Commercial loan terms can be foreign to some, but it is important to understand these concepts and terms. We have put together definitions for some of the most important terms related to commercial loans, along with links to in-depth explanations and examples of calculations that are commonly used.
The rate at which rentable space is filled. Gross absorption takes into account the total square feet rented over a period of time with no negative consideration for space vacated during that time. Net absorption does take into account the space vacated during that time, and is the amount occupied at the end of a period minus the amount occupied at the beginning of that same period.
The repayment of principal using a scheduled payment plan with payments that are more than the amount of interest due. The amortization term dictates the length of time it will take to pay off the debt in full, so a 20 year amortization would pay off a debt in full after 20 years of making scheduled payments.
The tenant that is the main draw to a commercial property, typically the largest tenant in a strip mall or shopping center.
Annual percentage rate, this is the actual cost of borrowing money. It can be higher than the actual note rate as it takes into account the rate, fees, points and other costs to give the actual cost of the money.
Capitalization rate, this is the rate at which net operating income (NOI) is discounted to determine the value of a property. The formula for finding cap rate is expressed as a percentage – cap rate = NOI/FMV. For a detailed overview, read our in-depth post – what is cap rate.
Actual rent due as laid out in a lease or rental agreement.
A blanket lien that encumbers multiple properties.
The money needed to make all interest and principal payments, usually expressed as a monthly or annual figure.
Debt coverage ration, the annual NOI of a property divided by the annual cost of it’s debt service. If this number is below one, it means the property is not generating enough cash flow to cover debt payments. Typically banks and institutions like this number to be 1.15-1.25 or higher. For more on this, read our post about evaluating income on a commercial property.
Deferred Maintenance Account:
A reserve account that may be required to provide for property maintenance.
Effective gross income – the total income from a property minus a pre-determined vacancy factor. This is calculated before expenses and debt service costs. For more on this, read our post about evaluating income on a commercial property.
Effective gross rent – the net rent after adjustments for sales and lease expenses, tenant improvements and other capital costs.
A signed document that certifies particular facts for a third party. An example would be a new purchaser of a property obtaining estoppel certificates from the tenants to verify their current rents.
Costs that are fixed regardless of the level of sales or income. Debt service and taxes would be examples of fixed costs.
Fair market value, this is the price at which a property would be reasonably expected to sell for on the open market.
Gross Building Area:
The sum of all areas of a building, this includes mezzanines, basements, etc. and is expressed in square footage.
Gross Leasable Area:
The portion of the gross building area that is improved for tenants occupancy. This includes storage areas, and is the total area that produces income from rents.
A lease where the landlord pays all expenses such as taxes, insurance, maintenance, utilities, etc. The tenant pays a flat amount in rent.
Hard Money Lenders:
Lenders specializing in non-institutional loans. Typically money is derived from private or individual investors. Known as hard money or private money interchangeably.
Loan to value, this is the ratio of the principal balance of a loan divided by the fair market value of the property.
The amount you would reasonably expect to be able to rent a space for on the open market at the time of evaluation.
Net operating income – gross income minus operating expenses (not including debt service). One of the more important figures to have on a commercial property. For more on this, read our post about evaluating income on a commercial property.
The actual costs associated with the property, includes maintenance, repairs, utilities, management, taxes and insurance.
Net operating income calculated using projections that are based on other like property types in the area.
The optimum occupancy that a building is likely to have after being marketed properly.
Triple Net Lease:
A lease in which the tenant pays all real estate taxes, building insurance, maintenance plus rent. The tenant is responsible for the cost of repairs, improvements and such. In multi-tenant buildings, the tenant would pay their share based on square footage or other agreed upon amount.
The amount of gross income that is expected to be lost due to vacancies. Usually expressed as a percentage of the total rentable square footage of a building.
The total amount of space vacant as compared to the total rentable space expressed as a percentage.
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