2014

Glossary of Terms
Commercial Mortgage-Backed Securities
A comprehensive glossary of terms to help navigate the world of CMBS.

CRE Finance Council

900 Seventh Street, N.W., Suite 501
Washington, DC 20001
Phone: 202.448.0850
[email protected]
© 2014 CREFC- CRE Finance Council, all rights reserved. 0
 CRE Finance Council Glossary of Terms
Commercial Mortgage-Backed Securities (CMBS)

CRE Finance Council Glossary of Terms

Commercial Mortgage-Backed Securities (CMBS)

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Table of Contents

A ….. 2
B ….. 4
C ….. 5
D ….. 9
E ….. 11
F ….. 12
G ….. 14
H ….. 15
I ….. 15
J ….. 17
K ….. 17
L ….. 17
M ….. 19
N ….. 20
O ….. 22
P ….. 22
Q ….. 25
R ….. 25
S ….. 28
T ….. 32
U ….. 33
V ….. 34
W ….. 34
X ….. 35
Y ….. 35
Z ….. 35

Acknowledgments

CREFC would like to thank Sally Gordon for developing the CMBS Glossary as well as the
following individuals who have contributed to original and updated editions of this product by
suggesting terms for inclusion, providing definitions and proofreading text.

Brad Cohen Diana Reid

Marielle Jan De Beur Don Rundblom
Keith Lee Steve Wolgin
Kevin Porter Tom Wratten

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 CRE Finance Council Glossary of Terms
Commercial Mortgage-Backed Securities (CMBS)

CRE Finance Council Glossary of Terms

Commercial Mortgage-Backed Securities (CMBS)

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A
ACLI: see American Council of Life Insurers.

Accrual Rate: The periodic rate at which interest is due on a mortgage. This may differ from
the pay rate.

Accrued Interest: Interest due on a loan that has not yet been paid. Before any principal
reductions are allowed on the loan, the accrued interest is added to the principal balance and
commonly must be paid.

ADA: see Americans with Disabilities Act, 1990.

ADR: see Average Daily Rate.

Adjustable Rate Mortgage (ARM): A mortgage loan on which the interest rate adjusts
periodically (e.g., monthly, every six months, annually). The rate is stated as a spread over a
published index rate such as the 10-Year Treasury or the London Inter-Bank Offer Rate
(LIBOR).

Administration Rate: The annual rate of the servicing fee and trustee fee, expressed as a
percentage of the outstanding principal balance of each loan.

Advances: Payments made by a servicer on behalf of a loan borrower, either for delinquent
loans (by the special servicer) or performing loans (by the master servicer), so that CMBS
certificate payments can be made according to schedule. Advances may be required not only for
principal and interest but also for property protection, taxes, insurance and foreclosure costs.
As reimbursement, the servicer has a proxy claim to subsequent collections and foreclosure
proceeds up to an amount that was stipulated as
“recoverable.” (see Non-recoverable Advance). Servicers are usually paid prime plus one
percent as an interest rate for their advances.

Agency Securities: Securities issued by governmental or quasi-governmental

agencies such as Fannie Mae (Federal National Mortgage Association), Freddie Mac (Federal
Home Loan Mortgage Corporation), or Ginnie Mae (Government National Mortgage
Association). Agency securities are not rated by rating agencies but carry an implied triple-A
rating.

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Aggregation Risk: The interest rate, pricing, and credit risk assumed by the issuer of CMBS
while mortgages are being warehoused during the process of pooling them for ultimate
securitization.

All-In Cost: The term applied to the total costs of a securitization. Usually quoted in basis
points to reflect what would have been added to the yield if the expenses had not been applied to
the creation of a security.

Allocated Loan Amount: The portion of the principal amount of a blanket mortgage
associated with each individual property in the loan. See blanket mortgage.
Allocation of Realized Losses: The distribution of realized losses among the various classes
of certificate holders in a transaction. Losses are recorded at the deal level after losses have
occurred on particular loans.

American Council of Life Insurers (ACLI): A trade association for life insurance
companies based in Washington, DC that collects and disseminates data on commercial real
estate portfolios held by those companies, including data on mortgage delinquencies. The data
represents approximately 85% of all mortgages held by life insurance companies.

Americans with Disabilities Act (ADA), 1990: A federal Act prohibiting public buildings
from having architectural and communicational barriers for the disabled.

Amortization: A repayment schedule of loan principal over a period of time until the debt is
paid off; the periodic payment consists of a growing portion of principal and a declining portion
of interest over time.

Appraisal Reduction: Following certain events based on loan delinquency, an appraisal will
be performed to determine if the property value justifies any further advances by the master
servicer. If the value of the property is below the loan balance plus authorized advances, the
master servicer may stop or reduce principal and interest payments on that loan to the Trustee.
The Trustee will then reduce principal and interest payments to the certificate holders in order
of their priority, beginning with the first-loss
security.

ARM: see Adjustable Rate Mortgage.

ASERs (Appraisal Subordinate Entitlement Reductions): Structural CMBS feature that

estimates expected losses on defaulted loans and prevents payment of current interest on the
estimated losses. Designed to prevent conflicts of interest between the subordinate and senior
classes.

Asking Rent: Rental rate offered by the landlord to a prospective tenant. The rent paid can be
less than the asking rent after tenants negotiate for an actual rental rate and concessions.

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Available Funds: All funds available or collected from borrowers, including regular payments
of principal and interest, prepayments or servicer advances.

Available Funds Cap: A limit on the amount of interest payable to certificate holders, to the
extent of interest accrued on a group or pool of mortgage loans.

Average Daily Rate (ADR): Total daily revenue divided by the total number of occupied
rooms on that day. This measure is typically used for hotels but may also be used for healthcare
properties.

Average Life: The time until all scheduled and unscheduled principal payments are expected
to have been made. The average life of a CMBS is typically compared to the comparable
Treasury (often an interpolated Treasury) to determine the expected yield on the CMBS.

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B
“B” Pieces: A term applied to the classes or tranches of CMBS rated BB+ and lower. Also
called “B.I.G.,” or below-investment grade.

Balloon Mortgage: A mortgage requiring monthly payments of principal and interest in

which the loan amortization is greater than the term of the mortgage. Principal and interest
payments are made until maturity of the mortgage, at which time full payment of the remaining
principal, the balloon payment, is due. For example, in a ten-year balloon mortgage, with
scheduled payments to amortize the loan in 30 years, part of the principal will be paid down
through year ten, at which point the remaining balance will be paid as a lump-sum.

Balloon Risk: The risk that a borrower is unable to make a balloon or lump-sum payment at
maturity. Also see Refinance Risk.

