rank equally in priority for repayment and have the same rights and privileges. Any payments and losses are shared on a pro-rata basis.
A/B Notes: When an A/B note structure is used in finance, the A Note is senior (ranks higher in priority for repayment) to the B Note and therefore has a lower risk and return profile than the B Note. Since the B Note is subordinate (ranks lower in priority for repayment) to the A Note, the B Note is paid only to the extent there is excess cash flow after the A Note has been paid. In return for this higher risk, the B Note earns a higher return.
Actual/360: An interest formula used for calculating interest on notes, which uses the actual number of days since the most recent 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 the interest rate with a 30/360 formula.
Actual/Actual: An interest formula used for calculating interest on notes, which uses the actual number of days since the most recent 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 the interest rate with an Actual/360 formula.
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.).
Appropriations Risk: The risk that a government entity (municipality, county, state, federal, etc.) may not set aside money, or appropriate funds, for a specific purpose. More specifically in leases, the amount required to pay all lease terms (rent, operating expenses, etc.) from the government tenant is not certain, but is contingent upon the passing of an annual budget or another metric.
Average Life (a.k.a. Weighted 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 due to the fact that the loan amortization is longer than the 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 basis point equals one one-hundredth of one percent (.01%). 100 bps equals 1%.
Condominium: A condominium, or condo, refers to a multiple-unit property (such as an office or apartment building) in which the individual units are sold to various parties. A condominium owner holds sole title to its own unit, but shares title to the land and common areas (elevators, stairs, halls, roof, lobbies) with its fellow condo owners.
CTL: Credit Tenant Lease transactions are based primarily on reliance of the tenant’s credit rating and the structure/type of lease. CTLs 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 of credit enhancement include, but are not limited to, a corporate guaranty, cross-collateralization/cross-default provisions, direct lease assignment, a letter of credit ("LOC"), over-collateralization, reserve funds, and third party insurance.
Creditworthiness: A creditor's measure of an individual's or company's ability to meet debt obligations.
Cross-collateralized: It is not uncommon for a lender to make more than one loan to a single borrower (or affiliates). Cross-collateralization is a provision in a bond or loan agreement stating that the collateral for one loan or debt obligation also serves as collateral for another debt obligation.
Cross-defaulted: Cross-default is a provision in a bond or loan agreement stating that a default by a borrower on one debt obligation automatically triggers a default on another debt obligation. The cross-default provision protects the interest of the lender from adverse selection by the borrower.
Date Certain: A specified date in a lease when rent will commence regardless of any unforeseen delays or conditions and whether the tenant has taken occupancy.
Direct Obligation Private Placement 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.
DST structure: A Delaware Statutory Trust (DST) is a separate legal entity created as a trust under the laws of Delaware in which each owner has a “beneficial interest” in the DST for Federal income tax purposes and is treated as owning an undivided fractional interest in the property.
EBITDA: Earnings before interest, taxes, depreciation and amortization.
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, improvements thereon, and bundle of rights.
Fully Amortizing: Loan in which the term is the same length as the amortization (a.k.a. self-liquidating).
Gap Insurance: In the event of a loss by casualty or condemnation, gap insurance runs to the benefit of the lender and 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.
GMP Contract: A guaranteed maximum price (GMP) contract is a cost-type contract where the contractor is compensated for actual costs incurred plus a fixed fee, subject to a ceiling (maximum) price. The contractor is responsible for all costs above and beyond the guaranteed maximum price.
Go Dark Value: A valuation based on the hypothetical assumption that a property is vacant (even though it is currently occupied in whole or in part) and the property is re-leased over a period of time at market rents to a stabilized market occupancy level.
I/O (Interest-only): An interest-only mortgage is a type of mortgage in which, for a certain period of time, the borrower is required to pay only the interest (as opposed to principal and interest) on the debt. There is no amortization of the loan principal during the interest-only period.
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, or a “1” or “2” from the NAIC. <links to Resources page titled Credit Rating Scales>
Lease Type − Bondable Lease: Structured as “absolute” net with no landlord obligations whatsoever, and the tenant has no lease termination, rent abatement, or rent offset rights for any reason (including casualty and/or condemnation) without make-whole. If there is a lease termination right, the tenant must either (a) pay the landlord a lump sum rent in an amount sufficient to pay off the indebtedness at par, or (b) purchase the property for an amount that would enable early redemption of the indebtedness at par. Bondable leases can be underwritten to a minimum 1.00x DSCR.
