Mortgage & Homeownership Terms
Repayment Schedule
Commercial real estate loan repayment schedules are based on term and amortization, and these frequently are different durations. The term is how long regular payments will be made. The amortization is the duration that’s used to calculate those regular payments.
For example, a commercial property loan might have a 10-year term and 30-year amortization. The regular payments (usually monthly) would be calculated as if the loan would take 30 years to pay off. The payments would only be made for 10 years, at which time a large payment would be required to clear the remaining balance of the loan.
Because term is often shorter than amortization, balloon payments are common with commercial property loans. Investors frequently manage balloon payments by refinancing or selling, but simply paying them is, of course, acceptable.
Loan-to-value
Loan-to-value ratios measure the balance of a commercial property loan against the value of a financed property. Loan programs have maximum allowed LTVs so that lenders don’t assume too much risk.
Loan-to-value is calculated as follows: LTV = Loan Balance / Property Value
A maximum allowed LTV of 80% is common, but some programs have different allowed maximums. Non-guaranteed programs might have lower LTV requirements. Guaranteed programs might have slightly higher LTV allowances.
Debt-Service Coverage (DSCR)
Debt-service coverage ratios measure a property’s income against the property’s debt. Lenders use DSCR to evaluate whether a property has enough income to service its monthly debt payments.
Debt-service coverage ratio is calculated as follows: DSCR = NOI / Debt Service
Net operating income encompasses a property’s revenues less its operating expenses. Debt service encompasses the interest payments and principal repaying, often of all loans on the property.
Prepayment Penalty
Prepayment penalties are charged when a commercial property loan is fully paid before the maturation date. Lenders use prepayment penalties to ensure at least a portion of their expected return on a loan. Penalties are common on most types of commercial real estate loans.
Prepayment penalties can be structured a number of different ways:
- Lockout Period: Doesn’t allow early repayment for the duration of the period
- Fixed Fee: Assesses a fixed percentage fee if fully repaid early
- Step Down: Assesses a percentage fee that decreases with time
- Yield Maintenance: Assesses a fee based on the expected interest a lender loses
- Defeasance: Assesses a fee in the form of government-based securities
Cap Rate
Cap rates measure the expected annual return that a property should generate. The rate represents the annual expected return that an all-cash investment would yield. Lenders use the rate to evaluate the financial health of an investment property.
Cap rate is calculated as follows: NOI / Property Value
Net operating income encompasses a property’s revenues less its operating expenses.
Net Operating Income
Net operating income encompasses a property’s revenues less its operating expenses.
Recurring revenue can stem from rental income, parking fees, service charges, vending machines, or any other regularly recurring form of revenue.
Operating expenses encompass repairs, maintenance, taxes, insurance, utilities, management fees, and other recurring expenses that are necessary to operate a property. Improvements aren’t part of operating expenses.
Loan-to-case (LTC)
Loan to cost ratios measure the cost of financing a property against the cost of building it. The ratio is specific to construction, and not used for acquisition or refinancing. Lenders consider LTC when calculating the amount of equity that must be retained during construction.
LTC is calculated as follows: LTC = Loan Amount / Construction Cost