Bankruptcy Remote Entity (BRE): A legal entity devised to insulate identifiable assets
(e.g., mortgages) and/or individual borrowers from the effects of bankruptcy in a larger pool of
assets. For example, a borrower might segregate selected mortgages in a BRE that are destined
for a CMBS; therefore, if other mortgages to the same borrower were to default, the cash flow
from the segregated assets would then not be interrupted or seized by a bankruptcy court, hence
assuring a continuous cash flow to bondholders of a CMBS. Also see Special Purpose Entity.

Basis Risk: The risk that the cash flow from the underlying mortgage loans does not match the
required payouts to bondholders because the offered certificates are tied to different indices
than are the mortgages (e.g., mortgages are at fixed rates but bonds are at floating rates). This
raises the possibility of the certificates accruing interest at higher interest rates than the
underlying mortgage loans. Also see Basis Risk Shortfall.

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Basis Risk Shortfall: When the aggregate amount of interest on the certificates is greater
than on the collateral, the difference is known as the basis risk shortfall. Also see Basis Risk.

Below Investment Grade: see “B” Pieces.

Blanket Mortgage: A single mortgage collateralized by more than one property with the same
owner. Also see Cross-Collateralization and Cross-Default.

Bucket: A grouping of loans by a single, shared attribute. For example, an issuer might speak
of loans satisfying a term bucket (meaning that all the loans have the same or nearly the same
average life).

Bullet Mortgage: A mortgage that requires monthly payments of interest only until the final
mortgage payment, or bullet payment, when full payment of principal is due.

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C
Call Protection: Language on specific loans that protect the lender against early prepayment.
The language specifies the specific terms of the call protection: either lockout, penalty points,
yield maintenance, defeasance, or a combination thereof over the loan term.

Capital Markets: Markets in which capital funds, both debt and equity, are traded. Included
are private placement sources of debt and equity as well as organized markets and exchanges.
Also see Primary Market.

Capitalization Rate (Cap Rate): Defined as the net operating income (I) for the year divided
by the appraised value of the property (V) [I/V = R]. It is used as a measure and/or benchmark
for a property’s value based on current performance. Cap rates also serve as an indicator of
investor expectations. See also Going-In Cap Rate and Reversionary Cap Rate.

Cash Flow: Cash flow is examined at the level of both the security and the individual property.
At the security level, the certificate holders of CMBS receive all principal and interest cash flow
from a pool of mortgages in a sequential, defined manner. Early prepayments or extended
maturities change those cash flows and therefore can have a material effect on how and when
some certificate holders receive their sequential payments, hence affect the total yield on the
bonds. At the asset level, the cash flow of each individual property in the CMBS transaction is
scrutinized to calculate the ability of the property to generate sufficient revenue to service the
loan.

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Cash-on-Cash Return: The short-term return on an investment in a property defined as the

cash flow received divided by the cash equity invested in a property; expressed as a percentage.
Also called an Equity Yield Rate (EYR).

Casualty: A property damaged or destroyed by an unexpected or unusual event.

CDR: See Constant Default Rate.

Certificate: An actual certificate that defines the beneficial ownership in a trust fund.

Certificate Holder: The owner of record that actually owns a certificate (security).

Closed-End Mortgage: A mortgage bond issued with an indenture that prohibits repayment
before maturity and the re-pledging of the same collateral without the permission of the
bondholders. Also called a closed mortgage.

CMBS: see Commercial Mortgage Backed Security.

CMSA: Commercial Mortgage Securitization Association. An international trade association

promoting the ongoing strength, liquidity and viability of commercial real estate capital market
finance worldwide. CMSA plays a vital role in setting industry standards and educating
professionals. With more than 470 member companies worldwide, and with a presence in
Canada, Europe, Japan and the United States, our diverse membership base represents the full
range of the industry’s market participants, including senior executives at the largest money-
center banks and investment banks, rating agencies, insurance companies, investors, lenders
and service providers.

CMBX: The CMBX is a group of indices – each index consisting of 25 equally weighted similar
rated CMBS tranches. Using the CMBX, one can either gain synthetic risk exposure to a
portfolio of CMBS by “selling protection” or take a short position by “buying protection.” The
notional balance, amortization and writedowns for a CMBX Index closely mirror the balance,
principal payments and writedowns of the corresponding portfolio of cash CMBS. The indices
are rolled into a new “on the run” series every six months (April and October). The first vintage
of indices began trading in March 2006. Markit is the Administration and Calculation Agent.

Collateral Valuation Adjustments (CVA): see ASERs.

Collection Account: An account established by the master servicer in the name of the trustee
for the benefit of the certificate holders. Usually all payments and collections received on the
mortgages and from advances made by the servicers are deposited into this account.

Comfort Letter: Generally defined as a letter between parties to a legal agreement stating that
certain actions not clearly covered in the agreement will or will not be taken. Such declarations
of intent usually deal with matters that are of importance only to the specific parties and do not
concern other signers of the agreement. Specifically to CMBS, a comfort letter is an independent

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auditor’s letter to assure that information in the registration statement and prospectus is
correctly prepared and that no material changes have occurred since its preparation.

Commercial Mortgage Backed Security (CMBS): Securities collateralized by a pool of

mortgages on commercial real estate in which all principal and interest from the mortgages flow
to certificate holders in a defined sequence or manner.

Commercial Property: An income-producing property, e.g., multifamily housing, retail,

office, warehouse, industrial or hotel.

Concessions: A relief or reduction in total payments for a period of time, used as an incentive
to attract or retain tenants in lease agreements. Concessions can include reduced or free rent for
a portion of the lease period, above-market tenant improvement and work letters. The use of
concessions in leasing is a response to current market conditions, but the existence of
concessions in a building’s leases makes it more difficult to calculate net cash flow and,
therefore, debt service coverage ratios.

Conduit: A financial intermediary that functions as a link, or conduit, between the lender(s)
originating loans and the ultimate investor(s). The conduit makes loans or purchases loans from
third party correspondents under standardized underwriting parameters, and once sufficient
volume has accumulated, pools the loans for sale to investors in the CMBS market. Also see
Real Estate Mortgage Investment Conduit (REMIC).

Constant Default Rate (CDR): A percentage of the outstanding collateral principal that is
expected to default in one year. The default is assumed to be a liquidation.

Constant Prepayment Rate (CPR): A percentage of the outstanding collateral principal that
is expected to prepay in one year. A CPR represents an assumed constant rate of prepayment
each month (expressed as an annual rate), rather than a variable rate of prepayment.

Constant Prepayment Yield (CPY):A modified CPR that assumes prepayments to be zero
until all yield maintenance and penalty provisions are expired. IO tranches in CMBS are priced
using a 100 CPY assumption.

