Terms and definitions

The periodic rate at which interest is due on a mortgage. This may differ from the pay rate.

Interest due on a loan that has not yet been paid. Before any principal reductions are allowed on the loan, the accrued interest is added to the principal balance and commonly must be paid.

A mortgage loan on which the interest rate adjusts periodically (e.g., monthly, every six months, annually). The rate is stated as a spread over a published index rate such as the 10-Year Treasury or the London Inter-Bank Offer Rate (LIBOR).

see Average Daily Rate

A repayment schedule of loan principal over a period of time until the debt is paid off; the periodic payment consists of a growing portion of principal and a declining portion of interest over time.

see Adjustable Rate Mortgage

The ratio of available space to total rentable space, calculated by dividing the total available square feet by the total rentable square feet.

The total amount of space that is currently being marketed as available for lease in a given time period. It includes any space that is available, regardless of whether the space is vacant, occupied, available for sublease, or available at a future date.

Total daily revenue divided by the total number of occupied rooms on that day. This measure is typically used for hotels but may also be used for healthcare properties.

The time until all scheduled and unscheduled principal payments are expected to have been made. The average life of a CMBS is typically compared to the comparable Treasury (often an interpolated Treasury) to determine the expected yield on the CMBS.

A term applied to the classes or tranches of CMBS rated BB+ and lower. Also called BIG, or below-investment grade.

A legal entity devised to insulate identifiable assets (e.g., mortgages) and/or individual borrowers from the effects of bankruptcy in a larger pool of assets. For example, a borrower might segregate selected mortgages in a BRE that are destined for a CMBS; therefore, if other mortgages to the same borrower were to default, the cash flow from the segregated assets would then not be interrupted or seized by a bankruptcy court, hence assuring a continuous cash flow to bondholders of a CMBS. Also see Special Purpose Entity.

see "B" Pieces

A grouping of loans by a single, shared attribute. For example, an issuer might speak of loans satisfying a term bucket (meaning that all the loans have the same or nearly the same average life).

A term describing a particular property, developed specifically for a certain tenant to occupy, with structural features, systems, or improvement work designed specifically for the needs of that tenant. A build-to-suit can be leased or owned by the tenant. In a leased build-to-suit, a tenant will usually have a long term lease on the space.

(Also known as a balloon mortgage) A mortgage that requires monthly payments of interest only until the final mortgage payment, or bullet payment, when full payment of principal is due.

The individual, group, company, or entity that has purchased a commercial real estate asset.

Language on specific loans that protect the lender against early prepayment. The language specifies the specific terms of the call protection: either lockout, penalty points, yield maintenance, defeasance, or a combination thereof over the loan term.

Markets in which capital funds, both debt and equity, are traded. Included are private placement sources of debt and equity as well as organized markets and exchanges. Also see Primary Market.

Defined as the net operating income (I) for the year divided by the appraised value of the property (V) [I/V = R]. It is used as a measure and/or benchmark for a property's value based on current performance. Cap rates also serve as an indicator of investor expectations. See also Going-In Cap Rate and Reversionary Cap Rate.

Cash flow is examined at the level of both the security and the individual property. At the security level, the certificate holders of CMBS receive all principal and interest cash flow from a pool of mortgages in a sequential, defined manner. Early prepayments or extended maturities change those cash flows and therefore can have a material effect on how and when some certificate holders receive their sequential payments, hence affect the total yield on the bonds. At the asset level, the cash flow of each individual property in the CMBS transaction is scrutinized to calculate the ability of the property to generate sufficient revenue to service the loan.

The short-term return on an investment in a property defined as the cash flow received divided by the cash equity invested in a property; expressed as a percentage. Also called an Equity Yield Rate (EYR).

Abbreviation for Central Business District. (See also: Central Business District)

The designations of Central Business District (CBD) and Suburban refer to a particular geographic area within a metropolitan statistical area (MSA) describing the level of real estate development found there. The CBD is characterized by a high density, well-organized core within the largest city of a given MSA.

see Commercial Mortgage Backed Security

Generally defined as a letter between parties to a legal agreement stating that certain actions not clearly covered in the agreement will or will not be taken. Such declarations of intent usually deal with matters that are of importance only to the specific parties and do not concern other signers of the agreement. Specifically to CMBS, a comfort letter is an independent auditor's letter to assure that information in the registration statement and prospectus is correctly prepared and that no material changes have occurred since its preparation.

Securities collateralized by a pool of mortgages on commercial real estate in which all principal and interest from the mortgages flow to certificate holders in a defined sequence or manner.

A relief or reduction in total payments for a period of time, used as an incentive to attract or retain tenants in lease agreements. Concessions can include reduced or free rent for a portion of the lease period, above-market tenant improvement and work letters. The use of concessions in leasing is a response to current market conditions, but the existence of concessions in a building's leases makes it more difficult to calculate net cash flow and, therefore, debt service coverage ratios.

A financial intermediary that functions as a link, or conduit, between the lender(s) originating loans and the ultimate investor(s). The conduit makes loans or purchases loans from third party correspondents under standardized underwriting parameters, and once sufficient volume has accumulated, pools the loans for sale to investors in the CMBS market. Also see Real Estate Mortgage Investment Conduit (REMIC).

Buildings that began construction during a specific period of time. (See also: Deliveries)

Space within a building that is or is able to be joined together into a single contiguous space.

A party designated in a CMBS transaction that has the right to approve and direct certain actions of the special servicer with respect to specially serviced loans.

Permit a retail tenant to cancel its lease if another major tenant vacates the property.

A guaranty made by the issuer (issuer guaranty) or a third party to cover losses due to delinquencies and foreclosures up to the guaranteed amount. The rating of the guarantor is commonly required to be, at a minimum, equal to the highest rating of the securities. A form of credit enhancement.

