Commercial real estate alphabet soup

 

02 9월, 16:14www.yourhoustonnews.com

Even the most experienced residential real estate investor can get mixed up by all the strange terminology in commercial real estate. Don’t be caught off guard when someone talks about CAP rates or a DSCR. Use this article as a primer for some of the abbreviated lingo.

 

 A&D is a type of loan used to acquire and develop a piece of raw land. The funds from this type of loan provide for the construction of roads, grading, retention and utilities.

 

 ARM loans are much more common in commercial real estate than in residential. It simply stands for adjustable rate mortgage. Most commercial loans adjust to current financial markets.

 

 Balloons can be a type of mortgage or a single payment due before the loan is paid in full. In either case, a lump sum is due and the loan is retired. In some cases, the loan is immediately refinanced at current rates.

 

 Bridge financing allows an investor to acquire a property with temporary, high interest rate funding with plans to get traditional financing when certain conditions are met. one example would be a property that needs to be rehabbed before a bank will consider offering funds.

 

 CAP rates are a calculation of net operating income based on a capitalization rate. It is a shortcut to help an investor begin deeper analysis of the transaction. The formula is value = annual income divided by the cap rate.

 

 DSCR is the debt service cover ratio. It is the comparison of NOI (net operating income) to the annual debt service (mortgage payments and other expenses).

 

 EGI is the effective gross income derived from the potential gross income, less a vacancy rate and collection loss expenses.

 

 IRR is the annual rate of earnings for a specific investment. The internal rate of return compares the cash invested to the cash returns while considering compound interest as a factor.

 

 JV indicates a joint venture. Two or more people (or entities) become involved in a single project with each entity agreeing to certain investment conditions and responsibilities. It is very similar to a general partnership except the JV usually expires at the end of the project.

 

 LTC is the loan to cost ratio. It calculates the amount of the money borrowed compared to the acquisition, construction and/or renovation expenses.

 

 LTV is the loan to value ratio. It is the amount of money borrowed compared to the value. To the bank calculating the LTV, value is established by the contract between buyer and seller or by an appraisal, whichever is lower.

 

 NOI is the income from the property after operating expenses and reserves have been backed out. The net operating income is calculated without factoring in income taxes or principal and interest payments.

 

 REIT is a mutual fund based on real estate. The fund sells shares of ownership in real estate or mortgages. A real estate investment trust must meet certain IRS requirements to avoid corporate income taxes.

 

 This list of abbreviated real estate terms barely scratches the surface of the language commonly used in a commercial real estate transaction. Even if you learn all these terms, your best bet is to find a local agent who specializes in commercial real estate. Be cautious about engaging an agent who is out of the area or normally practices residential real estate.