IMPORTANT LOAN TERMS

Term:

Length of time lender commits to rate and borrower. For a loan with a balance, the borrower must renew

financing at end of term, or make a balloon payment of the remaining balance.

Amortization:

The number of periods on which the principal repayment is based. May be expressed in years or months.

Longer amortization period reduces monthly payments compared to shorter amortization. The most common types of

amortization are mortgage-style (level P&I payment each period) and straight-line (level principal payment, but with

added interest results in payments which start higher and decline with principal reduction).

Maturity:

Final payment date of loan.

10 x 25:

10-year term with a 25-year amortization (120-month term with a 300-month amortization).

7 x 20:

7-year term with a 20-year amortization (84-month term with a 240-month amortization). Other variations will

exist, (e.g., 7x7, 7x10, 10x20, 15x25, etc.).

Loan to Value (LTV):

ratio of loan amount to the appraised value of the asset; higher LTV is considered more risky, with

75-85% LTV being the general range acceptable to banks.

Origination Fee/Commitment Fee:

Fee charged by lender upon entering into loan agreement; usually rolled into

financing.

Debt Service Coverage Ratio:

Cash flow divided by the annual interest and principal payments. This important covenant

seeks to ensure that the borrower will earn more than enough cash to cover the debt payments. Often there will be a

pre-distribution ratio that is higher (perhaps 1.25x), and then a post-distribution ratio that is lower (perhaps 1.05x) so

that once the borrower shows that it has delivered the cash flow to pay the principal and interest, the borrower is then

allowed to distribute out most or all of the excess cash flow to partners.

All-in Rate:

This is the rate the bank will charge for interest. Generally speaking, the all-in rate breaks down into two

sub-categories. First is the cost of funds. This is ubiquitous across the lending industry. That is to say, the cost for a 10

year term loan with 25 year amortization in the open market is the same for all lenders. The second sub-category is bank

profit which also has two sub-categories. Within the bank profit portion of the all-in interest rate there is the loan

spread (profit accumulated over the term of the loan). Depending on the methodology for fixing the rate (swapped or

not swapped), there could be an additional profit that is realized upon executing a swap. This profit is referred to as the

swap spread and is generally not transparent to borrowers unless they have access to a Bloomberg terminal.

All-in Spread:

This refers to the bank’s total profit. This could be only loan spread or loan spread plus swap spread.

Index:

The base on which a rate is determined. Floating indices are things like the Prime rate and 30-day Libor. Fixed

indices are things like Constant Maturity Treasuries or the swap market cost.

Cost of Funds:

The cost the bank pays to acquire funds based on a certain term and amortization. Included in all-in rate

Loan Spread:

The portion of the interest rate which is the bank’s profit. Generally, it is the difference between the

bank’s cost of funds, and the rate paid by the borrower. For floating rate loans, it might be stated as a spread over a

floating rate index, such as 1.50% over LIBOR, or 0.5% over Prime rate. For fixed rate loans it might be stated as a spread

over a fixed rate index such as 2.25% over Constant Maturity Treasuries, or 1.75% over the swap cost.

Basis Points (bps):

1 basis point is 0.01% (e.g., 1% is 100 basis points).

PV01:

The present value of one basis point, for a loan structure and amount, reference Bloomberg.

LIBOR:

London Interbank Offered Rate; a benchmark rate that the top banks in the world charge each other for short-

term loans. Libor is in the process of being phased out as a basis for commercial loans, since the rate was shown to be

artificially manipulated by traders and lost its integrity.

Secured Overnight Financing Rate (SOFR):

The index that has been proposed as the leading replacement for Libor in the

United States.

Floating Rate Loan:

The interest rate can fluctuate during the term of the loan, generally based on the change in the

index on which the rate is based.

Fixed Rate Loan:

Interest rate that does not fluctuate during period of loan. Fixed rate loans are generally either fixed

via an Interest rate swap contract, or offered directly from the bank.

Pre-Payment Penalty (PPP):

The bank “breakage” cost for early termination of a loan. Typical examples are step down

prepayments for CRE loans (e.g., 5% if the loan is prepaid in the first 12 months, 4% from months 13 to 24, 3%, 2%, 1%,

etc.). It is difficult to get a borrower to move if the PPP is too high to justify a refinance event. Other types of

prepayment penalties include one-way make whole or break funding or yield maintenance, two-way make whole (see

swaps), flat percentage-based prepayment penalties, and defeasance (often the worst type of prepayment penalty).

CMAC terms for PPP may differ from a particular lender, therefore, it is always best to get a specific understanding for

each instance of prepayment.

Yield Maintenance:

A type of prepayment penalty. Locks in client until the end of their term. This compares the cost of

funds today against the all-in interest rate, used against the remaining payments on the loan. This is bad.

Break Funding:

This compares the cost of funds at execution to the cost of funds now. This is not bad.

Net Present Value (NPV):

Present value of swap on a given time & date, or better said, the net present value of the cash

flows reflected in a given swap using the projections of the index over the tenor as the discount rate.