A mortgage loan entered into for the purpose of providing the borrower flexibility with respect to adding, releasing or substituting collateral. These loans generally have lower LTV and higher DSCR requirements.

A loan in which all payments are guaranteed by the credit of the tenant, which is typically a nationally or regionally rated company with an investment grade credit rating. The credit tenant assumes nearly all of the obligations of ownership, therefore making the lease payments net of any offsets or deductions to the lessor or owner.

A provision in a mortgage or deed of trust by which the collateral for one mortgage also serves as collateral for other mortgage(s). Thus, should the collateral on the one mortgage fall short in repayment of the debt, the collateral of the other mortgage(s) could be claimed as well (but only in the event of such a shortfall). CMBS backed by cross-collateralized properties have reduced delinquency risk; cross-collateralization therefore adds value to the structure. A set of properties with the same owner might be both cross-defaulted and cross-collateralized. A form of credit enhancement.

A provision in a mortgage or deed of trust by which a breach of terms or default under the loan documents of one loan will automatically trigger a default under other mortgage(s). A set of properties with the same owner might be both cross-defaulted and cross-collateralized. A form of credit enhancement.

A delinquent mortgage is said to be cured when all missed payments have been made and loan payments are current.

Vacated retail space for which the tenant is still paying rent despite having vacated the space. See Go Dark Provisions.

The scheduled payments due on a loan, including principal, interest, and other fees required by the loan agreement.

The ratio of a property's net operating income or net operating cash flow to the debt service payments on the loan backed by the property. DSCR is a measure of a mortgaged property's ability to meet monthly debt service payments; higher ratios are more desirable. A DSCR less than 1.0 means that there is insufficient cash flow by the property to cover debt payments

When a loan has violated any terms and conditions of the mortgage, it is considered defaulted.

A method of prepayment whereby the collateral on a mortgage is replaced with government bonds, such as Treasury Strips, which replicate the scheduled cash flows for the remainder of the loan term. In other words, a defeasance guarantees that future cash flows will be undisturbed by the prepayment, and effectively raises the credit rating on the collateral to the US Government's credit rating. The cost of the defeasance to the borrower is the difference between the remaining loan balance and the cost of the government securities replacing the loan.

The amount by which the interest a borrower is required to pay on a mortgage loan falls short of the amount of interest due on the outstanding principal balance. This amount is usually added to the outstanding principal balance of the mortgage loan.

A reserve account established by a borrower to cover future property maintenance costs. Also called a replacement reserve account.

A loan payment that is at least 30 days past due. Usually when the loan is more than 90 days delinquent, the lender has the right to begin foreclosure proceedings.

Buildings that complete construction during a specified period of time. In order for space to be considered delivered, a certificate of occupancy must have been issued for the property.

The date a building completes construction and receives a certificate of occupancy.

The company, entity or individual that transforms raw land to improved property by use of labor, capital and entrepreneurial efforts.

Space that is being offered for lease directly from the landlord or owner of a building, as opposed to space being offered in a building by another tenant (or broker of a tenant) trying to sublet a space that has already been leased.

The rate applied to each year's cash flow from a property to determine the net present value (NPV) of a series of cash flows. Based on the periodic weighted average cost of capital or the required return for a real estate investment.

"Workout fees" paid to a special servicer for making a loan current or liquidating a problem loan or foreclosed property. Can also include late fees, modification fees and loan administration charges. These fees are negotiated with each CMBS transaction.

see Debt Service Coverage Ratio

Involves the inspection of properties and the evaluation of financial records of a property involved in a CMBS transaction, and forms the foundation of the securitization. Due diligence protects investors from unethical and unprofessional practices, and is said to be the cornerstone of securities law.

A loan agreement which provides that the original principal balance may be resized by an additional advance as the operating performance of the property is able to service additional debt. Earn-out loans are made on properties of which performance is expected to improve in the near term due to such factors as renovations, retenanting or repositioning. Earn-out loans specify certain resizing criteria such as minimum debt service coverage ratios (DSCRs) and, in some cases, minimum loan to value ratios (LTVs).

The risk of liability and losses to the lender on a mortgage loan due to the presence of hazardous materials, such as asbestos, RCB, radon, or leaking underground storage tanks (LUSTS) on a property. Properties in a CMBS are required to have at least a Phase I environmental clearance. Even when properties show no current environmental problems, however, rating agencies sometimes in effect "price in" the possibility that properties are at risk of not meeting future environmental standards. Also see Phase I Environmental Site Assessment (ESA).

A loan or investment provision that allows the lender/investor to receive an equity-based return in addition to normal rates upon some event. Typically this involves a lender/investor receiving a disproportionate percentage share of the proceeds of refinancing or sale.

see Cash-on-Cash Return

A deposit jointly held by a borrower and a lender which provides reserved funds for key operating or capital expenses. Typical escrow accounts are held for real estate taxes, insurance, tenant improvement, leasing commissions, necessary structural repairs or environmental remediation, or reserves for replacement. Also called an Impound Account.

The square footage of buildings that have received a certificate of occupancy and are able to be occupied by tenants. It does not include space in buildings that are either planned, under construction or under renovation.

The ratio between operating expenses and operating revenues.

Lease clauses that stipulate the maximum amount of a landlord's owner's obligation for expenses; expenses greater than the stipulated amount (i.e., the "stop") are paid by tenants, pro-rated by the amount of space occupied by each tenant.

A period of time past the contractual termination of the mortgage given to a borrower to repay a mortgage loan through refinancing or sale of the property, or an automatic provision permitting extension of the original term of the mortgage. In order to prevent placing a property in foreclosure, thereby incurring additional costs, servicers may grant an extension to a borrower who has a balloon payment due.

