sign in sign up
<<
Home , Commercial mortgage, Finance (constituency), Hard money loan, Loan, Mortgage loan, Real estate owned

ommercial boils down to three “main events”: , , and Ctransactions in which money gets turned into property or property gets turned into money. The industry has developed its own vocabulary for these events and all their various bits, pieces, and steps. Some of these words and phrases are just descrip- tive. Others are metaphors or slang that carry some cynicism and humor along with them. Some of these words are cynical and funny, with meanings that are not obvious to the uninformed ear. By fully under- standing these words, one can begin to understand the thought processes and overall flavor of the entire real estate finance industry and mindset. Toward that end, the following lexicon collects words that are commonly and not so commonly used in commercial real estate transactions—pri- marily but also equity investment transactions and commercial . A few of these words some- times have meanings in other areas of business. The authors offer no guarantee about this lexicon, except that it is incomplete and imperfect. This lexicon limits itself to the areas listed in the last paragraph, ignoring two related industries that could offer fertile ground for additions to the list. First, until mid-2007, many newly originated com- mercial mortgage loans soon found their way into the “” process, a mechanism developed by Wall Street that permits pools of mortgage loans to secure multiple tranches of bonds issued to inves- tors. As that mechanism became ever more complex, its vocabulary grew accordingly. Given the dismal state of , the authors’ primary areas of expertise, and length limitations, this lexicon disre- gards any phrases that come exclusively from that area of practice. Second, residential real estate finance has a far more extensive language than commercial real estate finance, but the authors of this lexicon handle only commercial transactions. Words and phrases in this lexicon come mostly from two areas of commercial real estate finance. The first major source is the process of thinking about, structuring, negotiating, and commercial real estate loans. The second major source is the focus of most commercial real estate finance players right now: the process of dealing with troubled and defaulted loans and all the various permutations and elements that can arise in doing so. The words in this lexicon rarely appear in documents, but they often arise in negotiations, meetings, and industry events. And now for the fun part: our definitions of commercial real estate finance terms. Joshua Stein is a partner and Obianuju A. Enendu an associate in the New York, New York, office of

Rick Bright/Andrew O. Alcala Latham & Watkins.

Pr o b a t e & Pr o p e r t y j Ma r c h /Ap r i l 2009 59 Amo: Bow-Tie : Capital Stack: Repayment of principal of a loan, other Modification of an existing loan in The total structure of mortgage and than a Balloon Payment or Bullet Pay- distress, deferring that accrues other for a property, plus the equity ment, typically in recurring monthly above a pre-determined . A investment made by the borrower and its installments or based on a formula. Bow-Tie Loan rolls any deferred inter- principals. See also Debt Stack. est into the loan principal. Bad Boy Carve-out: Carve-out Guaranty: A risk or source of liability for which : A guaranty of certain risks for which a a borrower’s principals may assume -term interim (allegedly) financ- lender refuses to look solely to the col- personal liability under a Carve-out ing that provides the borrower with lateral. Also sometimes a contingent full Guaranty. money until it arranges -term guaranty of the loan, to discourage the financing (also known as a transitional borrower from doing certain bad things Baked: loan). See also . (e.g., a voluntary or collusive bankrupt- Language that has been drafted into cy). These matters are all “carved out” an agreement (e.g., a change in control Brownfields: from the otherwise nonrecourse nature of provision) in anticipation of a future Formerly contaminated , the loan, giving the lender access to the event. Variations: “half-baked” and now remediated to a point at which it other of the guarantor(s). Of little “fully-baked.” can be returned to commerce, subject value, unless signed by a Warm Body. perhaps to use restrictions. See also Bad Boy Carve-out. Balloon Mortgage: A mortgage whose Amo will not repay Bucket: Sweep (or Cash Trap): the entire principal balance by matu- A category of expenditure in a Wa- Procedure in which any excess cash (be- rity, triggering the need for a Balloon terfall. Can also mean any category yond operating costs and debt service) Payment at that point. of (e.g., hotels, office , goes into a lender-controlled . or buildings) in a portfolio Often activated by the borrower’s failure Balloon Payment: transaction. to meet a financial test and accompanied The payment due on of a Bal- by a Lockbox. loon Mortgage, called a Balloon Pay- Bullet Loan: ment because it is much bigger than A loan with no Amo, in which borrow- Chilling a Sale: the individual prior payments. er agrees to repay principal in a lump Actions taken at a sale to sup- sum at maturity. Interest is generally press bidding, so a favored bidder can Bid-out: payable monthly. buy below market. See also Bid-out. A strategy in which multiple foreclo- sure bidders agree to let one