Contributions Tax: A tax imposed on a REMIC triggered by certain contributions of

properties made to a REMIC after the day on which the REMIC issues all of its interests. Each
pooling and servicing agreement will include provisions designed to prevent the acceptance of
any contributions that would be subject to such a tax.

Controlling Party: A party designated in a CMBS transaction that has the right to approve
and direct certain actions of the special servicer with respect to specially serviced loans.

Convexity: A measurement of the rate of change of duration of a security. Positive convexity

implies that prices rise at an increasing rate as yields fall, and prices decline at a decreasing rate
as yields rise.

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Co-Tenancy Provisions: Permit a retail tenant to cancel its lease if another major tenant
vacates the property.

Corporate Guaranty: A guaranty made by the issuer (issuer guaranty) or a third party to
cover losses due to delinquencies and foreclosures up to the guaranteed amount. The rating of
the guarantor is commonly required to be, at a minimum, equal to the highest rating of the
securities. A form of credit enhancement.

Corrected Mortgage Loan: A mortgage loan that had previously incurred a default or related
event is current or cured in the sense that all payments are current and defaults are cured.

CPR: see Constant Prepayment Rate.

CPY: see Constant Prepayment Yield.

Credit Enhancement: Provisions in addition to the mortgage collateral to support a desired

credit rating on mortgage backed securities. Provisions made by issuers to compensate for
default risk in CMBS include subordination, reserve funds, cross-collateralization, cross-default
provisions, and advance payment agreements. Also see Subordination.

Credit Facility Loan: A mortgage loan entered into for the purpose of providing the borrower
flexibility with respect to adding, releasing or substituting collateral. These loans generally have
lower LTV and higher DSCR requirements.

Credit Tenant Lease: A loan in which all payments are guaranteed by the credit of the tenant,
which is typically a nationally or regionally rated company with an investment-grade credit
rating. The credit tenant assumes nearly all of the obligations of ownership, therefore making
the lease payments net of any offsets or deductions to the lessor or owner.

Cross-Collateralization: A provision in a mortgage or deed of trust by which the collateral

for one mortgage also serves as collateral for other mortgage(s). Thus, should the collateral on
the one mortgage fall short in repayment of the debt, the collateral of the other mortgage(s)
could be claimed as well (but only in the event of such a shortfall). CMBS backed by cross-
collateralized properties have reduced delinquency risk; cross-collateralization therefore adds
value to the structure. A set of properties with the same owner might be both cross-defaulted
and cross-collateralized. A form of credit enhancement.

Cross-Default: A provision in a mortgage or deed of trust by which a breach of terms or

default under the loan documents of one loan will automatically trigger a default under other
mortgage(s). A set of properties with the same owner might be both cross-defaulted and cross-
collateralized. A form of credit enhancement.

Cured: A delinquent mortgage is said to be cured when all missed payments have been made
and loan payments are current.

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Cut-Off Date: The date on which the portfolio securing the CMBS is firmly identified, and the
numbers from that pool are used for the final calculations before issuing the securities.

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D
Dark Space: Vacated retail space for which the tenant is still paying rent despite having
vacated the space. See Go Dark Provisions.

Debt Service: The scheduled payments due on a loan, including principal, interest, and other
fees required by the loan agreement.

Debt Service Coverage Ratio (DSCR): The ratio of a property’s net operating income or net
operating cash flow to the debt service payments on the loan backed by the property. DSCR is a
measure of a mortgaged property’s ability to meet monthly debt service payments; higher ratios
are more desirable. A DSCR less than 1.0 means that there is insufficient cash flow by the
property to cover debt payments.

Default: When a loan has violated any terms and conditions of the mortgage, it is considered
defaulted.

Defeasance: A process by which a borrower may obtain release of the lien on its property as
security for the loan by substituting qualifying government securities as replacement collateral,
which have payment terms sufficient to make scheduled payments on the loan. Defeasance is
used as an alternative to prepayment of the loan, the key difference being that in defeasance the
loan remains outstanding. For comparison purposes, the cost of the defeasance securities as
replacement collateral over the outstanding balance of the loan could be compared to the yield
maintenance or prepayment premium where the prepayment option is permitted.

Deferred Interest: The amount by which the interest a borrower is required to pay on a
mortgage loan falls short of the amount of interest due on the outstanding principal balance.
This amount is usually added to the outstanding principal balance of the mortgage loan.

Deferred Maintenance Account: A reserve account established by a borrower to cover

future property maintenance costs. Also called a replacement reserve account.

Delinquency: A loan payment that is at least 30 days past due. Usually when the loan is more
than 90 days delinquent, the lender has the right to begin foreclosure proceedings.

Delivery Date: The date on which the securities will be delivered to the purchasers, or to the
Trustee if the Trustee is the custodian for the Depository Trust Company (DTC). The DTC
handles the security certificates for purchasers by acting as custodian of the certificates and
issuing a form showing the “book entry” for safekeeping to the certificate

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holder.

Depositor: The entity that accumulates the mortgages and transfers them to the Trust
simultaneously with the issuance of the securities to the certificate holders. The depositor can
be the seller of a portfolio of mortgages or an entity established just for the purpose of holding
the mortgages until the pool accumulation is completed.

Determination Date: The date of the month (usually the 15th or the next business day) that
is used as a cut-off date for calculation of payments due on the securities.

Discount Rate: The rate applied to each year’s cash flow from a property to determine the net
present value (NPV) of a series of cash flows. Based on the periodic weighted average cost of
capital or the required return for a real estate investment.

Disposition Fee: “Workout fees” paid to a special servicer for making a loan current or
liquidating a problem loan or foreclosed property. Can also include late fees, modification fees
and loan administration charges. These fees are negotiated with each CMBS transaction.

Distribution Date: The date of the month (usually the 20th or the next business day) the
payments on the securities will be paid to the certificate holders.

Double-Net Lease: A lease that typically requires the tenant to pay for property taxes and
insurance in addition to the rent. Also called a net-net lease or an NN lease.

DSCR: see Debt Service Coverage Ratio.

Due Diligence: Involves the inspection of properties and the evaluation of financial records of
a property involved in a CMBS transaction, and forms the foundation of the securitization. Due
diligence protects investors from unethical and unprofessional practices, and is said to be the
cornerstone of securities law.

Duration: An indication of the percentage change in the price of a security relative to a change
in interest rates. It provides a measure of the price volatility of the security: the greater the
duration, the greater the price volatility relative to a change in interest rates. Positive duration
means that the price of a security moves in the opposite direction of a change in interest rates;
conversely, negative duration means that the price moves in the same direction as a change in
interest rates. Duration is the weighted average
term-to-maturity of the security’s cash flows when the weights are the present values of each
cash flow as a percentage of the present value of all cash flows of the security.