The risk of a borrower's potential inability to refinance balloon mortgages in a timely manner, thereby requiring that the life of the security be extended beyond the expected life.

A government sponsored enterprise (GSE) or a "corporate instrumentality" of the government. Fannie Mae is a quasi-private corporation, with stock that trades. It does not receive a government subsidy or appropriation and is taxed like any other corporation. Fannie Mae purchases and pools conventional mortgages, i.e., those not insured by the Federal Housing Administration (FHA), the Veteran's Administration (VA), or the Farmer's Home Administration (FmHA), but also buys mortgages from FHA, and then issues securities using the pool of mortgages as collateral. Fannie Mae was the first agency to pool mortgages backed by adjustable-rate mortgages and created the first pass-through collateralized by multifamily mortgages through a swap program. Holders of Fannie Mae certificates are guaranteed full and timely payment of principal and interest.

The FDIC oversees the insurance fund for both commercial banks (the BIF) and saving institutions (the SAIF) and assures the viability and liquidity of retail financial institutions. The FDIC is also the principal regulator for some banks, while the Comptroller of the Currency is the regulator for other banks.

A division of the Department of Housing and Urban Development (HUD) that insures residential mortgages.

The lowest class or tranche of a CMBS transaction which will absorb credit losses from the mortgage pool first before any other classes are affected.

A type of building designed to be versatile, which may be used in combination with office (corporate headquarters), research and development, quasi-retail sales, and including but not limited to industrial, warehouse, and distribution uses. A typical flex building will be one or two stories with at least half of the rentable area being used as office space, have ceiling heights of 16 feet or less, and have some type of drive-in door, even though the door may be glassed in or sealed off.

The process triggered by a delinquency where payments are more than 90 days past due, whereby a lender assumes title to a property on which the mortgagee has defaulted. A servicer may take over a property from a borrower on behalf of a lender.

Fee paid by the hotel owner to a larger hotel company that allows the owner to "fly the flag" of that particular company (Hilton, Holiday Inn, etc.) and to benefit from the advertising and reservation network of the company. Fee ranges from 4% to 7% of gross revenue.

A government sponsored enterprise (GSE) or a "corporate instrumentality" of the government. Freddie Mac is a quasi-private corporation, with stock held by Federal Home Loan Banks, under the regulatory control of the Department of Housing and Urban Development (HUD). Under the direction of the Federal Home Loan Bank Board (FHLB), Freddie Mac is charged to buy mortgages from S&Ls to enhance their role in and provide liquidity to the secondary market for single family mortgages (i.e., mortgages not backed by a government agency) and then issues securities using the pool of mortgages as collateral. Rental rates that include all operating expenses such as utilities, electricity, janitorial services, taxes and insurance.

see Gross Full Service Lease

Rental rates that include all operating expenses such as utilities, electricity, janitorial services, taxes and insurance.

A government related agency that is part of the Department of Housing and Urban Development (HUD) and uses the "full faith and credit" of the U.S. government in borrowing. GNMA guarantees securities collateralized by mortgages initially issued by approved lenders (thrifts, commercial banks, and mortgage banks) that pooled the mortgages, using the mortgages for collateral for the security. In so doing, GNMA supports the Federal Housing Administration (FHA) mortgage market as well as mortgages from the Veterans Administration (VA) and the Farmers Home Administration (FmHA). GNMA guarantees pass-throughs, but does not issue them, and will only guarantee a pool in which the underlying mortgages are insured or guaranteed by either the FHA, VA, or FmHA.

Prevents a retail tenant from vacating a space before the term of the lease expires even while continuing to pay rent, since vacant space is de8rimental to the performance of neighboring retail stores.

The capitalization rate applied to the first year's income. Also see capitalization rate and reversionary cap rate.

One of several agencies formed to provide a secondary market for residential real estate loans, including Fannie Mae (Federal National Mortgage Association "FNMA"); Freddie Mac (Federal Home Loan Mortgage Corporation "FHLMC"); and Ginnie Mae (Government National Mortgage Association "GNMA").

Lease structure under which the landlord pays all building expenses. Also called a full service lease or a gross rent lease.

The total change in occupied space over a given period of time, counting space that is occupied but not space that is vacated by tenants. Gross absorption differs from leasing Activity, which is the sum of all space leased over a certain period of time. Unless otherwise noted Gross Absorption includes direct and sublease space.

A lease on undeveloped land that covers the land but not improvements or buildings on that land. In other words, the land and buildings are separate entities and are separately owned. Also called a leasehold.

The change in size of the existing square footage in a given area over a given period of time, generally due to the construction of new buildings.

see Government Sponsored Enterprise

A CMBS expression that refers to the reduction of estimated income or cash flow expected from a property, on which the debt service coverage ratio is calculated. A haircut is a means to take a more agencies to calculate "stressed" DSCR on a property.

A break-even debt service calculation that establishes the maximum interest rate a mortgaged property can handle at maturity if the property must be refinanced. It is calculated using current net operating income and an interest-only mortgage with a reasonably short maturity of less than five years. The hurdle rate is usually calculated to answer the question, Can all loans refinance at maturity if interest rates at a "disaster level"? Also called break even debt service analysis.

The accelerated paydown of a class in a CMBS or of an individual property loan achieved by allocating all scheduled principal and interest to that class.

see Escrow account

A non-affiliated individual on the board of directors of a borrowing entity. The vote of the independent director is required for certain actions by the entity, e.g., declaration of bankruptcy, thus insulating the entity from deleterious control by affiliated principals. This is often a key component of special purpose entity (SPE) and bankruptcy remote structures.

Property used for light or heavy manufacturing, research and development, or warehouse space, including office/warehouse space and flex space.