of them Bullet Payment: Class A: acquire the with a low bid, Same as Balloon Payment. A high quality category in a particular then resell it at a second auction just market, typically referring to office space. within the group, with the increase in Cap: Trophy Buildings are of even higher price being split among the multiple A to protect the borrower from quality. bidders. Often a crime. the risk that a will float above a certain point, much like Closing: Big Box: an policy against high inter- The event when the buyer pays the pur- A large store operated by a major est rates. Requires a one-time payment chase price, the seller delivers the , regional or national retailer, requiring but imposes no other obligations on the buyer gives the lender a mortgage, substantial space but relatively little the beneficiary. and the lender funds the loan. Some- customization by the . Some- times a meeting of the parties; more often times (but not always) operated on a Cap Rate (or ): handled by a single party that receives stand-alone basis, with little integration Annual net operating income divided the money and signed documents, then or interaction with other tenancies. by purchase price (or sometimes total distributes them (an “”). investment or current fair market Boilerplate: value), expressed as a percentage. For Club Deal: Terms and conditions in loan docu- example, if a property cost $100 and A substantial commercial ments that are generic and rarely nego- its net operating income is $6, then the originated by a small group of lenders tiated but which may become crucial in Cap Rate is 6%. Low Cap Rates imply that often originate loans together and a meltdown of the loan or of the loan high values, and vice versa. not widely offered to the marketplace markets generally. Lenders often don’t of lenders. (In contrast, if a single read the Boilerplate, instead assuming originates a loan and then approaches a that the lawyers got paid to get it right. wide group of other institutions to try to

60 Pr o b a t e & Pr o p e r t y j Ma r c h /Ap r i l 2009 Sell Down the loan, this takes it out of Draw: shorter than a Permanent Loan, to enable the Club Deal category.) A disbursement from a construction a borrower to turn around, redevelop, loan to pay for construction and other or reposition a property and bring it to Comfort Letter costs incurred to date on a Job. Stabilization. Typically requires little or no (or Cold Comfort Letter): Amo except during a Mini-Perm period. Hotel franchisor’s letter to a lender, Drop Shop: offering very limited comfort that the A dry cleaner that does not actually do Flow Deal: franchisor will notify the lender of any dry cleaning on site. An understanding between a bor- future problems with the franchise and rower and a lender, in which the lender possibly issue a replacement franchise Dry Closing: agrees in principle to provide financing after foreclosure. A Closing in which everything is fin- for a series of similar acquisitions that ished except the funding. meet specified criteria, usually includ- Cubing: ing some element of discretionary Estimating the cost of a Job by estimat- Dry Use: approval by the lender. ing the volume and quantities of materi- Any use of retail real property other als the Job will require. than the sale of prepared food. Go Dark: A shutdown of operations by a Big Box Cut-Off Notice: Due Diligence: or other major retail tenant, often with- A borrower’s notice to a lender say- Checking out an asset and a transac- out assigning the or subletting the ing that any future discretionary loan tion—reviewing documents, inspect- space to another operator. This shut- advances will no longer have priority ing, testing, and so on. Considered down can potentially damage other over debt secured by later recorded se- a quaint notion during overheated tenants and, in the worst case, destroy curity devices (e.g., second mortgages), markets. As a practical matter, a an entire shopping center. ostensibly to allow borrower to obtain purchaser’s Due Diligence period also more elsewhere. A law professor’s gives time to arrange its Capital Stack. Go Hard: fantasy with no application in the real A buyer’s determination not to exercise world. Due Diligence Out: a Due Diligence Out, and the expira- A purchaser’s right to terminate an tion of buyer’s deadline to do so. At Debt Stack: acquisition without cost dur- this point, buyer will probably lose its The total structure of mortgage and ing a Due Diligence period. A recent deposit if it cannot close, but may liti- other debt for a property. Part of the case treats such a contract as gate and ultimately settle by splitting Capital Stack; may include a Permanent illusory, Steiner v. Thexton, 77 Cal. Rptr. the deposit. Loan, Mezz Loans, and other financing. 