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E
E-Curve: The front end of the swap curve is constructed with Eurodollar futures contracts,
which are future contracts on 3-month LIBOR. Unlike the J-spread, which is a spread over the
bond’s average life point on the Treasury curve, the E-spread is a single constant spread that is
added to each relevant point on the Eurodollar futures curve.

Earn-Out Loans: A loan agreement which provides that the original principal balance may be
resized by an additional advance as the operating performance of the property is able to service
additional debt. Earn-out loans are made on properties of which performance is expected to
improve in the near term due to such factors as renovations, re-tenanting or repositioning.
Earn-out loans specify certain resizing criteria such as minimum debt service coverage ratios
(DSCRs) and, in some cases, minimum loan to value ratios (LTVs). Also see Reverse Earn-
Out Loans.

Economic Recovery Tax Act (ERTA), 1981: Tax reform which created tax incentives for
construction of commercial real estate. The practical effect was to fuel excess building,
particularly of multifamily properties, which were only economically viable in that tax-
advantaged environment. Also see Tax Reform Act, 1986.

Employee Retirement Income Security Act of 1974 (ERISA):

Legislation which stipulates the standards of risk that are appropriate and acceptable for private
pension plan investments. A fiduciary of an employee benefit plan, i.e., a pension fund subject
to ERISA, may invest in CMBS only if the certificates meet specified investment guidelines.

Environmental Risk: The risk of liability and losses to the lender on a mortgage loan due to
the presence of hazardous materials, such as asbestos, RCB, radon, or leaking underground
storage tanks (LUSTS) on a property. Properties in a CMBS are required to have at least a Phase
I environmental clearance. Even when properties show no current environmental problems,
however, rating agencies sometimes in effect “price in” the possibility that properties are at risk
of not meeting future environmental standards. Also see Phase I Environmental Site
Assessment (ESA).

Equity Kicker: A loan or investment provision that allows the lender/investor to receive an
equity-based return in addition to normal rates upon some event. Typically this involves a
lender/investor receiving a disproportionate percentage share of the proceeds of refinancing or
sale.

Equity Yield Rate: see Cash-on-Cash Return.

ERISA: see Employee Retirement Income Security Act of 1974.

ERTA: see Economic Recovery Tax Act, 1981.

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Escrow Account: A deposit jointly held by a borrower and a lender which provides reserved
funds for key operating or capital expenses. Typical escrow accounts are held for real estate
taxes, insurance, tenant improvement, leasing commissions, necessary structural repairs or
environmental remediation, or reserves for replacement. Also called an Impound Account.

Excess Interest/Excess Spread: Interest received from repayments that is greater than the
interest on the certificates. It is defined as the difference between the interest paid on the
mortgage loans (net of servicing fees) and the interest accrued on the certificates.

Expense Ratio: The ratio between operating expenses and operating revenues.

Expense Stops: Lease clauses that stipulate the maximum amount of a landlord’s or owner’s
obligation for expenses; expenses greater than the stipulated amount (i.e., the “stop”) are paid
by tenants, pro-rated by the amount of space occupied by each tenant.

Extension/Extension Option: A period of time past the contractual termination of the

mortgage given to a borrower to repay a mortgage loan through refinancing or sale of the
property, or an automatic provision permitting extension of the original term of the mortgage.
In order to prevent placing a property in foreclosure, thereby incurring additional costs,
servicers may grant an extension to a borrower who has a balloon payment due.

Extension Advisor: A third party who has the right, or obligation, to approve loan extensions
and modifications recommended by the master servicer or special servicer. Not all CMBS have
third party extension advisors.

Extension Risk: The risk of a borrower’s potential inability to refinance balloon mortgages in
a timely manner, thereby requiring that the life of the security be extended beyond the expected
life.

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F
Fannie Mae (Federal National Mortgage Association — FNMA): A government
sponsored enterprise (GSE) or a “corporate instrumentality” of the government. Fannie Mae is a
quasi-private corporation, with stock that trades. It does not receive a government subsidy or
appropriation and is taxed like any other corporation. Fannie Mae purchases and pools
conventional mortgages, i.e., those not insured by the Federal Housing Administration (FHA),
the Veteran’s Administration (VA), or the Farmer’s Home Administration (FmHA), but also
buys mortgages from FHA, and then issues securities using the pool of mortgages as collateral.
Fannie Mae was the first agency to pool mortgages backed by adjustable-rate mortgages and
created the first pass-through collateralized by multifamily mortgages through a swap program.
Holders of Fannie Mae certificates are guaranteed full and timely payment of principal and
interest.

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FASB: see Financial Accounting Standards Board.

FASIT: see Financial Asset Securitization Investment Trust.

FDIC: see Federal Deposit Insurance Corporation.

Federal Deposit Insurance Corporation (FDIC): The FDIC oversees the insurance fund
for both commercial banks (the BIF) and saving institutions (the SAIF) and assures the viability
and liquidity of retail financial institutions. The FDIC is also the principal regulator for some
banks, while the Comptroller of the Currency is the regulator for other banks.

Federal Housing Administration (FHA): A division of the Department of Housing and

Urban Development (HUD) that insures residential mortgages.

FHA: see Federal Housing Administration.

Financial Accounting Standards Board (FASB): An industry group that establishes the
prevailing standards for the accounting treatment of assets and liabilities.

Financial Asset Securitization Investment Trust (FASIT): A REMIC like tax structure
intended to permit the securitization of a wide variety of asset classes, including mortgages.
This new vehicle expands and improves upon the existing REMIC rules. With respect to CMBS,
it permits the replacement of pre-paid loans after initial sale of the security, permits the
inclusion of hedging investments and permits the pooling of mixed asset types. The legislation
was passed in 1996 as part of the “Small Business Job Protection Act of 1996” (HR 3448).

First Loss Piece: The lowest class or tranche of a CMBS transaction which will absorb credit
losses from the mortgage pool first before any other classes are affected.

Foreclosure: The process triggered by a delinquency where payments are more than 90 days
past due, whereby a lender assumes title to a property on which the mortgagee has defaulted. A
servicer may take over a property from a borrower on behalf of a lender.

Franchise Fee: Fee paid by the hotel owner to a larger hotel company that allows the owner to
“fly the flag” of that particular company (Hilton, Holiday Inn, etc.) and to benefit from the
advertising and reservation network of the company. Fee ranges from 4% to 7% of gross
revenue.