A property used by special institutions, such as a university, hospital, or a government agency. Since such properties are designed for a specific purpose, they may be difficult to adapt for other uses, even though they may resemble other property types.

A tranche in CMBS that comprises the aggregate payment stream of all interest from the underlying mortgages(s) due on a certain security that exceeds the coupon paid on the security. The excess interest is sold as a separate tranche at a small fraction of the price of the security or of classes with a similar credit rating. IO tranches are highly sensitive to prepayment and extension of loans, since the duration on these tranches may drastically change with these events, and therefore have relatively high price volatility.

An option purchased typically by the borrower that limits the interest rate to a specified maximum on either a periodic or lifetime basis. This option protects the borrower from rising interest rates.

The aggregate amount of interest payments from borrowers that is less than the accrued interest on the certificates.

A calculation of an assumed Treasury rate based on the rates of two other Treasuries with similar maturities, if there is no Treasury available with that specific maturity. For instance, if a 4-year bond is priced to yield a rate benchmarked to Treasuries, the price will be set at approximately the midpoint between the 3-year and 5-year Treasury rates since there is no 4-year Treasury.

Investments that are rated triple-A, double-A, single-A and triple-B are investment grade, therefore appropriate for regulated institutional investors. The lowest investment grade rating is BBB-.

see Corporate guaranty

(Landlord Representative) In a typical lease transaction between an owner/landlord and tenant, the broker that represents the interests of the owner/landlord is referred to as the Landlord Rep.

An arrangement whereby the owner of a commercial property owner and the lender enter into an agreement that assigns lease payments directly to the lender. This is opposed to the standard arrangement where lease payments go directly to the owner, who then forwards mortgage payments to the lender. In a CMBS transactions, lease payments under a lease assignment would go directly to the servicer.

All the space that has a financial lease obligation. It includes all leased space, regardless of whether the space is currently occupied by a tenant. Leased space also includes space being offered for sublease

The cost of improvements for a leased property, often paid by the tenant.

The volume of square footage that is committed to and signed under a lease obligation for a specific building or market in a given period of time. It includes direct leases, subleases and renewals of existing leases. It also includes any pre-leasing activity in planned, under construction, or under renovation buildings.

The fees paid by the landlord to brokers for bringing tenants to a property.

A form of credit enhancement which is an obligation by a third party to cover losses on a loan due to delinquencies and foreclosure on a commercial mortgage loan. The credit rating of the third party that issues the letter of credit is typically required to be, at a minimum, equal to the highest rating of the securities.

see London Interbank Offer Rate

see Low Income Housing Tax Credit

The sale of a defaulted mortgage loan, or of the REO property that previously secured the loan. Also see Real Estate Owned (REO).

A measure of the ease and frequency with which assets such as CMBS are actively traded in the secondary market. Liquidity is related to volume; the greater the outstanding and ongoing issuance of a certain asset such as CMBS, the greater the liquidity typically is.

see Letter of Credit

The ratio of the principal amount on a mortgage at origination to the current appraised value of the property. The ratio is commonly expressed to a potential borrower as the percentage of value a lending institution is willing to finance. The ratio is not fixed and varies by lending institution, the borrower's credit history, the property type, geographic location, size and other variables.

A provision whereby the trustee is given control over the gross revenues of the underlying properties in a CMBS transaction. Property owners only have a claim to cash flows net of expenses, which include debt service, taxes, insurance and other operating expenses.

A period of time towards the beginning of the life of a loan, during which a borrower cannot prepay the mortgage loan. Lock-out is a form of call protection since it prevents prepayment.

The short-term (1-year or less) rate at which banks will lend to each other in London. Commonly used as a benchmark for adjustable rate financing. LIBOR terms are usually for one, two, three or six months or one year.

The difference between the market rental rate for a property and the actual rent being paid for the property, indicating changing market conditions. For example, if a property were leased for a one year term at $10,000 per month, and the current market rate were $10,500 per month on similar properties, the loss to lease would be $500 per month.

A tax credit given to owners for the construction or rehabilitation of low income housing. To qualify for the credit, the property must have: a) at least 20% of the units occupied by individuals with incomes of 50% or less of the area median income, or b) at least 40% of the units occupied by individuals with incomes of 60% or less of the area median income. Also called Section 42 properties after the section of the Internal Revenue Code which authorizes the credit.

see Loan-to-Value Ratio

Periodic adjustments of estimated value of an asset, or of future cash flows from an asset, to reflect current market levels. In a falling or weak market this is likely to create a downward adjustment of current value based on lower expected future income streams, such as if rental rates on existing leases are greater than rental rates being charged for new leases in the market (i.e., if there are several above-market leases in a building that are terminating). The opposite is true in a strong or rising market. This term may apply to the value of CMBS or any security subject to price movements.

Geographic boundaries that serve to delineate core areas that are competitive with each other and constitute a generally accepted primary competitive set of areas. Markets are building type specific, and are non-overlapping contiguous geographic designations having a cumulative sum that matches the boundaries of the entire Region (See also: Region). Markets can be further subdivided into Submarkets. (See also: Submarkets)

A firm responsible for servicing the mortgage loans collateralizing a CMBS transaction on behalf of the bondholders. A master servicer's responsibilities vary according to the servicing agreement, and often include collecting mortgage payments and passing the funds to the trustee, advancing any late payments to the trustee, providing loan performance reports to bondholders, and passing all loans to the special servicer that are non-performing or become REO. Also see Special Servicer.

The principal compensation paid to the master servicer, payable monthly on a loan-by-loan basis from interest on the loans. The base fee is computed on the principal amount for the same period and accrued at the applicable fee rate for a specific deal. In addition, the fee may include all assumption and modification fees, late payment charges and similar fees paid by borrowers on non-specially serviced loans.