3d 632 (Ct. App. 2008); one should expect to see as the price of Good Bones: Deep Pocket: such . Solid structure and foundations of an A person with extensive Liquidity. old (often unattractive) ready Equity Kicker: for renovation, as opposed to ready to Deep Pocket and Short Arms: A lender’s right to receive a percentage be Scraped. A person with extensive Liquidity who of appreciation or ownership of the is also very good at not using it. collateral. Greenfield: A site where no improvements were Developer’s : Exit: previously built. A green field. A fee payable out of a The end of a transaction, such as a to a developer, ostensibly to “keep the buyer’s successful sale of the property Hair: lights on” in the developer’s office. at a profit. Complexities, issues, and history about Often one of the first line items removed a particular property that create prob- from the budget of a construction loan. Exit Strategy: lems, delays, and extra legal fees for A buyer’s or a lender’s plans for its the Closing. Dialing for Dollars: Exit from a property or transaction. Looking for a lender and trying to nego- Haircut: tiate the best deal. Flag: A reduction of the amount of a loan or Brand name of a hotel or other lodging the value of an equity investment for Doctors and Dentists: property. valuation or capital purposes. Many small in a real estate deal and potential plaintiffs if the deal Floater: Hard Costs: goes bad. Often team up with lawyers A loan that bears interest at a float- Costs of construction that create who don’t follow their own advice. ing rate, typically for a term much additional value in real property

Pr o b a t e & Pr o p e r t y j Ma r c h /Ap r i l 2009 61 (e.g., bricks, mortar, architects, and In the Money: Loan to Own: engineers). Also includes contractor’s The status of a Hedge when the holder A Hard Money Loan or Mezz Loan in overhead and profit. of the Hedge has the right to receive which the lender’s business motiva- current payments from the other party, tion may consist not so much of being Hard Lockbox: so that the Hedge can be sold at a posi- repaid as of acquiring the collateral A Lockbox that the lender fully estab- tive selling price; that is, it has value. through foreclosure. lishes at Closing, with tenants being im- mediately directed to pay all rent to the Jingle Mail: Lockbox: Lockbox. Any disbursements from the When a borrower mails the keys to the An arrangement by which property in- Hard Lockbox require lender approval. property back to the lender (an infor- come goes directly to a particular bank Hard Money Loan: mal deed in lieu of foreclosure). account (subject to a lender interest) to be applied in accordance An expensive mortgage loan from a Job: with a Waterfall. Formally called cash nontraditional lender, often obtained Any substantial construction project. management. Subspecies include Hard because of borrower distress or to meet Lockbox, Soft Lockbox, and Springing financial requirements beyond the Key Money: Lockbox, whose definitions can vary acquisition. Also employed to close Amounts a tenant pays up front to ob- (although this lexicon seeks to capture an acquisition, with the idea that the tain a new lease or purchase an existing some common definitions). borrower will replace the Hard Money lease. The amount of the Key Money Loan with a Permanent Loan at lower depends on leasing market conditions. Lock-in Period (or Lock-out Period): rates. A period during which a loan prohibits Kick-out: Hedge: Amo beyond regularly scheduled prin- A right of a party to terminate an agree- cipal payments, if any. Any transaction to shift to a third party ment, such as a tenant’s or landlord’s a risk of market fluctuations. In real right to terminate a lease based on insuf- MAI: estate, typically refers to mitigating the ficient percentage rent, or a hotel owner’s An appraiser who is a “Member, borrower’s exposure to interest rate right to terminate a management agree- ,” which requires fluctuations by purchasing a Cap or ment based on poor performance. Also, certain training, testing, experience, and entering into a Swap. Borrowers cannot a purchaser’s right to exclude certain adherence to standards. Can also mean yet enter into Hedge transactions to or loans from a multi-property “Made as Instructed,” referring to an cover fluctuations in real estate values, or multi-loan acquisition. appraisal. but these may be around the corner, as- suming continued development of the Land Man: Mandate Letter: . An expert on oil, gas, and mineral titles An agreement between a borrower and Hedge Pledge: and transactions. a Lead Lender by which the borrower authorizes the Lead Lender to seek to A borrower’s collateral of a Lead Lender: arrange and a loan. Hedge to mortgage lender, as additional The lender that originates and adminis- collateral and to mitigate interest rate ters a multiple-lender . Marry Up: risks. A lender’s sale of an REO property by Leakage: Holdback: packaging it with some other property In a partial release formula for a port- to increase the appeal to buyers. Funds retained from a contractor folio loan, the ability of the borrower to pending final completion of a Job or a receive some cash from property sales Mezz Loan (or Mezzanine Loan): particular category of work for a Job. before the loan has been fully repaid. Additional financing secured by a Also funds retained by a lender pend- pledge of equity in the bor- ing completion of necessary repairs or Lease-up: rower or by the borrower’s issuance further leasing. The process of finding “first tenants” of preferred equity interests much like Hope Certificate: for a new or substantially renovated or preferred . Often used as an alter- repositioned building. native to a loan. A subordinated (created in a Workout) that may become valuable if Liquidity: Mini-Perm: the world changes in a more positive Cash or immediately marketable secu- Short-term extension of a construction way than it has changed from mid-2007 rities. loan, after the borrower has completed to early 2009. construction, to give the borrower a year or two to achieve Stabilization.

