Commercial Loans Blog

Commercial Loan Terms - Open, L-Plus, Sized, TI's, and LC's

Posted by George Blackburne on Fri, Jun 1, 2018

LIBORGeorge Smith Partners is a commercial mortgage banking company and life company correspondent that has been in business since the 1940's.  More precisely George Smith and Company was founded way back in the 1940's.  Management bought the company and changed its name slightly in 1992.  The bottom line is that this was already an old-old company when I first founded Blackburne & Sons way back in 1980.

The term, "correspondent", is an often missed term in commercial real estate finance (CREF).  Lots of blowhard mortgage brokers call themselves correspondents of banks, when in truth they are just mortgage brokers with a good working relationship with a few banks.

 

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A correspondent is the exclusive eyes and ears of some commercial lender, almost always a life company, in some region or city.  All loans in the region are routed through this exclusive correspondent.  In other words, if you were to call the life insurance company (called life companies in the lingo of CREF) directly, they would tell you to call Bob Smith of Granite Commercial Lending, their correspondent for, say, Portland, Oregon.  

The most important feature about a correspondent is that a correspondent services the commercial loans that it originates for Whatever Life Insurance Company.  Therefore, I'm sorry, but unless you are servicing the loans for some commercial lender, you are not a correspondent.

 

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Every two weeks I receive a wonderful newsletter from George Smith Partners called, FinFacts.  In this newsletter, the company provides details about recent loan closings.  These closings announcements are also called tombstones, and tombstones are an excellent way to market for commercial loans.

In this week's FinFacts, George Smith uses a number of terms of art (the language of practitioners of commercial real estate finance) that you should know.  For example, in the tombstone of some bridge loan closing, describes the prepayment penalty as follows: "2% for two years and then open thereafter."  Open obviously means free of a prepayment penalty.

 

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The commercial loan was "priced at L + 300".  The "L" stands for LIBOR, the London Interbank Offer Rate.  It is the rate at which European banks lend reserves to each other, and it is roughly comparable to our Federal Funds Rate.  Most commercial loans tied to LIBOR use either the three-month or six-month LIBOR rate.

FinFacts talks a lot about commercial loans being sized.  Sized means the maximum loan amount that the lender would lend, and it is usually the lower of the maximum loan size allowed by the loan-to-value ratio and the maximum loan size allowed by debt service coverage ratio.  If the lender is  a conduit, the lender may also use the debt yield ratio.  The debt yield ratio typically produces the smallest loan size.  In other words, its the toughest ratio to get past.

 

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Many commercial lenders on their commercial loans will insist on a holdback for TI's and LC's.  TI's stand for tenant improvements, which is an allowance given to new tenants to fix up the space to their liking (carpets, walls, bathroom rooms, etc.).

LC's are leasing commissions.  When a sponsor builds or renovates a commercial building, he will usually have to hire a leasing agent to find a tenant for the space.  The leasing commission can be substantial, so it needs to be built into the budget.

 

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The landlord budgets a 4% to 6% commission for the listing agent, which is split with the tenant broker upon completion of the lease.  The split is most often 50/50, but can be as low as 90/10 in favor of the listing agent.

 

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Topics: commercial loan terms