A subordinate loan made after the first-lien mortgage that is secured by an ownership interest in the borrower, instead of by the mortgaged property itself. The borrower pledges his equity stake in the property as collateral for the loan. The term "mezzanine" implies temporary indebtedness, but a long term second mortgage is also technically mezzanine debt.

The chronological collation of cash flows from pools of loans, including balloon maturities, that are securitized in a CMBS transaction, and their allocation among the various tranches in the transaction.

A building with five or more residential units or apartments. Multifamily properties are usually distinguished as high rise, low rise, or garden apartments.

Buildings that house more than one tenant at a given time. Usually, multi-tenant buildings were designed and built to accommodate many different floor plans and designs for different tenant needs. (See also: Tenancy).

see Net Cash Flow

Numerous indices compiled by the National Council of Real Estate Investment Fiduciaries (NCREIF) on commercial real estate performance based on data provided principally by pension funds’ equity real estate. Often used as a benchmark for real estate investment performance.

When the scheduled interest payment on a loan is less than the interest accrued according to a certain interest rate, this shortfall is added to the outstanding principal balance. Therefore, as the loan progresses, the principal balance due on the loan grows with time. This is known as negative amortization and often occurs in Adjustable Rate Mortgages (ARMs) when the borrower's capacity to service the loan falls short of the interest due.

The net change in occupied space over a given period of time. Unless otherwise noted Net Absorption includes direct and sublease space.

Defined as the gross revenue from rental payments less operating expenses, rental concessions, tenant improvements, etc. In weak or declining markets, net effective rent may be negative.

Gross operational revenues earned by a property less operating expenses as well as tenant improvements, leasing commissions and reserves, but before mortgage payments. May be expressed as: NCF = NOI - (tenant improvements + leasing commissions + capital repairs).

Gross operational revenues earned by a property less operating expenses but before mortgage payments, tenant improvements, replacement reserves and leasing commissions. NOI is typically used as the basis for calculating debt service coverage ratios.

A rental rate that excludes certain expenses that a tenant could incur in occupying office space. Such expenses are expected to be paid directly by the tenant and may include janitorial costs, electricity, utilities, taxes, insurance and other related costs.

see Notice of Default

An attorney's statement which affirms that the assets of an entity would not be substantially consolidated with those of its affiliates by a bankruptcy court per Section 105 of the bankruptcy code. This is often a key component of special purpose entity (SPE) and/or bankruptcy remote structures.

A loan that fails to make principal and/or interest payments as required by the loan agreement. This includes loans that are making payments at a rate less than the full principal and interest payments required by the mortgage

A notice posted by the trustee or mortgage lender in public records to initiate foreclosure proceedings involving a public sale of the property securing the mortgage. NOD also includes the right to be informed of a borrower's default on a major contract such as a ground lease.

see Net Operating Income

Space that is physically occupied by a tenant. It does not include leased space that is not currently occupied by a tenant.

Property designed to be used principally as a place of business, ranging from major multi-tenant buildings to single tenant buildings built to a tenant's specific needs.

A provision which permits repayment of all or a portion of a loan during a specified period prior to scheduled maturity without a fee or penalty.

A term used primarily by banks to identify real estate on the books that was taken back through foreclosure of a mortgage loan. The term "Other" REO is used by banks to distinguish foreclosed real estate from bank real estate owned, which is typically corporate real estate assets. Nonetheless, the industry commonly uses the term REO for foreclosed real estate. Also see Real Estate Owned (REO).

A form of credit enhancement where the outstanding principal balance of the collateral backing a security is in excess of the outstanding certificate principal owed to the bondholders.

The company, entity, or individual that holds title on a given building or property.

A single loan backed by a certain property or portfolio of properties, which is divided among several smaller components. Each component is securitized in a separate CMBS transaction, and is paid scheduled interest and principal payments on a prorated basis depending on their size relative to the larger loan. Each pari passu component receives equal legal treatment and, in the event of a default, receives a prorated portion of the net liquidation proceeds.

The periodic rate at which interest is paid on a mortgage. This may differ from the accrual rate.

Lease commonly used for large retail stores where rent payments include a base rent plus a percentage of the gross sales ("overage") if sales are greater than a stipulated amount. Percentages typically range from one to six percent of gross sales.

A report prepared by an environmental consultant which reviews the property and surrounding land to ascertain the presence or potential presence of environmental hazards. The analysis examines any ground water contamination, PCBs, abandoned disposal of paints and other chemicals, asbestos or a wide range of other potential contaminants. This Phase I ESA provides a review and makes a recommendation as to whether further investigation is warranted (a Phase II ESA). The latter report would confirm or deny the presence of an environmental hazard and, should one be found, will recommend additional review and/or mitigating effects that should be undertaken.

The status of a building that has been announced for future development but not yet started construction.

see Probable Maximum Loss

A legal contract defining the responsibilities and the obligations of the master and special servicers in managing a CMBS transaction, including required advances.

The amount of space in a building that has been leased prior to its construction completion date, or certificate of occupancy date.

A whole or partial repayment of principal by the borrower greater than or earlier than a scheduled payment on a mortgage loan. Most occurrences are due to borrower refinancing at lower interest rates or due to capital appreciation of the property value.

Language in loan documents requiring a borrower to pay a penalty for any prepayments made on a mortgage loan. Most prepayment premiums are structured either as yield maintenance or penalty points.

The risk that a borrower will repay the remaining principal or an amount greater than the scheduled payment on a mortgage prior to maturity, thus shortening the life of the loan. In order to reduce prepayment risk, commercial mortgages often have call protection provisions.

Calculated by dividing the price of a building (either sales price or asking sales price) by the Rentable Building Area (RBA).

A market that issues new securities on an exchange. The primary market consists of the issuer and the first buyers of the issue.