Freddie Mac (Federal Home Loan Mortgage Corporation - FHLMC: A government

sponsored enterprise (GSE) or a “corporate instrumentality” of the government. Freddie Mac is
a quasi-private corporation, with stock held by Federal Home Loan Banks, under the regulatory
control of the Department of Housing and Urban Development (HUD). Under the direction of
the Federal Home Loan Bank Board (FHLB), Freddie Mac is

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charged to buy mortgages from S&Ls to enhance their role in and provide liquidity to the
secondary market for single family mortgages (i.e., mortgages not backed by a government
agency) and then issues securities using the pool of mortgages as collateral.

Full Service Lease: see Gross Full Service Lease.

Fusion Deal: A CMBS transaction that has conduit style loans, but either has one loan that is
more than 10% of the pool balance, or has at least 15% of the pool balance comprised of loans of
$50 million or more.

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G
Ginnie Mae (Government National Mortgage Association - GNMA): A government-
related agency that is part of the Department of Housing and Urban Development (HUD) and
uses the “full faith and credit” of the U.S. government in borrowing. GNMA guarantees
securities collateralized by mortgages initially issued by approved lenders (thrifts, commercial
banks, and mortgage banks) that pooled the mortgages, using the mortgages for collateral for
the security. In so doing, GNMA supports the Federal Housing Administration (FHA) mortgage
market as well as mortgages from the Veterans Administration (VA) and the Farmers Home
Administration (FmHA). GNMA guarantees pass-throughs, but does not issue them, and will
only guarantee a pool in which the underlying mortgages are insured or guaranteed by either
the FHA, VA, or FmHA.

Go Dark Provisions: Prevents a retail tenant from vacating a space before the term of the
lease expires even while continuing to pay rent, since vacant space is detrimental to the
performance of neighboring retail stores.

Going-In Cap Rate: The capitalization rate applied to the first year’s income. Also see
capitalization rate and reversionary cap rate.

Government Sponsored Enterprise (GSE): One of several agencies formed to provide a

secondary market for residential real estate loans, including Fannie Mae (Federal National
Mortgage Association—FNMA); Freddie Mac (Federal Home Loan Mortgage Corporation—
FHLMC); and Ginnie Mae (Government National Mortgage Association—GNMA).

Gross Full Service Lease: Lease structure under which the landlord pays all building
expenses. Also called a full service lease or a gross rent lease.

Ground Lease: A lease on undeveloped land that covers the land but not improvements or
buildings on that land. In other words, the land and buildings are separate entities and are
separately owned. Also called a leasehold.

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GSE: see Government Sponsored Enterprise.

_____________________________

H
Haircut: A CMBS expression that refers to the reduction of estimated income or cash flow
expected from a property, on which the debt service coverage ratio is calculated. A haircut is a
means to take a more agencies to calculate “stressed” DSCR on a property.

Hurdle Rate: A break-even debt service calculation that establishes the maximum interest
rate a mortgaged property can handle at maturity if the property must be refinanced. It is
calculated using current net operating income and an interest-only mortgage with a reasonably
short maturity of less than five years. The hurdle rate is usually calculated to answer the
question, Can all loans refinance at maturity if interest rates at a “disaster level?” Also called
break even debt service analysis.

Hyper-Amortization: The accelerated paydown of a class in a CMBS or of an individual

property loan achieved by allocating all scheduled principal and interest to that class.

_____________________________
I
I-Curve: Interpolated Treasury curve. Pricing a 9.5-year CMBS bond as a spread to the I-Curve
involves interpolating yields for the remaining maturities of the on-the-run 5-year and 10-year
Treasury notes. If both notes were issued three months ago, the interpolation would involve
4.75 years as the starting point and 9.75 years as the ending point.

Impound Account: see Escrow Account.

Independent Director: A non-affiliated individual on the board of directors of a borrowing

entity. The vote of the independent director is required for certain actions by the entity, e.g.,
declaration of bankruptcy, thus insulating the entity from deleterious control by affiliated
principals. This is often a key component of special purpose entity (SPE) and bankruptcy
remote structures.

Industrial Property: Property used for light or heavy manufacturing, research and
development, or warehouse space, including office/warehouse space and flex space.

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Institutional Property: A property used by special institutions, such as a university, hospital,

or a government agency. Since such properties are designed for a specific purpose, they may be
difficult to adapt for other uses, even though they may resemble other property types.

Interest Only Strip (IO): A tranche in CMBS that comprises the aggregate payment stream
of all interest from the underlying mortgages(s) due on a certain security that exceeds the
coupon paid on the security. The excess interest is sold as a separate tranche at a small fraction
of the price of the security or of classes with a similar credit rating. IO tranches are highly
sensitive to prepayment and extension of loans, since the duration on these tranches may
drastically change with these events, and therefore have relatively high price volatility.

Interest Paid vs. Interest Impacted: A clause in the CMBS structure that determines how
and when losses are allocated—for instance, whether losses are allocated before or after
principal is paid. This clause most greatly impacts the yield of the lowest class of certificate
holders.

Interest Rate Cap: An option purchased typically by the borrower that limits the interest rate
to a specified maximum on either a periodic or lifetime basis. This option protects the borrower
from rising interest rates.

Interest Shortfall: The aggregate amount of interest payments from borrowers that is less
than the accrued interest on the certificates.

Interpolated Treasury: A calculation of an assumed Treasury rate based on the rates of two
other Treasuries with similar maturities, if there is no Treasury available with that specific
maturity. For instance, if a 4-year bond is priced to yield a rate benchmarked to Treasuries, the
price will be set at approximately the midpoint between the 3-year and 5-year Treasury rates
since there is no 4-year Treasury.

Investment Grade (IG): Investments that are rated triple-A, double-A, single-A and triple-B
are investment grade, therefore appropriate for regulated institutional investors. The lowest
investment grade rating is BBB-.

Investor Reporting Package (IRP): The CMSA Investor Reporting Package is the
established reporting standards for the CMBS industry. The IRP is a standardized set of bond,
loan and property level information provided for all CMBS securitizations.

Involuntary Payment: Prepayment on a mortgage loan due to a default.

IO: see Interest Only Strip.

Issuer Guarantee: see Corporate Guaranty.

_____________________________

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J
J-Curve: Interpolated nominal Treasury curve. Pricing a 9.5-year CMBS bond as a spread to
the J-Curve involves interpolating yields for the original maturities of the on-the-run 5-year and
10-year Treasury notes. The J-Curve ignores any seasoning that may have taken place in either
issue.

_____________________________
L
Lead Manager: The investment bank charged with the principal responsibility for managing
the issuance of a new security. This firm also typically has the largest role in the underwriting of
the security, and their name appears in the most prominent position on the tombstone
advertisement announcing the issuance of the security.