Lease Type − NNN (Triple Net): Structured with no landlord obligations for structural, roof, parking, or operating expenses. Tenant termination rights for casualty are only permitted during the last three (3) years of the primary lease term, or casualty gap insurance will be required. In the event of full condemnation, or partial condemnation resulting in tenant’s termination of the lease, condemnation gap insurance will be required for the loan term. NNN leases can be underwritten to a minimum 1.01x DSCR.
Lease Type − NN (Double Net): A NN lease typically involves a limited amount of landlord obligations, such as structural and roof, and usually contains tenant termination rights for condemnation and/or casualty, thereby necessitating gap insurance. Replacement reserves for capital items will be underwritten and escrowed monthly from the rent. NN leases can be underwritten to a minimum 1.05x DSCR.
Lease Type − Modified Gross: A modified gross lease includes a greater number of landlord responsibilities, such as some operating expenses and capital items. It is preferable that operating expenses are passed through to the tenant, however operating expenses can be underwritten. Replacement reserves for capital items and any applicable operating expenses will be underwritten and escrowed monthly from the rent. Modified Gross leases can be underwritten to a minimum 1.05x DSCR.
Leased Fee Interest: When a property owner leases a property to a tenant, the property owner becomes a landlord and its ownership interest shifts from fee simple (meaning unencumbered) to leased fee (meaning encumbered by a lease). A leased fee interest consists of the landlord’s right to (i) receive a rental payment stream pursuant to any leases that encumber the property, plus (ii) reclaim possession of the previously encumbered property at the end of the lease terms (a.k.a. the landlord’s reversionary right).
Leasehold Interest: A leasehold interest is created when a land owner (ground lessor) enters into a ground lease with a tenant (ground lessee), thereby granting to tenant the right to use and construct or remodel permanent structure(s) upon the parcel of leased land in return for the payment of ground rent. The leasehold interest refers to the ground lessee’s set of rights conveyed by the land owner. The ground lessee benefits by avoiding the capital outlay of acquiring the land, gaining access to a property that might be unavailable for outright purchase, acquiring ownership rights to the structure(s) during the term of the ground lease, securing use and occupancy rights, and potentially deriving rental income if the tenant chooses to sub-lease the property to a sub-tenant. The land owner benefits by retaining its ownership rights to the land, receiving an income stream (ground rent) from the tenant throughout the term of the ground lease, and acquiring ownership rights to the structure(s) at the end of the ground lease term (reversionary rights).
Letter of Credit: A letter of credit (LOC) 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.
LTC: The loan-to-cost (LTC) ratio is a metric used in real estate finance to compare the amount of leverage (loan amount) to the cost of the property being financed. It is calculated by simply dividing the loan amount by the total cost to construct or acquire the property, expressed as a percentage.
LTV: The loan-to-value (LTV) ratio is a metric used in real estate finance to compare the amount of leverage (loan amount) to the appraised value of the property being financed. It is calculated by simply dividing the loan amount by the current appraised value of the property, expressed as a percentage.
NAIC: The National Association of Insurance Commissioners (NAIC) 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 that will determine whether a security may be classified as a CTL by an insurance company for reserve purposes (Schedule D treatment).
Noteholders: Lenders under the terms of a note.
Pari-passu: Pari-passu is Latin for “equal footing”. In the finance world, when two notes are pari-passu, it means they rank equally in priority for repayment and have the same rights and privileges. Any payments and losses are shared on a pro-rata basis.
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 any 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.
Schedule D Bonds: Insurance companies book most of their bond holdings, including CTL bonds, on Schedule D of their financial statement. The capital reserve requirements for securities booked on Schedule D are lower than other asset classes such as commercial whole loans and equities, thus providing a benefit to the noteholders’ of CTL bonds. The CTL bonds are rated annually by the NAIC based on the underlying creditworthiness of the tenant, bond structure, and historically-adjusted default rates for each bond category. The factor is then multiplied by the bond’s book/adjusted carrying value to arrive at the final risk-based capital reserve requirement.
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.
Surety Bond for Performance and Payment: A contract bond between three parties: the “principal” or primary party who will perform the contractual obligations; the “obligee” or party who is relying on the principal to perform the contractual obligations; and the “surety” or party who assures the obligee that the principal will perform the task. More specifically, in real estate terms, this type of contract bond guarantees satisfactory performance of all duties specified within the construction contract as well as payment of all participants (suppliers, subcontractors, laborers, etc.) should the contractor default.
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) organization under the IRS Tax Code.
Trustee: One who, as agent for others, handles money and/or holds title to their assets. In the case of a Credit Tenant Lease, the trustee receives the lease payments directly from the tenant, pays the principal and interest to the noteholder, deducts any required reserves, 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, seven-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 “whole” so that they are 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.