Securities backed by mortgages that are issued by the private sector, including conduits, banks, thrifts and other financial institutions. These securities are also known as non-agency securities and are not backed by agencies such as Fannie Mae, Freddie Mac, or Ginnie Mae.

The private sale of securities to institutional investors who meet specific criteria of net worth and/or income and who are deemed to be sophisticated investors, e.g., insurance companies. Private placement securities are generally exempt from registration requirements of the Securities Act of 1933. Investors are permitted to scrutinize the financial data of private placements that would not otherwise be publicly released due to confidentiality restrictions. As a result, private placements are particularly suitable for the lower-rated tranches of CMBS because investors have access to more information on which to base a decision.

A statistical analysis that determines the severity of earthquake risk for a property in an earthquake-prone area by defining the damage ratio due to the worst possible earthquake scenario. PML is also used to quantify risk from other natural disasters such as hurricanes, floods and tornadoes. Generally, properties with PMLs over a certain threshold (perhaps 20%) are required to carry additional insurance coverage.

The company and/or person responsible for the day-to-day operations of a building, such as cleaning, trash removal, etc. The property manager also makes sure that the various systems within the building, such as the elevators, HVAC, and electrical systems, are functioning properly. 

see Pooling and Servicing Agreement

An agency that examines the securities and their underlying collateral and assigns credit ratings to the securities based on its benchmarks. Ratings range from triple-A, the highest rating, to triple-C, the lowest rating possible, and are a major influence on CMBS structure and pricing. The four rating agencies of CMBS are Dominion Bond Rating Service, Fitch Ratings, Moody's Investors Service and Standard & Poor's.

A corporation or partnership specially formed to invest in real estate (e.g., by acquiring or providing financing for real estate properties) and/or securities backed by real estate. REITs are required to pass through 90% of taxable income to their investors but are not taxed at the corporate level. The major types of REITs are equity, mortgage, and hybrid; equity REITs are the most common.

A pass-through entity that can hold loans secured by real property without the regulatory, accounting and economic obstacles inherent in other forms of mortgage backed securities. A REMIC is a bankruptcy-remote legal entity which distributes the cash flow to bondholders of various classes (or tranches) of securities without being taxed at the entity level. REMICs have facilitated the sale of interests in mortgage loans in the secondary market. Embedded in the Tax Reform Act, 1986.

A mortgaged property that has been acquired by a trust fund or lender through foreclosure or deed in lieu of foreclosure. Also see Other Real Estate Owned (OREO).

The amount unrecovered from the sale of a foreclosed mortgage loan or REO property. It is equal to the outstanding principal balance of the loan, plus all unpaid scheduled interest, plus all fees applied to the sale of the property, minus proceeds received from liquidation.

Provisions that permit the owner to cancel a lease and regain control of the space after the tenant vacates the space.

see Hurdle Rate

The risk that borrowers are unable to refinance mortgages at maturity, thereby extending the life of a security collateralized by those mortgages.

Core areas containing a large population nucleus, that together with adjacent communities have a high degree of economic and social integration. Regions are further divided into market areas, called Markets. (See also: Markets)

see Real Estate Investment Trust

1) A provision to release certain collateral under a mortgage for a previously agreed upon amount, or 2) A provision that if a borrower prepays the loan associated with one property in a pool of mortgages that are cross-collateralized and cross-defaulted, the borrower must additionally prepay a portion of all other loans in the pool. This provides protection against a borrower “cherry picking” properties out of a cross-collateralized pool.

Sometimes called second generation or direct space, refers to existing space that has previously been occupied by another tenant.

see Real Estate Mortgage Investment Conduit

A lease agreement in which the rent increases at given intervals for a fixed amount of time or for the life of the lease.

The total square footage of a building that can be occupied by, or assigned to a tenant for the purpose of determining a tenant's rental obligation. Generally RBA includes a percentage of common areas including all hallways, main lobbies, bathrooms, and telephone closets.

The annual costs of occupancy for a particular space quoted on a per square foot basis.

see Real Estate Owned

see Deferred maintenance account

The representations (or "reps") and warranties made by a mortgage lender about the quality of the loans. Many reps and warranties survive the securitization process, and are still enforceable once the mortgage has been included in a security. With CMBS the reps and warranties language focuses on the issue of fraud and misrepresentation.

A form of credit enhancement whereby a portion of the bond proceeds are retained to cover losses on the mortgage pool. Also called reserve accounts.

Refers to any cash flow remaining after the liquidation (full payoff) of all classes of securities in a CMBS. Multiple-asset, multiple-class CMBS frequently have a residual.

Property types range from super-regional shopping centers with a gross leasable area greater than one million sq. ft. to small stores with single tenants.

Total hotel revenue over a specified time period divided by the number of available rooms in the hotel in that period

The capitalization rate applied to the expected ultimate sale price/value of a building after a multiple-year holding period. Typically about 50 basis points higher than a going-in cap rate.

The expected value of a building during a theoretical sale after a several-year holding period; used to calculate the reversionary cap rate.

In the event that a contractual obligation between two parties (e.g., a ground lease) is breached or defaulted, the right to cure permits a specified and interested third party (e.g., a lender) to assume the responsibilities of one of the parties (e.g., the borrower) to perform under the agreement (e.g., pay rent) on behalf of the defaulting party to preserve their interests (e.g., their lien position). Often, holders of subordinate debt have the right to cure any default on the primary debt.

Term used to describe the expiration of a lease. Large rollover concentrations in a given time period are undesirable, since this leads to the landlord's exposure to a potentially weaker market and to the possibility of a debt service coverage ratio below one.

The total dollar amount paid for a particular property at a particular point in time.

The sum of sales prices for a given group of buildings in a given time period.

