This comprehensive glossary of terms will help increase your understanding of the finances involved in the self-storage and other industries.
Amortization: The number of years necessary to pay the loan down to zero, including payments of principal and interest. Most self-storage loans are placed on a 25-year amortization schedule.
Assumption/transfer: Most lenders will allow a one-time assumption of the loan upon their approval and a 1 percent transfer fee.
Basis point: One-hundredth of a percent, i.e., 100 basis points equals 1 percent.
Conduit loan: A loan usually made by a securities firm that sells bonds to investors to raise money for the purpose of lending.
Debt service coverage ratio (DSCR): A ratio used to express the relationship between annual net-operating income and annual debt service. Most lenders require a minimum DSCR of 1.25:1.00. For example, if the annual debt service is $100,000, the annual net income has to be equal to or greater than $125,000.
Impound/escrow account: An account used for the deposit of valuable considerations such as money with an impartial third party. The most common use for these accounts is for the collection of property taxes and insurance premiums.
Index: The instrument used to serve as a base for the cost of money. The LIBOR (London Interbank Offered Rate) index may be used for variable-rate loans, and the Treasury bill may be used for fixed-rate loans. Most CMBS (commercial mortgage-backed securities) lenders will use the seven-, 10- or 15-year Treasury bill.
Loan-to-value (LTV): The percentage amount borrowed in the acquisition or refinancing of a property. A third-party appraiser determines the value of a property.
Lock-out: A provision in a loan indicating a period of time during which the borrower is not allowed to prepay.
Margin (or spread): The rate above the index that is charged. Loosely, this is the investor’s “profit.” If an investor placed funds in U.S. Treasury bills, the margin is the amount above the Treasury bill rate. Usually expressed in basis points.
Mortgage constant: An equal annual payment, expressed in a percentage that will amortize the principal and pay interest over the life of the mortgage. It is important to look at the loan application to determine if there is a minimum constant required by the lender.
Note rate: The annual interest rate you pay. The rate is the index plus the margin.
Prepayment premium or penalty: A penalty for an advanced payment on a mortgage. The most common penalty is known as Defeasance, which is the substitution of Treasuries for the remaining payments on the loan.
Recourse: Alternately known as a personal guarantee. If a loan is in default, the personal assets of the borrower are open for attachment by the lender to cure an amount of the loan payoff in excess of the proceeds from foreclosure sale.
Reserves account: An account to collect reserves for capital improvements. Most lenders will require that an account be established to collect reserves in accordance with the report prepared by a third-party engineer. In most cases, there will be a minimum collection of 15 cents per square foot regardless of the results of the engineering report.
Securitization: A securitization involves a lender bundling similar mortgages that are analyzed by rating agencies and then used as collateral for bonds purchased by institutional investors. This type of financing is ideal for borrowers looking for low fixed-rate financing.
Single-purpose entity: A requirement by all CMBS lenders, a single-purpose entity restricts the borrowing entity from owning any other facility other than the property being financed.
Term: This is the period of time between the borrowing date and due date. In most cases, the term of the loan will coincide with the Treasury bill. For example a 10-year loan will be priced over a 10-year Treasury bill.
Yield maintenance: A prepayment penalty that assures the lender that if a loan is paid off early, no interest will be lost, as though the loan were paid at the end of the term. For example: A loan with a note rate of 10 percent is due in the year 2010. The borrower prepays in 2005, and the Treasury bill rate on five-year money is 5 percent. The yield maintenance would, therefore, be 25 percent (or 5 percent per year).