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Home Terms and Definitions Definitions - Terms E Thru K
Definitions - Terms E Thru K PDF Print E-mail


Equity - the value of an ownership interest in a property. In commercial financing, equity is the amount of cash that a borrower must put in a project as a "down payment" to meet the lender's LTV, or loan to value, requirements.


Estoppel Certificate or clause - contract clause in which one party asserts that mortgage debt, collateral pledged, etc, is correct on the date the agreement was made. This prevents the borrower from claiming differently at a later date.


Exit Strategy - a plan for leaving one's current situation after a predetermined objective is achieved to mitigate failure or enhance one's position. In commercial lending, an exit strategy at the end of the loan term would be the plan to payoff the remaining principal, either through a balloon payment (pay remainder), refinancing the remaining principal, selling the business or project, or some other alternative. For an investor in a project or business, an exit strategy is the exit plan to transition one's ownership interest in a project or business to recoup their capital investment.


Factoring - short-term financing from the nonrecourse sale of accounts receivable to a 3rd party, known as a "factor." The receivables are sold without recourse, meaning that the factor cannot turn to the seller in the event accounts prove uncollectible.


Flagged Hospitality - hotels with national franchise affiliation are considered "flagged.” Hotels must be in good standing with their affiliated franchise to maintain this tier.


Fully Amortizing Loan - a loan with regular payments of principal that are sufficient to fully pay off the loan by the maturity date, or end of the term, without a balloon payment or additional principal payments. An example is a 30-year fixed rate loan with a 30-year term and a 30-year amortization.


Funeral Home - funeral homes include those properties used for viewing purposes as well as those that include embalming services. They may include equipment and machinery, such as hearses.


Gross Potential Income (GPI) - the total rental revenues of the property when it is 100% leased. The new investor will represent the property’s earning potential at 100% occupancy. Lenders will use this calculation to determine underwriting requirements then reduce the GPI by a vacancy factor in that particular market, or historical factors for that property.


Hard Money Loan - an asset-based loan from which a borrower receives funds secured by the value of the property or real estate. Hard money loans are typically issued to borrowers with higher risk because of their lower business credential or qualifications. Interest rates are usually higher than conventional commercial loans because of the higher risk taken by the lender. Most hard money loans are used for short-term projects lasting from a few months to a few years. The qualifying criteria for a hard money loan varies depending on the lender qualifications and loan purpose, and is largely dependent on the value of the collateralized asset or property.


Health Care - properties that include assisted living, nursing homes, hospitals, and medical treatment facilities, such as out patient care or walk-in emergency medicine. A license is required to operate these facilities as well as having trained medical staff.


Hedge/Hedging - a financial technique to offset the risk of loss from price fluctuations in the market. Hedgers employ a variety of techniques, including futures contracts, options on futures, and interest rate swaps. An investor wanting protection against a fall in price can sell forward contracts (a Long Hedge); in the futures market, to protect against a rise in price, the investor buys forward contracts (a Short Hedge). For example, a borrower in the money market can use interest rate futures as protection against increases in short term rates with a sell or Short Hedge, by selling an interest rate contract for future delivery. If rates happen to rise between the contract sale date and the delivery date, the value of of the futures contract will drop and the hedger can make a gain by buying back, at a lower price, the contract sold earlier.


Income Statement - a profit and loss statement detailing a businesses' financial operations for a defined period, such as a fiscal or calendar year. The Income Statement includes income from business sales (or revenue), expenses, interest, and taxes. It gives a detailed account of all income and rents as well as all of the expenses associated with the property. It is usually accompanied with a balance sheet.


Index - the base interest rate (prime, LIBOR, Fed Funds, T- Bills, etc.) upon which a variable or adjustable-rate loan's interest rate is calculated. Investors can judge the volatility of the loan payments based on the volatility of the index rate selected by the lender.


Industrial - property designed for manufacturing processes, heavy assembly, or the use of heavy machinery. It contains an average amount of office space commensurate with the quality of the building and the intended use. Heavy frames, walls and floors, specialized manufacturing processes and power or utility-service characterize industrial facilities. Examples include automobile assembly and manufacturing plants, steel mills, refineries, smelting plants, coal power plants, etc.


Interest Rate Futures - a contract giving the holder the right to buy or sell a financial instrument at a specific price at a given future date. Interest futures began in 1975 when the Chicago Board of Trade (CBOT) began trading futures contracts on Ginnie Mae pass-through certificates. Later commodities exchanges added futures contracts in Treasury bills, notes and bonds, and commercial paper. Financial institutions use futures contracts as a hedging device to minimize interest rate risk in periods of rising or falling rates.

Last Updated on Thursday, 12 September 2013 15:48

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