The length of time elapsed since the origination of a mortgage loan; i.e., the longer a loan has been outstanding and performing to its terms, the more "seasoned" it is. The presumption is that more seasoned loans have a lower probability of default. A loan that has been outstanding for perhaps three years but shows a poor pay history (e.g., several late pays, particularly beyond 30 days), is not considered seasoned because of its performance.

see Securities and Exchange Commission

The trading of securities that have been previously issued. Also see Primary Market.

The generic term applied to Certificates of Ownership of the funds or assets of a trust fund. These undivided interests are issued by the trustee in amounts of $100,000 until less than $100,000 remains, then in amounts of $1,000. The certificates are usually issued in lettered classes starting with Class A, the highest-rated class. Each class is risk-rated by one or more of the major rating agencies. If the higher risk first-loss class is included in the security and sold rather than being held by the seller, the class is rated as "NR" (not rated). The "not rated" risk-rating is used for securities not qualifying for the minimum risk rate.

The regulatory agency charged with establishing the proper procedures for the registration and sale of publicly-traded securities and monitoring that these procedures are maintained in the interest of a fair public market.

The creation of a new financial instrument representing an undivided interest in a segregated pool of assets such as commercial mortgages. The ownership of the assets is usually transferred to a legal trust or special purpose, bankruptcy-remote corporation to protect the interests of the security holders.

Loans for which the full amount of the principal will be completely paid off at the loan's termination pursuant to the loan's payment schedule. Also called fully amortizing loans.

The individual, group, company, or entity that sells a particular commercial real estate asset.

Security classes, or tranches, that are rated as investment grade, therefore appropriate for regulated institutional investors (i.e., triple-A, double-A, single-A, and triple-B).

A common structure used in CMBS involving a prioritization of cash flows. For example, in a simple two class senior/subordinate structure (also known as an A/B structure) a) Class A will receive all cash flow up to the required scheduled interest and principal payment; b) The subordinate class, Class B, provides credit enhancement to Class A, and c) Class B will absorb 100% of losses experienced on the collateral until cumulative losses exceed Class B's amount; thereafter Class A will absorb all losses. Also known as a sequential pay structure.

Party responsible for the administration of mortgage loans in a CMBS transaction, acting for the benefit of the certificate-holders. The servicer's responsibilities include reporting to the trustee, collecting payments from borrowers, advancing funds for delinquent loans, negotiating workouts or restructures (as permitted by the pooling and servicing agreement) and taking defaulted properties through the foreclosure process. Also see Master Servicer and Special Servicer.

A major retail tenant that provides significant drawing power to a retail center but which itself may not be part of the particular shopping center or the specific collateral —
for example, a shopping center consisting of several in-line stores with a Wal-Mart on an outparcel that is not collateral for the loan but serves as an anchor. Although the Wal-Mart is not part of the shopping center, the store nonetheless serves as a shadow anchor to the other property and in-line stores.

Buildings that are occupied, or intended to be occupied by a single tenant. (See also: Build-to-suit and Tenancy)

Special Purpose Corporation. See Special Purpose Entity.

see Special Purpose Entity

A bankruptcy-remote entity established by the borrower(s) at the loan level and the issuer at the securities level whose sole asset is the property or properties being financed. The SPE protects the lender and, ultimately, the certificate holders of a security, from having the underlying property involved in bankruptcy proceedings against the borrower on the property; in the event of a bankruptcy or insolvency of the borrower or issuer, an automatic stay would apply and delay payments to investors. Rating agencies generally request counsel to provide "true sale" opinions on the sale from the transferor to the issuer and "non-consolidation opinions" confirming that the entity is indeed bankruptcy remote. Also called a special purpose corporation (SPC) or special purpose vehicle (SPV).

A party in addition to the master servicer that is responsible for managing loans that go into default and conducting the "work-out" or foreclosure process, e.g., liquidating of loans and advancing the proceeds to the trustee. There are various types of special servicers:

a) Those that retain first-loss pieces;

b) Those that invest in B-pieces in return for special servicing rights; and

c) Those that are appointed solely because of their specialized asset management

see Workout fee

A series of tests performed by the rating agency which project the performance of the mortgage pool under varying scenarios or stress related assumptions. The rating agency determines the likelihood of timely repayment using historical loan experience for the collateral type and its own statistical database concerning probability of default and severity of loss. The stress tests to which the pooled loans are submitted include analysis of the mortgage documents, real property collateral, tax structure, geographical distribution, loan servicing and administration issues. For example, a stress test might assess the impact of a change in interest rates on debt-service coverage ratios (DSCRs).

The process of combining mortgages and the creation of corresponding CMBS classes in such a way as to achieve the highest price for a transaction, based on capital market factors prevailing at that time. Also see Waterfall.

Space that has been leased by a tenant and is being offered for lease back to the market by the tenant with the lease obligation. Sublease space is sometimes referred to as sublet space.

Specific geographic boundaries that serve to delineate a core group of buildings that are competitive with each other and constitute a generally accepted primary competitive set, or peer group. Submarkets are building-type specific (office, industrial, retail, etc.), with distinct boundaries dependent on different factors relevant to each building type. Submarkets are non-overlapping, contiguous geographic designations having a cumulative sum that matches the boundaries of the Market they are located within (See also: Market).

An lease on a parcel of land in which the rights attributable to the lease are junior, or secondary, to another more senior obligation.

A collateralized secondary loan, or mortgage, in which the rights to the collateral are junior, or subordinate, to another debt or obligation.

A form of credit enhancement that determines the structure of a CMBS transaction, in terms of the distribution of the risk of credit loss via the face amount allocated to each discrete rating class. Also see Senior/Subordinate Structure and Waterfall.