62 Pr o b a t e & Pr o p e r t y j Ma r c h /Ap r i l 2009 Mod: Proceeds: Shotgun: Modification of an existing loan agree- Total dollars the borrower receives A process through which one joint ment. from a loan at closing. During periods venturer can force a buyout by naming a of easy credit, lenders compete to give price for all the assets of the joint ven- Motor: “maximum proceeds” to desired bor- ture. The other venturer must then either The person who ultimately makes a real rowers. buy out the initiator, or sell to the initia- estate company, development, or project tor, at a price based on the distributions go forward. Just as a car has only one REO: that the joint venture would make if it motor, usually so too does a real estate “” or “Other Real sold all its assets for the stated price. company, development, or project. Estate Owned”—a category of assets on a bank’s , reserved for Silent Partner: Neutron Loan: real estate that the bank has acquired A financial in a borrower, typi- A loan that destroys the borrower by through foreclosure or a deed in lieu of cally with very limited rights to approve forcing a sale of the property, while leav- foreclosure. certain major transactions and no right to ing the property itself intact. control day-to-day management. Often Repo: not publicly identified, so that developer NIMBY: A “repurchase” transaction, in which can portray itself as owner of the Job. “Not in my backyard.” Shorthand sum- the originator of a loan “sells” that loan mary of almost all the usual arguments to a “purchaser” and commits to “re- Single Purpose Entity: mounted against any Job. Related to purchase” it, typically 364 days later. A newly formed entity whose sole BANANA (“Build Absolutely Nothing This method of financing loans may purpose in life is to own and operate Anywhere Near Anything”). give the “purchaser” a better position in particular collateral. The rating agen- than if the originator merely cies established elaborate rules for these No-Cut Management Agreement: pledged the loan to the “purchaser.” entities (e.g., cannot share letterhead or A management agreement that a hotel telephone number with any other entity). owner has virtually no hope of ever termi- Scrape: nating before its scheduled expiration. Demolish existing buildings and clear Sizing: the site in preparation for a Job. Lender’s determination of the final loan Out Years: Proceeds. Any years in the distant future during Second-Owner Project: the life of a property or a lease. A Job in which the initial developer will Snatch Dirt: never make any money. Instead, the Resolution of a defaulted loan by which Overrun (or Cost Overrun): lender will need to foreclose and resell the collateral is transferred to the lender, Amount by which the actual cost ex- at a lower price to the next owner, who often through a bankruptcy. ceeds the originally budgeted, estimated, might make money. or targeted cost of a Job. Snorkeling: See-Through Building: Negotiating, structuring, and closing Pairings: A finished building that does not yet transactions that relate to mortgages that A Single-purpose Entity and another have any tenant improvements or oc- are Under Water. identified entity higher in the borrower’s cupants and is typically in distress (or organizational chart. Rating agencies about to be). Popularized in the 1980s Soft Costs: fear that if the latter entity files bank- by Texas developers that had friendly Marketing, administrative costs, profes- ruptcy, the Single-purpose Entity might S&L lenders. sional fees, real estate , insurance, be dragged into it. This leads to require- and purchases of personal property not ments for “nonconsolidation” opinions Sell Down: directly associated with creating a struc- for each Pairing. Process by which a Lead Lender sells ture but incurred during construction of to a syndicate of lenders’ interests in a a Job. Permanent Loan: previously originated loan. Long-term (more than five year) financ- Soft Lockbox: ing for real property that has achieved Shill: A Lockbox that the parties establish at Stabilization. Typically requires monthly A fake bidder at an auction, whose role Closing, initially allowing the borrower Amo and contemplates a fixed rate of is simply to increase the bids, with an to withdraw funds without lender per- interest (matching the borrower’s rela- understanding that the seller won’t re- mission or control. The lender can block tively stream). ally require the Shill to buy if the Shill is those withdrawals if the property later the highest bidder. fails certain financial tests. Piece: Any parcel of real property.