Treasuries:

Various tenors such as 2-year, 3-year, 5-year, 7-year, 10-year, etc. Generally speaking, treasury based rates

will be quoted as the treasury tenor plus the bank’s loan spread. For example, 10-year treasury plus 2.00%. In order to

determine the all-in rate you would need to know the prevailing 10-year treasury cost of funds for a given time and

date.

Internal Fixed Rate:

Often referred to as an on-balance sheet fixed rate. This is a fixed interest rate a bank can offer and

often hold until closing, but this needs to be verified for every proposal.

Indicative Fixed Rate:

Fixed rate as of that day.

Purpose of a swap:

From borrower’s perspective, it is to convert all or a portion of their variable rate to a fixed rate.

Borrower must have closed on a loan with a floating rate. This eliminates risk of floating rates rising and allows for

consistent monthly payment.

Swap Spread:

Banks make a profit on a swap through the swap spread. This is a spread that is added to borrower’s fixed

rate; typically between 10 and 50 basis points (.10% and .50%). A good swap spread from the borrower’s perspective is

below 25 bps. It is completely negotiable, but typically not disclosed in a deal with unsophisticated borrowers.

CMAC works to minimize swap spread so that the bank’s profit is minimized and to negotiate more favorable swap

documents.

Components of fixed swap rate:

Loan spread + swap spread + swap cost = all-in rate

Terminating a Swap:

If a borrower sells their building and needs to terminate a swap, the swap will have positive or negative value.

Negative Value: If the swap cost for the remaining years (replacement rate) is less than original swap cost, borrower owes bank money.

 Positive Value: If the swap cost for the remaining years (replacement rate) is more than original swap cost, bank owes borrower money.

Unsecured bank loan:

Bank provides a loan to commercial entity and the bank is dependent solely upon borrower to

repay loan.

Secured bank loan:

If the borrower is disconcerting to bank, it looks for assets that the borrower can pledge to the bank

in case of non-payment. This includes accounts receivables, equipment, or real property. The bank now has two sources

of repayment – the promise from the borrower and a pledge of the borrower’s assets.

Guarantees:

When the bank doesn’t want to rely on pledged assets of secured bank loan, the bank asks for guarantees

from a related entity or personal guarantees from practice members.

 The bank could accept a guarantee of practice in lieu of personal guarantees if the practice has strong cash flow.

This means no recourse to individuals and recourse to practice.

 For small or mid-size practices, banks will require a guarantee of each member.

Joint Liability:

Each party liable up to full amount of relevant obligation. The bank has the right to collect up to full

amount of any deficiency from any one guarantor.

Several Liability

Each party is liable only for its own specified obligations. If a party is unable to satisfy its obligation,

responsibility does not pass to other parties.

Joint and Several Unlimited:

Each owner of real estate entity guarantees 100% of liability

Joint and Several Limited:

Fixed dollar limit assigned per member or proportional to ownership.

a. Each owner guarantees less than all the debt. Expressed as flat dollar amount or ratably as a multiple of

individual percentage of ownership.

b. Burn Off Provisions: Banks allow extent of these guarantees to burn down after specified period of time.

Sometimes can burn off entirely when certain conditions are met.

c. Banks will pursue those with more net worth and liquidity (marketable securities)

Non-recourse Financing:

No personal guarantees at all. This is usually the preference of borrower. Personal

guarantees are usually avoided when strong borrowers have more than 10-12 owners.

Fair Market Value (FMV)

: determines how much a bank will lend in accordance with the LTV (loan to value) in its

proposal. The LTV multiplied by the appraised FMV equals the maximum approved loan amount.

Net Operating Income (NOI):

Amount of lease revenue that flows through to investor after payment of all expenses

excluding payment of any debt service (i.e. principal and interest).

Capitalization Rate (Cap Rate):

Rate of return on an investment expressed as a whole number. To measure this, you

need the value of the property and how much NOI will be generated. A higher Cap Rate means a lower price, and a

lower Cap Rate means a higher price. Cap Rate is driven by risk; the greater the risk, the higher the Cap Rate. Factors

affecting risk include creditworthiness of tenants, length of leases, condition of property, or location.

Value:

Dollar amount of property as determined by an appraisal; also known as the cost or purchase price. We can use

NOI and cap rates to imply the value.

Asset:

Resources owned by company which have a measured value; examples include cash, buildings, investments.

Liability:

Obligation that is owed by company; examples include loans, debts, bills.

Net worth

: Assets minus liabilities.

Liquidity:

Marketable securities that can be easily converted to cash such as bonds or stock. Banks ask for verification of owners’ liquidity to ensure they can pay loans.

Income statement (profit & loss statement):

The detailed financial results of a business over a period of time.

Quantifies amount of revenue generated and expenses incurred.

Balance Sheet:

Snapshot of financial summary at a certain point in time.

Cash Basis:

Revenues reported on income statement when they are received.

Accrual Basis Accounting:

Revenues reported on income statement when they’re earned but not necessarily paid.

Cost Segregation:

Different factors of a building depreciate differently. Cost segregation identifies which factors

depreciate faster; when factors depreciate faster, taxes are less.