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Commercial Mortgage Terminology 

CAP RATE (or Capitalization Rate)

*is set by appraiser. 

The rate (as a percentage) that denotes value when divided into the Net Operating Income. A 10 cap on 100,000 of net operating income would yield a value of $1,000,000.

100,000 / 0.10 = 1,000,000

Debt Service Coverage (DSC)

The amount of Net Operating Income that can be earmarked for debt service.  If there is a $100,000 in net operating income and the mortgage constant is 10.5 and the debt service coverage ratio is 1.25, then: $100,000 divided by 1.25 equals $80,000.  The maximum m

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ortgage is therefore the lesser of the loan to value ratio or $80,000 divided by the mortgage constant (10. 5) or $761,905.

Deferred Maintenance

Maintenance items that affect value - in that budgeted amounts for these repairs will be deducted from indicated value.

GNMA Indemnity Escrow

A requirement for GNMA Securities is the posting of cash or a CD equal to 1.75% of the mortgage amount for 39 months.  This is not financeable from the mortgage proceeds and is refunded with interest at the end of 39 months with any interest earned if there are no defaults.

Gross Potential Rent

The current rent roll before vacancies.  The value of all leases for one month plus street rents for the vacant units equals monthly gross potential and annual rent when multiplied by twelve.

Loan to Value

Expressed as a percentage.  Denotes the maximum loan amount as a percentage of value.  Hence, 75% LTV on a $10,000,000.  Property is $7,500,000 Maximum loan.

MBS or Mortgage Backed Securities

Securities backed by a series of mortgages usually, in our case, meaning GNMA securities.  We don’t use, as mortgages are pre-sold as whole loans.  A requirement for GNMA’s is an [“Indemnity Escrow”] equal to 1.75% of the mortgage amount in cash or a CD for 39 months.  This is not financeable from mortgage proceeds.

Net Operating Income

Total income less operating expenses. This is an indicator of value when divided by the CAP Rate.

Net Potential Rent

Gross potential rent less vacancies.

Operating Expenses

Those expenses required operating the property, usually categorized as Administrative, Operating, Maintenance, Taxes and Insurance expenses. Operating expenses do not include any debt service or debt expenses or depreciation or income taxes.

Street Rents

Usually a theoretical income potential if all leases were re-written at the current market rent rather than wait for them to expire.  Some owners report this number as the gross potential in error.

Total Income

Net potential rent plus other income, including laundry, parking and vending income.

Useful Life

A schedule of major building components with the remaining useful life of each.  Used to determine reserve requirements or length of service for main systems that include appliances, carpeting, painting,  parking lot surfaces, boilers, hot water heaters, etc.