Commercial real estate terms
37 terms
Definitions of commercial real estate lending terms for bank credit desks: valuation, covenants, leases and security, each cited to the official record.
A
Adverse media screening
Adverse media screening reviews public news and open sources for financial crime, corruption or other serious misconduct linked to a customer or owner.
B
Basel III
Basel III is the Basel Committee's post-crisis package of minimum capital, leverage and liquidity standards for internationally active banks.
Beneficial ownership
Beneficial ownership identifies the natural persons who ultimately own or control a legal person or on whose behalf a transaction is conducted.
Borrowing base
A borrowing base is the collateral-derived ceiling on revolving advances, calculated from eligible assets after advance rates and reserves.
C
Cap rate
Cap rate is the ratio of a property's stabilised net operating income to its value or sales price, used to convert income into value.
Cash sweep
A cash sweep applies surplus project cash, after operating costs and scheduled debt service, to mandatory prepayment of principal.
Construction loan
A construction loan is credit extended to erect or rehabilitate buildings or other structures, including infrastructure needed for development.
Covenant breach
A covenant breach is a failure to meet a financial or operational undertaking in a loan agreement, often constituting or leading to an event of default.
Cross default
A cross default clause makes a default under other financial indebtedness an event of default under the facility, preserving parity among creditors.
Customer due diligence
Customer due diligence is the anti-money-laundering process to identify and verify customers and beneficial owners and monitor the business relationship.
D
Debenture
A debenture is a corporate instrument that creates security over a company's assets, commonly combining fixed and floating charges in favour of lenders.
Debt service coverage ratio (DSCR)
Debt service coverage ratio (DSCR) measures cash flow available for debt service relative to scheduled principal and interest.
Debt service reserve account (DSRA)
A debt service reserve account holds cash sized to cover a defined period of scheduled principal and interest if operating cash falls short.
Debt yield
Debt yield is the ratio of net operating income to loan amount, expressed as a percent and independent of interest rate and amortisation.
F
FATF
FATF is the Financial Action Task Force, the inter-governmental body that sets and monitors global AML and counter-terrorist financing standards.
Fixed and floating charge
A fixed and floating charge is security over specific assets plus a fluctuating asset class, common in UK company and project lending.
I
Intercreditor agreement
An intercreditor agreement sets ranking, payment waterfalls and enforcement controls among creditors in the same financing.
Interest coverage ratio
Interest coverage ratio measures income available to meet interest costs, used in CRE and project finance credit assessment.
K
Know your business (KYB)
Know your business (KYB) is customer due diligence applied to legal-person customers, including ownership, control and nature of business.
Know your customer (KYC)
Know your customer (KYC) is the industry label for identifying and verifying customers and beneficial owners under customer due diligence rules.
L
Legal entity identifier (LEI)
A legal entity identifier is a unique 20-character code that identifies a legal entity in financial markets under the ISO 17442 standard.
Loan to cost (LTC)
Loan to cost (LTC) is the ratio of credit extended to the total cost of a property including construction costs at origination.
Loan to value (LTV)
Loan to value (LTV) is the ratio of credit extended to the market value of the real estate securing or being improved by that credit.
Lockbox account
A lockbox account is a lender-controlled collection account that receives property rents before cash is swept to reserves and debt service.
M
Material adverse change
A material adverse change clause treats a significant deterioration in the borrower's condition, business or prospects as a default or drawstop.
N
Negative pledge
A negative pledge stops the borrower granting security over assets to other creditors, or requires equal security for existing lenders.
Net operating income (NOI)
Net operating income is annual property gross income less operating expenses, before debt service, depreciation and income taxes.
Non-recourse
Non-recourse financing gives lenders no direct sponsor guarantee, so repayment rests on project or property cash flows and secured assets.
P
Pari passu
Pari passu means ranking equally: lenders share the same priority of payment or security among themselves and relative to other unsubordinated creditors.
PSC register
The PSC register records people with significant control of a UK company, LLP or eligible Scottish partnership, including ownership and control conditions.
R
Retention bond
A retention bond is a guarantee that replaces cash retention, securing defect liability after taking over of the works.
S
Sanctions screening
Sanctions screening checks customers, counterparties and transactions against official sanctions lists to identify prohibited parties or dealings.
Security package and security agent
A security package is the collateral, assignments and support arrangements that secure lender claims over project or property cash flows and assets.
Security trustee
A security trustee holds and enforces shared security on behalf of syndicated lenders and other secured finance parties.
Special purpose vehicle (SPV)
A special purpose vehicle (SPV) is a ring-fenced project company that holds assets and borrows against project cash flows.
Sponsor
A sponsor is the equity party that owns and supports a project or CRE borrower, often through an SPV, with limited or defined recourse to lenders.
U
Ultimate beneficial owner (UBO)
An ultimate beneficial owner is the natural person who ultimately owns or controls a legal entity, or on whose behalf a transaction is conducted.