Multifamily Financing Terminology
Affordability: Percentage of a property’s rents that qualify as “affordable” in accordance with the definitions set by the Federal Housing Finance Agency (FHFA). This is generally based on a ratio of property rents to area median income (AMI).
Agency Lender: Government-sponsored enterprise (GSE) including Federal National Mortgage Association (FNMA or Fannie Mae), Federal Home Loan Mortgage Corporation (FHLMC or Freddie Mac), and the Federal Housing Administration (FHA). We typically use the term “agency lender” when referring to Fannie Mae and Freddie Mac.
Amortizing Loan: A type of debt requiring interest and principal to be paid steadily throughout the loan’s term.
Amortization Period: Period of time that it would take to pay off a loan based on the monthly payments of principal and interest. The longer the amortization, the lower the monthly payment.
Area Median Income (AMI): The median income, generally defined by the U.S. Department of Housing and Urban Development, for a household in a specific census tract.
Cap Rate: Ratio (expressed as a percentage) that is used as an estimation for an investor’s potential return on a real estate investment. This is calculated by dividing a property’s net operating income by the current market value. Conversely, a cap rate (expressed as a percentage) can be applied to the net operating income to derive the value. The properties net operating income divided by the cap rate will produce the value.
Cash Flowing: When the cash inflows are higher than cash outflows, during a given period.
Comparables (Comps): Properties with similar characteristics as the property to which they are being compared which are used to derive fair market value and benchmark property operations as they relate to income and expenses (on a per unit basis). These characteristics generally include building size, age, class, amenities and location.
Debt: Capital that is lent with the obligation of the borrower to repay the full amount plus interest, on a regular basis (usually monthly).
Debt Service Coverage Ratio (DSCR): Ratio of net cash flow to the total debt service payment on an annual basis or over any specified period. Fannie Mae Small Loans and Freddie Mac Small Balance Loans (SBL) programs typically require a minimum DSCR of 1.20x – 1.25x, which means that the net cash flow must be 1.20-1.25 times greater than the debt service payment.
Debt Service Reserve (DSR): Reserve account established to fund monthly debt service (interest only or principal and interest payments) in the event the borrower is unable to make payments due to unforeseen circumstances. DSR reserves became more common during the Covid-19 pandemic. Declining Prepayment Penalty: Prepayment penalty applying a predetermined percentage to the principle balance; whereby, such percentage has scheduled decreases throughout the loan term. Sometimes referred to as a, “Step-down” prepayment penalty.
Effective Gross Income (EGI): Annual net rental income (NRI) plus other income, minus vacancy, bad debt, and concessions.
Equity: Capital provided by you, your business partners, or an investor that is required by lenders as part of the total funding sources.
Fixed Rate: Interest rate that stays the same during the term of the loan.
Fully Amortizing Loan: When the loan term and amortization period match so the full loan amount will be paid off once the borrower reaches the end of the loan term.
Government-Sponsored Enterprise (GSE): Congressionally chartered quasi-government entities which include Federal National Mortgage Association (FNMA or Fannie Mae), the Federal Home Loan Mortgage Corporation (FHLMC or Freddie Mac), and the Federal Housing Administration (FHA).
Gross Potential Rent (GPR): Calculation of the maximum potential income a property could generate from unit rent alone assuming the property is 100% occupied with no concessions. This calculation does not include other income such as parking fees, pet fees, laundry fees, etc.
Guarantor: Key principal(s) or any other person required to execute a guaranty for a non-recourse Fannie Mae or Freddie Mac loan imposing recourse on such Guarantor(s) in the event he/she/they intentionally commit certain ‘bad acts’ as defined in the loan documents.
Hybrid ARM (Adjustable-Rate Mortgage): Loan product that blends characteristics of a fixed-rate mortgage with an adjustable rate mortgage. Includes initial fixed interest rate period followed by an adjustable rate period.
Interest: Payment the borrower owes the lender (as a percent of the loan principal) for a loan.
Interest Only (IO) Period: Portion of the loan term in which the monthly payment consists only of interest and no principal. This reduced monthly payment maximizes cash flow which can be used for other purposes such as capital improvements.
