Glossary of Lending Terms

Here is a list of some "basic" lending terms from the AFT Conference. Don't be afraid to ask questions that may seem basic, chances are that at least 50% of the folks in the room have the same one.

Capital Markets 101, Apartment Finance Today Conference, April 8, 2008

All-in Rate: The interest rate charged to borrowers on a given loan. The all-in rate includes both the benchmark rate used to set the loan, such as the 10-year Treasury rate, and the spread charged by the lender. So, a 10-year Treasury rate of 3.5 percent plus a spread of 200 basis points (or 2 percent) would equal an all-in rate of 5.5 percent.

Amortization: The way that debt is reduced by installments over a given period of time. Amortization is the calculation of equal monthly payments that pay off the debt and interest charged on a loan. It is expressed in years: a loan with a 30-year amortization would have 360 payments.

Debt Service Coverage Ratio (DSCR): DSCR is an underwriting formula that measures whether an income-producing property can sustain its debt based on cash flow. The calculation is Net Operating Income/Total Debt Service. For lenders, the higher the DSCR, the less risk it is taking on the loan. Freddie Mac and Fannie Mae lenders typically underwrite to a 1.20 DSCR, meaning that for every dollar spent on debt payments, the property generates $1.20.

Government-sponsored Enterprises (GSEs): GSEs are financial institutions that were created by the U.S. Congress to provide liquidity in a given market segment. Fannie Mae, Freddie Mac, and the Federal Home Loan Banks are GSEs. While these institutions have a public charter, they are privately owned.

Loan to Value (LTV): An underwriting calculation that measures the amount of a loan against the property’s appraised value. A borrower seeking a $1 million loan for a property worth $2 million will have an LTV of 50 percent, for instance.

Mezzanine Financing: A form of capital that fills the gap between a first mortgage and equity to achieve 100 percent financing on a deal. Mezzanine financing can be structured to emphasize debt or equity characteristics—it can work like a standard loan or allow the mezzanine provider to share in profits.

Non-Recourse Debt: A type of debt wherein the borrower does not have personal liability for the loan. Non-recourse debt is secured by collateral, usually in the form of property. If the borrower defaults, the lender can seize the collateral, but can’t seek further compensation, regardless of whether that collateral covers the full value of the defaulted amount.

Senior Debt: A form of debt that has priority over other types of debt in a given deal. If a borrower defaults, the senior debt must be repaid before other creditors receive payment.

Spread: The amount charged by a lender for issuing a loan. The spread is one component of the all-in interest rate. The spread is expressed in basis points: 100 basis points equals 1 percent.

Subordinate Debt: A form of debt that ranks below other loans in a given deal. If a borrower defaults, subordinate debt providers would get paid only after the senior debt is paid off in full.