Lease Assignment: An arrangement whereby the owner of a commercial property owner and
the lender enter into an agreement that assigns lease payments directly to the lender. This is
opposed to the standard arrangement where lease payments go directly to the owner, who then
forwards mortgage payments to the lender. In CMBS transactions, lease payments under a lease
assignment would go directly to the servicer.

Leasehold Improvements: The cost of improvements for a leased property, often paid by
the tenant.

Leasing Commissions: The fees paid by the landlord to brokers for bringing tenants to a
property.

Letter of Credit (LOC): A form of credit enhancement which is an obligation by a third party
to cover losses on a loan due to delinquencies and foreclosure on a commercial mortgage loan.
The credit rating of the third party that issues the letter of credit is typically required to be, at a
minimum, equal to the highest rating of the securities.

Levered IO: An interest-only tranche whose cashflows are “stripped” from the excess interest
on senior and subordinate classes of the CMBS structure. It is rated AAA because of its high
priority in receiving cashflows, but has greater exposure to collateral defaults than the PAC IO
(see PAC IO).

LIBOR: see London Interbank Offer Rate.

LIHTC: see Low Income Housing Tax Credit.

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Commercial Mortgage-Backed Securities (CMBS)

Liquidation: The sale of a defaulted mortgage loan, or of the REO property that previously
secured the loan. Also see Real Estate Owned (REO).

Liquidation Fee: The fee paid to a special servicer when the special servicer obtains a full or
discounted payoff on any specially serviced loan. The fee is calculated by applying the
liquidation fee rate as stipulated in the pooling and servicing agreement to the related payment
or proceeds.
Liquidity: A measure of the ease and frequency with which assets such as CMBS are actively
traded in the secondary market. Liquidity is related to volume; the greater the outstanding and
ongoing issuance of a certain asset such as CMBS, the greater the liquidity typically is.

LOC: see Letter of Credit.

Loan-to-Value Ratio (LTV): The ratio of the principal amount on a mortgage at origination
to the current appraised value of the property. The ratio is commonly expressed to a potential
borrower as the percentage of value a lending institution is willing to finance. The ratio is not
fixed and varies by lending institution, the borrower’s credit history, the property type,
geographic location, size and other variables.

Lock-Box Provision: A provision whereby the trustee is given control over the gross revenues
of the underlying properties in a CMBS transaction. Property owners only have a claim to cash
flows net of expenses, which include debt service, taxes, insurance and other operating
expenses.

Lock-Out Period: A period of time towards the beginning of the life of a loan, during which a
borrower cannot prepay the mortgage loan. Lock-out is a form of call protection since it
prevents prepayment.

London Interbank Offered Rate (LIBOR): The short-term (1-year or less) rate at which
banks will lend to each other in London. Commonly used as a benchmark for adjustable rate
financing. LIBOR terms are usually for one, two, three or six months or one year.

Loss Severity: A measure of the rate of loss on a liquidated loan, defined as the ratio of
realized loss on the mortgage loan divided by the outstanding principal on the mortgage loan.
Also see Realized Loss.

Loss to Lease: The difference between the market rental rate for a property and the actual
rent being paid for the property, indicating changing market conditions. For example, if a
property were leased for a one year term at $10,000 per month, and the current market rate
were $10,500 per month on similar properties, the loss to lease would be $500 per month.

Low Income Housing Tax Credit (LIHTC): A tax credit given to owners for the
construction or rehabilitation of low income housing. To qualify for the credit, the property
must have:
a) at least 20% of the units occupied by individuals with incomes of 50% or less of the area
median income, or

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Commercial Mortgage-Backed Securities (CMBS)

b) at least 40% of the units occupied by individuals with incomes of 60% or less of the area
median income.
Also called Section 42 properties after the section of the Internal Revenue Code which
authorizes the credit.

LTV: see Loan-to-Value Ratio.

_____________________________
M
Mark-to-Market: Periodic adjustments of estimated value of an asset, or of future cash flows
from an asset, to reflect current market levels. In a falling or weak market this is likely to create
a downward adjustment of current value based on lower expected future income streams, such
as if rental rates on existing leases are greater than rental rates being charged for new leases in
the market (i.e., if there are several above-market leases in a building that are terminating). The
opposite is true in a strong or rising market. This term may apply to the value of CMBS or any
security subject to price
movements.

Mark-to-Market Regulations: In December, 1996 the IRS released final regulations relating
to the requirement that a securities dealer mark-to-market those securities that are being held
for sale to customers. This mark-to-market requirement applies to all securities owned by a
dealer, except to the extent that the dealer has specifically identified a security as held for
investment. The mark-to-market regulations provide that, for purposes of this requirement, a
REMIC Residual Certificate is not treated as a security and thus generally may not be marked to
market.

Master Servicer: A firm responsible for servicing the mortgage loans collateralizing a CMBS
transaction on behalf of the bondholders. A master servicer’s responsibilities vary according to
the servicing agreement, and often include collecting mortgage payments and passing the funds
to the trustee, advancing any late payments to the trustee, providing loan performance reports
to bondholders, and passing all loans to the special
servicer that are non-performing or become REO. Also see Special Servicer.

Master Servicing Fee: The principal compensation paid to the master servicer, payable
monthly on a loan-by-loan basis from interest on the loans. The base fee is computed on the
principal amount for the same period and accrued at the applicable fee rate for a specific deal.
In addition, the fee may include all assumption and modification fees, late payment charges and
similar fees paid by borrowers on non-specially serviced loans.

Mezzanine Debt: A subordinate loan made after the first-lien mortgage that is secured by an
ownership interest in the borrower, instead of by the mortgaged property itself. The borrower

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Commercial Mortgage-Backed Securities (CMBS)

pledges his equity stake in the property as collateral for the loan. The term “mezzanine” implies
temporary indebtedness, but a long term second mortgage is also technically mezzanine debt.

Mezzanine Classes: Tranches in a securitization rated in the middle range of a multi-class

security, i.e., more secure than the first-loss tranche but less secure than senior classes.
According to CMBS market convention, mezzanine tranches typically refer to those rated
between AA and BBB-.

Modeling (Cash flow modeling): The chronological collation of cash flows from pools of
loans, including balloon maturities, that are securitized in a CMBS transaction, and their
allocation among the various tranches in the transaction.

Multifamily Property: A building with five or more residential units or apartments.

Multifamily properties are usually distinguished as high rise, low rise, or garden apartments.

_____________________________
N
NAIC: see National Association of Insurance Commissioners.

National Association of Insurance Commissioners (NAIC): An association of

regulators of insurance companies headquartered in Kansas City whose recommendations,
while not binding on members, they are generally followed. As a result, NAIC rulings can be
important to the CMBS market. For example, the NAIC determines the reserves that life
companies are required to retain against either mortgages or bonds. There was recently a
controversy over whether a CMBS collateralized by a single asset was really a mortgage
(requiring higher reserve levels) or a bond (with lower capital reserve requirements).