The Suburban and Central Business District (CBD) designations refer to a particular geographic area within a metropolitan statistical area (MSA). Suburban is defined as including all office inventory not located in the CBD. (See also: CBD)

A loan that is making partial or full interest and principal payments, but with a debt service coverage ratio (DSCR) that would be unacceptable if underwritten at this time. A loan may be classified as sub-performing even if monthly payments are current if the loan-to-value ratio (LTV) or other primary value indicator suggests that the loan is unlikely to be able to pay off in full at maturity.

A servicer contractually engaged by the master or special servicers to perform some of the real estate services required under pooling and servicing agreements, such as property inspections, foreclosure services or individual loan administration. The master or special servicer is legally responsible for the activities of the sub-servicers. Sub-servicers are more likely to be engaged for specialized property types or if there is a small number of loans, a subset of the total portfolio, in a given area.

A term used to indicate whether or not a building is occupied by multiple tenants (See also: Multi-tenant) or a single tenant. (See also: Single-tenant).

see Concessions.

These include the costs of new carpeting, painting, walls, cleanings, etc. The cost is borne generally by the landlord; tenants are often provided with a maximum TI allowance (expressed in dollars per square foot) that the owner will contribute toward improvements. In markets with strong demand, TI may be passed on to the tenant in terms of higher rent. In times of weaker demand, TI allowances may be more generous, thereby adding uncertainty to net cashflow from a building.

See Tenant Improvements

Tenant rep stands for tenant representative. In a typical lease transaction between an owner/landlord and tenant, the broker that represents the interests of the tenant is referred to as a tenant rep. May also refer to tenant representation, the service of representing a tenant.

A measure of how long a currently available space has been marketed for lease, regardless of whether it is vacant or occupied.

Each discretely-rated class of CMBS securities, which is typically paid a coupon stipulated at the time of issue and principal based on a predetermined payment sequence. Typically, lower-rated tranches have higher coupons and longer lives, since they receive no principal payments until the higher-rated tranches have been retired or paid off.

A lease whereby the tenant pays rent, real estate taxes, expenses as well as maintenance fees. This implies no running costs for the owner.

The trustee for a CMBS holds the mortgage collateral documents, issues the certificates of beneficial ownership (the securities), passes all funds from the master servicer to the bondholders, and distributes statements on distributions and the status of the collateral. Acts as a supervisor to the master servicer and special servicer. Ensures that the servicers act in accordance with the pooling and servicing agreement. If there is a violation of the agreement, the trustee has the right to assume the authority of or appoint a new servicer. The trustee represents the trust that holds the legal title to the collateral for the benefit of all class holders of the security. Trustees must carry out their duties according to the indentures established within the trust indenture.

The status of a building that is in the process of being developed, assembled, built or constructed. A building is considered to be under construction after it has begun construction and until it receives a certificate of occupancy.

The ratio of 1BR to 2BR apartments in multifamily properties. The general trend has been toward a higher percentage of 2BR apartments since they provide more flexibility to families and lifestyle renters.

A measurement expressed as a percentage of the total amount of physically vacant space divided by the total amount of existing inventory. Under construction space generally is not included in vacancy calculations.

Space that is not currently occupied by a tenant, regardless of any lease obligation that may be on the space. Vacant space could be space that is either available or not available. For example, sublease space that is currently being paid for by a tenant but not occupied by that tenant, would be considered vacant space. Likewise, space that has been leased but not yet occupied because of finish work being done, would also be considered vacant space.

Unless otherwise specified, the value of a mortgaged property is its fair market value determined in an appraisal obtained by the originator when the loan is first made.

A term used to describe the cash flow pay-out priority of a CMBS. The cash flow from the pool of mortgages typically pays principal plus interest to the highest-rated tranche, while paying only interest on the lower-rated tranches (the coupon payment having been stipulated at the time of issue). After all of the certificates from the highest rated tranche have been retired or paid down, the cash flow then is dedicated to paying principal as well as interest to the next-highest rated tranche. Since lower rated tranches receive principal payments only after higher-rated tranches are paid down, they typically have longer average lives.

Rental rates that are calculated by factoring in, or weighting, the square footage associated with each particular rental rate. This has the effect of causing rental rates on larger spaces to affect the average more than that of smaller spaces. The weighted average rental rate is calculated by taking the ratio of the square footage associated with the rental rate on each individual available space to the square footage associated with rental rates on all available spaces, multiplying the rental rate by that ratio, and then adding together all the resulting numbers. Unless specifically specified otherwise, rental rate averages include both Direct and Sublet available spaces.

A portion of the special servicer's compensation payable for each corrected mortgage loan, as specified by the pooling and servicing agreement. This fee is payable out of and is calculated by applying a workout fee rate to each collection of interest and principal (including scheduled payments, prepayments, balloon payments and payments at maturity) for a mortgage loan as long as it remains a corrected mortgage loan. This fee ceases to be payable if the loan becomes a specially serviced mortgage loan again or becomes an REO property.

The year in which a building completed construction and was issued a certificate of occupancy.

A prepayment premium that makes investors whole for any loss in yield resulting from a prepayment; i.e., the penalty compensates the lender for scheduled interest payments above a risk-free rate that would have been made if no prepayment had occurred. The fee is designed to make investors indifferent to prepayments and to make refinancing unattractive and uneconomical to borrowers. Also see Defeasance.

The difference in yield between a security and a benchmark, typically U.S. Treasuries of the same maturity.

The calculated rate of return an investor will receive as of a certain date if a long-term, interest-bearing investment, such as a bond, is held to its maturity date. The calculation takes into account purchase price, face value, time to maturity, coupon yield and the time between interest payments.

Abbreviation for Year-to-Date. Describes statistics that are cumulative from the beginning of a calendar year through whatever time period is being studied.