Commercial Real Estate

The loan-to-value (LTV) ratio compares the loan amount to the value of the real estate. The LTV is calculated by dividing the loan amount by the property value. The LTV is an assessment of lending risk that financial institutions and other lenders examine before approving a mortgage. Typically, loan requests with high LTV ratios are considered higher risk loans.

LTV = Loan Amount/Property Value

Loan-to-cost (LTC) compares the loan amount to the cost of a real estate project. LTC is calculated by dividing the loan amount by the acquisition and construction cost of a property. Meanwhile, stabilized loan-to-value (LTV) or after remodeled value (ARV) compares the loan amount to the expected market value of the completed project.

LTC = Loan Amount/Project Costs

SLTV (or ARV) = Loan Amount/Completed Value of the Property

(CapEx) are funds used by a borrower to upgrade and make capital improvements to a property and its buildings or equipment. CapEx is often used to improve a property to increase rents and/or reduce operating costs.

The combined loan-to-value (CLTV) ratio is the ratio of all secured loans on a property divided by the value of a property. Lenders use the CLTV ratio to determine a prospective borrower’s risk of default when more than one loan is used.

CLTV = Total Amount of All Mortgage Loans/Property Value

CMBS stands for commercial mortgage backed security. In the case of commercial real estate, it refers to the loan being pooled with other loans and securitized, to be sold off to bond holders for a return. A pool (or group) of similar loans are bundled together for a blended rate of return. Sometimes the loans in the pool are similar (e.g. multifamily properties) and at other times the loans vary in size, property type, and loan terms. Investors may buy shares of these bundled mortgages in the form of a CMBS bond.

CMBS loans, also known as Conduit Loans, are a popular source of capital for commercial real estate owners. Rates on the loans are competitive and are generally non-recourse, with a fixed term of ten years, though often have prepayment penalties and provisions to protect the guaranteed yield to the CMBS bond investors.

A credit tenant lease (CTL) is a long-term lease agreement made between a property owner and a tenant with extremely good credit, typically a major corporation. Credit tenant leases are the basis for credit tenant lease (CTL) loans, which historically had some of the lowest default rates in the commercial finance industry.

Debt Coverage Ratio(DCR), also known as Debt Service Coverage Ratio (DSCR), is a metric that looks at a property’s income compared to its debt obligations (i.e. the principal and interest payments on the mortgage loan).

DCR/DSCR = Net Operating Income (NOI)/Debt Obligations.

Debt yield is simply a property's NOI as a percentage of the total loan amount.

Debt Yield = property NOI/loan amount

GPR is the maximum amount of rent money an owner or investor can expect to make from a property during a specific time period. Unlike a rent roll, which compiles all current actual rents from a property. Gross potential rent assumes 100% occupancy. Market rate tents may be higher or lower than the actual rents.

GRM = Property Value/Gross Rental Income

Gross leasable area, or (GLA), is the area in a commercial property designed for the exclusive use of a tenant. GLA typically includes mezzanines, basements, or upper floors which may be leased by a tenant, but not shared areas, such as public bathrooms or maintenance areas.

Net operating income (NOI) measures the return on an income producing property before debt service. It is calculated by subtracting the property’s operating expenses from its actual gross revenue (actual rents plus other revenue such as laundry, parking, expense reimbursement and other revenue).

NOI = Gross Income - Operating Expenses

Non-recourse financing is a type of commercial lending where the lender looks for repayment only from the income from the real property and the value of the real property as collateral and not from any other assets of the borrower. There are no guarantors or other sureties for the repayment of the loan.

A recourse loan is a loan where the guarantors and/or other sureties are liable for repaying any outstanding balance interest, principal and other amounts owed under the loan if the borrower fails to repay the loan. That guaranty of repayment is in addition to the collateral itself.

A tenant improvement (TI) is an improvement that a landlord/property owner makes to a property to suit the needs of a new tenant. A leasing commission (LC) is a percentage-based commission that a leasing agent receives when they successfully close a deal for a new lease between a landlord and a tenant.

The term capital at risk refers to the amount of capital that a borrower or sponsor contributes to and puts at risk toward the success of the property and or the project. At-risk capital (or the borrower’s “skin in the game”) is used as a buffer or protective equity cushion by lenders to help protect their loan. The more at-risk capital (or skin in the game) the borrower or sponsor puts into the property, the greater the protective equity cushion for the lender

Sponsor Capital Contribution means the at-risk capital contribution by the Sponsor in cash, property or other assets made directly or indirectly to the borrower and the real property. The sponsor capital contribution is used by lenders to determine the commitment and alignment of the sponsor with the borrower and the property.