NCF: see Net Cash Flow.

NCREIF Index: Numerous indices compiled by the National Council of Real Estate
Investment Fiduciaries (NCREIF) on commercial real estate performance based on data
provided principally by pension funds’ equity real estate. Often used as a benchmark for real
estate investment performance.

Negative Amortization: When the scheduled interest payment on a loan is less than the
interest accrued according to a certain interest rate, this shortfall is added to the outstanding
principal balance. Therefore, as the loan progresses, the principal balance due on the loan grows
with time. This is known as negative amortization and often occurs in Adjustable Rate
Mortgages (ARMs) when the borrower’s capacity to service the loan falls short of the interest
due.

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Net Effective Rent: Defined as the gross revenue from rental payments less operating
expenses, rental concessions, tenant improvements, etc. In weak or declining markets, net
effective rent may be negative.

Net-Net Lease: see Double-Net Lease.

Net-Net-Net Lease: see Triple-Net Lease.

Net Cash Flow (NCF): Gross operational revenues earned by a property less operating
expenses as well as tenant improvements, leasing commissions and reserves, but before
mortgage payments. May be expressed as:

NCF = NOI – (tenant improvements + leasing commissions + capital repairs).

Net Operating Income (NOI): Gross operational revenues earned by a property less
operating expenses but before mortgage payments, tenant improvements, replacement reserves
and leasing commissions. NOI is typically used as the basis for calculating debt service coverage
ratios.

NOD: see Notice of Default.

Non-Consolidation Opinion: An attorney’s statement which affirms that the assets of an

entity would not be substantially consolidated with those of its affiliates by a bankruptcy court
per Section 105 of the bankruptcy code. This is often a key component of special purpose entity
(SPE) and/or bankruptcy remote structures.

Non-Performing Loan: A loan that fails to make principal and/or interest payments as
required by the loan agreement. This includes loans that are making payments at a rate less
than the full principal and interest payments required by the mortgage.

Non-recoverable Advance: If an advance made towards a non-performing loan by a master

servicer, special servicer or trustee is, in their judgment, deemed unrecoverable from related
proceeds or another specifically identified source, this advance is not required to be made.

Notice of Default (NOD): a notice posted by the trustee or mortgage lender in public records
to initiate foreclosure proceedings involving a public sale of the property securing the mortgage.
NOD also includes the right to be informed of a borrower’s default on a major contract such as a
ground lease.

NOI: see Net Operating Income.

Notional Amount: A stated dollar amount on which a calculation is based, such as the
payment on a swap contract or an IO strip.

_____________________________
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 CRE Finance Council Glossary of Terms
Commercial Mortgage-Backed Securities (CMBS)

O
OAS: see Option Adjusted Spreads.

Office Property: Property designed to be used principally as a place of business, ranging from
major multi-tenant buildings to single tenant buildings built to a tenant’s specific needs.

Open Prepayment: A provision which permits repayment of all or a portion of a loan during a
specified period prior to scheduled maturity without a fee or penalty.

Option Adjusted Spreads (OAS): A measure of the return, or risk premium, over
comparable Treasuries used as a risk-free base that incorporates interest rate volatility and
possible cashflow variations, but not credit quality. The method is chiefly applicable to the
pricing of prepayment risk in residential MBS, wherein borrowers have a legal option to fully
prepay their loans when interest rates decline, creating reinvestment risk for the investor. OAS
is less applicable to CMBS, where prepayments are highly limited by strict prepayment
penalties.

Original Issue Discount (OID): The sale of a bond at a discount to the par price. The
increase in value of the bond as it approaches maturity is part of the total return calculation, but
various investors are required to treat this part of their total return differently due to tax
considerations.

Other Real Estate Owned (OREO): A term used primarily by banks to identify real estate
on the books that was taken back through foreclosure of a mortgage loan. The term “Other”
REO is used by banks to distinguish foreclosed real estate from bank real estate owned, which is
typically corporate real estate assets. Nonetheless, the industry commonly uses the term REO
for foreclosed real estate. Also see Real Estate Owned (REO).

Overcollateralization: A form of credit enhancement where the outstanding principal

balance of the collateral backing a security is in excess of the outstanding certificate principal
owed to the bondholders.

_____________________________
P
PAC IO: An interest-only tranche whose cashflows are “stripped” from the excess interest
payments on mezzanine bonds in the CMBS structure. Also see Mezzanine Classes.

Pari Passu Loan: A single loan backed by a certain property or portfolio of properties, which
is divided among several smaller components. Each component is securitized in a separate

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 CRE Finance Council Glossary of Terms
Commercial Mortgage-Backed Securities (CMBS)

CMBS transaction, and is paid scheduled interest and principal payments on a prorated basis
depending on their size relative to the larger loan. Each pari passu component receives equal
legal treatment and, in the event of a default, receives a prorated portion of the net liquidation
proceeds.

Pay Rate: The periodic rate at which interest is paid on a mortgage. This may differ from the
accrual rate.

Percentage Lease: Lease commonly used for large retail stores where rent payments include
a base rent plus a percentage of the gross sales (“overage”) if sales are greater than a stipulated
amount. Percentages typically range from one to six percent of gross sales.

Phase I Environmental Site Assessment (ESA): A report prepared by an environmental

consultant which reviews the property and surrounding land to ascertain the presence or
potential presence of environmental hazards. The analysis examines any ground water
contamination, PCBs, abandoned disposal of paints and other chemicals, asbestos or a wide
range of other potential contaminants. This Phase I ESA provides a review and makes a
recommendation as to whether further investigation is warranted (a Phase II ESA). The latter
report would confirm or deny the presence of an environmental hazard and, should one be
found, will recommend additional review and/or mitigating effects that should be undertaken.

PML: see Probable Maximum Loss.

Pooling and Servicing Agreement (PSA): A legal contract defining the responsibilities and
the obligations of the master and special servicers in managing a CMBS transaction, including
required advances.

Preliminary Prospectus: Also known as a “red herring”, or private placement

memorandum, it includes all or most of the information that will be included in the final
prospectus but is subject to amendment. Also see Prospectus.

Prepayment: A whole or partial repayment of principal by the borrower greater than or earlier
than a scheduled payment on a mortgage loan. Most occurrences are due to borrower
refinancing at lower interest rates or due to capital appreciation of the property value.

Prepayment Interest Shortfall: The difference between the interest accrued on the
corresponding certificates and the interest accrued on the prepaid loan. In the event of a
prepayment of principal, interest received on the loan is less than the interest due on the
certificates. To the extent that any such shortfall is allocated to a certain class of offered
certificates, the yield on that class will be adversely affected.

