Financial Leverage

Preferred Equity:

An Investment in the Ownership Interest of a Property, that is not a Mortgage, with a Preferred Return that takes Priority over other Equity Investors

Interest-Only Loan:

Borrower pays only Interest on the Loan, with no Principal Amortization, and a Balloon Payment due at Maturity. Also called a "Bullet Loan"

Prepayment Penalties, Yield Maintenance, Loan Lockouts:

Mortgage Loan terms that make costly or impossible for a Borrower to Payoff or Refinance a Loan before the contract Maturity Date

Participating Loan:

The Lender receives additional Interest, based on a formula, typically related to Gross Income, NOI, or Cash Flow, that is called a Participation or "Equity Kicker" but is not an actual Ownership Interest in the Property

Convertible Mortgage:

When the Lender has the right to Convert part or all of the Loan Principal to an Ownership Interest in the Property at a specified time.

Mezzanine Loan:

A Loan that often Secured by the Owner's Equity in a Property, rather than by a Mortgage on the Property itself. Usually requires an Inter-Creditor Agreement between the Mezzanine Lender and the First Mortgage Lender.

Financial Leverage:

Allows an Investor to use less Equity to acquire an Investment potentially achieve a higher Leveraged Return, and benefit from the Tax Deductibility of Mortgage Interest. Investors with limited Equity or who desire a higher Leveraged Return may try to borrow at a higher LTV, but as the LTV increases, Risk increases

Sale-Leaseback:

An alternate means of Financing a Property where the Seller retains use of the Property for the duration of the Lease Term. With a Repurchase Option in the Lease, the Seller may regain Ownership of the Property in the future.

Positive and Negative Leverage:

Positive Leverage is when Equity Returns are higher with Debt than without. Negative Leverage is when Equity Returns are lower with Debt than without. With Positive Leverage, the higher the LTV, the higher will be the Leveraged Return on Equity. With Negative Leverage, the higher the LTV, the lower will be the Leveraged Return on Equity.

Loan Underwriting:

The Loan to Value Ratio (LTV) and Debt Service Coverage Ratio (DSCR) are two of the key elements of a loan underwriting. Although the maximum LTV ratio and minimum DSCR levels vary with mortgage market conditions, Lenders are always more secure with a lower LTV ratio and a higher DSCR