What is a floating / adjustable rate mortgage (ARM)?

An ARM is a mortgage that has an interest rate that adjusts as specific given intervals, which may be set to adjust monthly, quarterly, semi-annually, or annually. Typically the ARM has a fixed spread (i.e. 2.0%) over a given index (i.e. treasuries, LIBOR, etc.).

What is an assumable mortgage?

An assumable mortgage is a mortgage with a feature that allows the buyer of a property to take over the loan that is already in place on the property without triggering any prepayment penalties.

What is a balloon mortgage?

A balloon mortgage is a mortgage that has a shorter term than amortization. At the end of the term, the balance of the loan needs to either be paid off or refinanced.

What are capital expenditures / repairs (CapEx)?

CapEx is typically structural improvements or repairs that are infrequent or one-time expenses. They appear below the NOI in a cash flow statement.

What is a capitalization (cap) rate?

A capitalization rate is a method used by appraisers and investors as a way of determining the value of a property. Practically, a cap rate can be calculated by dividing the net operating income (NOI) of a property by the property’s value and is represented as a percentage (i.e. 7.0%). Alternatively, the value can be determined by dividing the NOI by the cap rate.

What is common area maintenance (CAM)?

CAM are charges that are passed through from the landlord to the tenants for the upkeep and maintenance of the property. It may include grounds-keeping, security, repairs, utilities, and in cases, property taxes and insurance. The definition of CAM changes depending on how it is laid out in the lease.

What is a debt service coverage ratio (DSCR or DCR)?

This is a method used by lenders to asses the credit risk associated with the cash flow of the property in comparison to the required debt payments. A DSCR is calculated by dividing the NOI of the property (excluding capital expenditures as well as intangibles such as depreciation, amortization, interest, and financing fees) by the annual mortgage payments for the property.

What is debt yield?

Debt yield is a ratio used by some lenders to assess the credit risk associated with the cash flow of the property in relationship to the overall value of the property. It is calculated by dividing the cash flow of the property over the loan amount as is expressed as a percentage. Typically the less risky a property, the more acceptable a lower debt yield is.

What is a fixed-rate mortgage?

As the name suggests, the interest rates in these mortgages are fixed (unchanging) for the term of the loan.

What is loan-to-value (LTV)?

This is a ratio used by lenders during the credit analysis process in order to determine what percentage the loan is of the appraised value of the property. The higher the LTV, the more risk the loan is considered to have because of the potential for fluctuations in value. Most commercial lenders like to keep the LTV at 75% or below unless the loan is guaranteed by a government program.

What is a self-amortizing mortgage?

This is a mortgage where the term matches the amortization, making the loan balance $0 at the maturity date.

What are “specialty-use” properties?

Any property that can only be used for a limited number of business purposes are considered specialty use. This includes such properties as: car dealerships, marinas, golf courses, restaurants, car washes, churches, auto-repair shops, day cares, bowling alleys, schools, funeral homes, and most self-storage facilities, among others.