Pr o b a t e & Pr o p e r t y j Ma r c h /Ap r i l 2009 63 Springing Lockbox: Takeout: Value Engineering: A Lockbox to be established or activated A commitment to provide a Perma- Modifying the plans, specifications, in the future if certain events occur. nent Loan for a Job (i.e., refinance the schedule, logistics, and sequencing of a construction loan) after completion of Job to try to reduce its cost. Stabilization: construction and, in most cases, Lease- The point when a Job is no longer a spec- up and Stabilization. Vanilla Box: ulative development or acquisition and A shell interior of rentable space, with instead has become income-producing Taxpayer: landlord-installed utilities, subfloor, real estate, by achieving a certain state of An outdated building (typically less and finished but unpainted drywall. physical completion, Lease-up, and net than the maximum development al- income. lowed on the site) expected to throw Walk Away Rights: off only enough net operating income A party’s rights to unilaterally termi- Stalking Horse: for its owner to pay real estate taxes. nate a transaction, such as a buyer’s A buyer whose contract will be used to rights under a Due Diligence Out. entice other buyers, with whom the seller Temporary Liquidity Problem: is more likely to actually close a transac- Common explanation for financial Warehouse: tion. Creates a floor for future bidding. stresses that precede a . A revolving loan under which a mort- gage lender borrows money to origi- Sticks and Bricks Takeout: Tillie Feldman: nate mortgages and then holds them on A Takeout conditioned only on finishing A noncreditworthy person, who held a short-term basis, pending securitiza- construction, with no requirement for real property only long enough to tion. Often structured as a Repo. Lease-up or Stabilization. place a mortgage on it, then recon- veyed it (subject to the mortgage) to Warm Body: Story Property: the real owner (who did not assume A creditworthy individual, as opposed Collateral for a loan that requires signifi- the mortgage). An early substitute for to a borrower-related entity that might cant explanation and optimism to justify nonrecourse financing in New York. sign a guaranty but has no real assets. the transaction. See also Deep Pocket. Top Out: Swap: To complete the steel frame structure Waterfall: An agreement in which a borrower (typi- and roof deck for a new building under The priorities for application of cash, cally under a floating rate loan) agrees construction. such as in a Lockbox. to pay a fixed rate, and a counterparty agrees in exchange to cover the borrow- Trailing 12: Way Out in Front of One’s Skis: er’s floating rate loan payments. Because A 12-month period during which a Taking positions, raising issues, or early termination of a Swap can create lender will test the net operating in- expressing views that are premature or substantial liability for a borrower (e.g., come of a project. poorly thought through. if rates have dropped), lenders disfavor Swaps. Borrowers like them because they Tranche: Wet Closing: require no up-front payment. A “slice” of a loan having a particular A Closing that is not a Dry Closing. At priority for application of foreclosure a Wet Closing, the parties not only sign Sweat Equity: sale proceeds. “Higher” Tranches have documents but also fund the Capital The equity value in a property that is lower risk and lower interest rates than Stack. earned by a developer who increases its “lower” Tranches. worth through the developer’s intan- Workout: gible efforts, such as by obtaining Trophy Building: The negotiated resolution of a troubled or planning consent, negotiating option A building, typically a central , typically but not necessarily rights, producing schematic drawings district office building, that attracts the allowing the borrower to retain the for a potential form of development, or highest rent and delivers visibility and collateral, subject to the debt, for some negotiating terms for a pre-leasing. The cachet for its owner above and beyond period. developer may convert its Sweat Equity “ordinary” buildings, or even mere into a share in the future value of the Class A buildings, of the same type. Yank a Bank: completed development. A clause in a allowing Under Water: Lead Lender to buy out the interest Sweetener: A loan whose amount exceeds the of a syndicate member who does not An inducement to someone to enter value of its collateral. behave. n into a contract or to make a loan (e.g., an Equity Kicker).

64 Pr o b a t e & Pr o p e r t y j Ma r c h /Ap r i l 2009