Key Principal (KP): Person who controls or manages the borrower, and is critical to the successful operation and management of the borrower and the property.
Lender: As it pertains to Agency Lending: an organization approved by Fannie Mae and/or Freddie Mac to directly originate and/or service multifamily loans on behalf of either Agency.
Loan Application: Document providing a summary of agreed upon loan terms which is executed in good faith by the borrower and lender. Also commonly referred to as a term sheet.
Loan Commitment: Letter outlining the final loan terms to be delivered by Lender at closing.
Loan-to-Value (LTV): Ratio of the loan amount to the value of the property. Generally, the higher the LTV, the higher the risk of the loan and therefore, the higher the rate.
Manufactured Housing Community (MHC): Real estate development with lots on which manufactured homes are located, together with amenities, utility services, landscaping, roads, and other infrastructure. Also referred to as mobile home parks.
Multifamily: Rental housing with five (5) or more dwelling units.
Net Cash Flow (NCF): Annual net operating income less replacement reserve expense.
Net Operating Income (NOI): The difference between a rental property’s income and its operating expenses excluding capital expenditures and debt service payments.
Net Rental Income (NRI): Annual gross potential rent (GPR) less physical vacancy, premiums, concessions, and bad debt.
Non-Recourse Loan: Secured loan which does not hold the borrower, key principal(s), or principal(s) personally liable beyond the pledged loan collateral. Often contains a carve-out clause for intentional acts of omission, fraud, and other actions commonly referred to as, “Bad Boy Acts”.
Origination Fee: Fee a lender charges to the borrower for underwriting and originating the loan. Typically collected at closing.
Prepayment Premium: Fee that the borrower must pay in addition to the outstanding loan amount and any accrued interest if they decide to pay off their loan ahead of schedule. Also commonly referred to as prepayment penalty.
Pre-Review: Certain loan or borrower attributes that are deemed to present increased risk or deviations from defined programmatic requirements requiring a pre-screening or deeper review.
Principal: Person who owns or controls a significant interest in the borrowing entity (typically 25% or greater), yet does not hold managing control or majority interest.
Proforma: A detailed projection of income and expenses commonly produced for the first year through the end of the hold period for acquisition transactions. Also commonly referred to as an operating budget.
Replacement Reserve: Custodial account set aside from net operating income to provide funds for anticipated repairs or eventual replacements during the term of the loan.
Sponsor: Individual or company serving as the principal equity owner and/or primary decision maker of the borrower (often the key principal).
Spread: The difference between the rate of a loan and any underlying index rate. For multifamily loans, the underlying index rate is generally the yield of a US Treasury bond with a term equal or closest to the loan term. Fannie Mae Small Loans are quoted as a spread over the corresponding US Treasury index, whereas Freddie Mac SBL Loans are only quoted as an all-in rate.
Subsidy: Funding provided by some level of government (e.g., municipal, county, or state) and made available to a project because that project has been deemed by the issuing entity to provide a public good.
Supplemental Loan: Additional loan proceeds funded through the same lender no sooner than 12 months after the origination date of the initial loan. The Supplemental Loan is typically conterminous with the initial loan. Freddie Mac SBL does not offer supplemental loans, only Fannie Mae Small Loans qualify.
Term: Period during which a borrower will make payments on a loan. The balance of the loan is required to be paid off at the end of the term, also known as the “Maturity Date.”
Third-Party Reports: Reports completed by independent sources or suppliers not directly involved with the loan transaction. These reports typically include an appraisal, streamlined property condition assessment (PCA) and environmental screening (or Form 1104 for Freddie Mac SBL), an insurance review, zoning report, and credit reports.
Underwriting: Process by which the lender verifies the creditworthiness of the borrower, combined with financials, characteristics and quality of the collateral (the property), and agreed upon terms of the loan in order to obtain final approval to originate the loan.
Underwritten Value: Value of a property as determined by the Lender.
Variable Rate: Interest rate that fluctuates during the term of a loan.
Waiver: Approval to deviate from the standard terms, rates, or program requirements based on the borrower’s unique circumstance.
Yield Maintenance Prepayment Penalty: Prepayment penalty that allows investors to attain the same yield as if the borrower made all scheduled interest payments up until the maturity date.
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