Prepayment Premium or Prepayment Penalty: Language in loan documents requiring a

borrower to pay a penalty for any prepayments made on a mortgage loan. Most prepayment
premiums are structured either as yield maintenance or penalty points.

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 CRE Finance Council Glossary of Terms
Commercial Mortgage-Backed Securities (CMBS)

Prepayment Risk: The risk that a borrower will repay the remaining principal or an amount
greater than the scheduled payment on a mortgage prior to maturity, thus shortening the life of
the loan. In order to reduce prepayment risk, commercial mortgages often have call protection
provisions.

Primary Market: The market in which newly issued loans or securities are sold. When loans
or securities are sold by the initial lender to another investor, they constitute the secondary
market.

Priority of Distributions: The CMBS provision that defines how, when and to whom the
available funds will be distributed.

Private Label Securities: Securities backed by mortgages that are issued by the private
sector, including conduits, banks, thrifts and other financial institutions. These securities are
also known as non-agency securities and are not backed by agencies such as Fannie Mae,
Freddie Mac, or Ginnie Mae.

Private Placement: The private sale of securities to institutional investors who meet specific
criteria of net worth and/or income and who are deemed to be sophisticated investors, e.g.,
insurance companies. Private placement securities are generally exempt from registration
requirements of the Securities Act of 1933. Investors are permitted to scrutinize the financial
data of private placements that would not otherwise be publicly released due to confidentiality
restrictions. As a result, private placements are
particularly suitable for the lower-rated tranches of CMBS because investors have access to
more information on which to base a decision. Also see SEC Rule 144A.

Probable Maximum Loss (PML): A statistical analysis that determines the severity of
earthquake risk for a property in an earthquake-prone area by defining the damage ratio due to
the worst possible earthquake scenario. PML is also used to quantify risk from other natural
disasters such as hurricanes, floods and tornadoes. Generally, properties with PMLs over a
certain threshold (perhaps 20%) are required to carry additional insurance coverage.

Prospectus: The document filed with the Securities and Exchange Commission (SEC) that
stipulates all the material information about a security. The final prospectus is commonly called
“the black” to differentiate it from the preliminary prospectus, or “the red”. In the case of a
CMBS, the prospectus lists various details, including (but not limited to) the properties
collateralizing the security, the terms and conditions of payment
to security holders, the payment sequence among classes, the contingency plan in the event that
mortgages are not paid as expected, and the treatment of defaults and prepayments. All relevant
information about a security must be spelled out in the prospectus.

PSA: see Pooling and Servicing Agreement.

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 CRE Finance Council Glossary of Terms
Commercial Mortgage-Backed Securities (CMBS)

Q
Qualified Institutional Buyer (QIB): An investor defined within the meaning of Rule 144A
under the Securities Act who must have a minimum net worth and/or income and be
knowledgeable of the risks of the investment. Most CMBS can only be sold to QIBs.

Qualified Mortgage: A mortgage that can appropriately be included in a CMBS. Includes any
obligation principally secured by an interest in real property and which is either:
a) transferred to the REMIC on the startup day, or
b) purchased by the REMIC within the three-month period beginning as of the startup day,
pursuant to a fixed price contract in effect on the startup day.

Additional obligations qualifying as secured by real property for the purposes of being termed a
qualified mortgage include:
a) obligations secured by stock held by tenants/stockholders in a cooperative housing
corporation;
b) debt securities backed by mortgages on timeshare ownership interests in a
condominium development; and
c) REMIC regular interests (not residual interests) transferred to the REMIC on the startup
day in exchange for any interest in the REMIC.

_____________________________
R
Rate Step-Ups: A previously agreed upon increase in the mortgage rate, either contractual
and expected at intervals or triggered by certain events, i.e., if the borrower (particularly with a
balloon mortgage) fails to show progress towards refinancing (such as an appraisal, engineering
report, or environmental study) or is unable to obtain a signed commitment or sales contract on
the underlying property.

Rating Agency: An agency that examines the securities and their underlying collateral and
assigns credit ratings to the securities based on its benchmarks. Ratings range from triple-A, the
highest rating, to triple-C, the lowest rating possible, and are a major influence on CMBS
structure and pricing. The four rating agencies of CMBS are Dominion Bond Rating Service,
Fitch Ratings, Moody’s Investors Service and Standard & Poor’s.

RBC: see Risk Based Capital.

Real Estate Investment Trust (REIT): A corporation or partnership specially formed to

invest in real estate (e.g., by acquiring or providing financing for real estate properties) and/or

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 CRE Finance Council Glossary of Terms
Commercial Mortgage-Backed Securities (CMBS)

securities backed by real estate. REITs are required to pass through 90% of taxable income to
their investors but are not taxed at the corporate level. The major types of REITs are equity,
mortgage, and hybrid; equity REITs are the most common.

Real Estate Mortgage Investment Conduit (REMIC): A pass-through entity that can
hold loans secured by real property without the regulatory, accounting and economic obstacles
inherent in other forms of mortgage backed securities. A REMIC is a bankruptcy-remote legal
entity which distributes the cash flow to bondholders of various classes (or tranches) of
securities without being taxed at the entity level. REMICs have facilitated the sale of interests in
mortgage loans in the secondary market. Embedded in the Tax Reform Act, 1986.

Real Estate Owned (REO): A mortgaged property that has been acquired by a trust fund or
lender through foreclosure or deed in lieu of foreclosure. Also see Other Real Estate Owned
(OREO).

Realized Loss: The amount unrecovered from the sale of a foreclosed mortgage loan or REO
property. It is equal to the outstanding principal balance of the loan, plus all unpaid scheduled
interest, plus all fees applied to the sale of the property, minus proceeds received from
liquidation.

Recapture Provisions: Provisions that permit the owner to cancel a lease and regain control
of the space after the tenant vacates the space.

Recreational Property: A property designed for a recreational specialized use. Includes

sports arenas, country clubs and marinas.

Red Herring, or “Red”: see Preliminary Prospectus.

Refinance Rate: see Hurdle Rate

Refinance Risk: The risk that borrowers are unable to refinance mortgages at maturity,
thereby extending the life of a security collateralized by those mortgages. Also see Balloon
Risk.

REIT: see Real Estate Investment Trust.

Release Provision: 1) A provision to release certain collateral under a mortgage for a

previously agreed upon amount, or 2) A provision that if a borrower prepays the loan associated
with one property in a pool of mortgages that are cross-collateralized and cross-defaulted, the
borrower must additionally prepay a portion of all other loans in the pool. This provides
protection against a borrower “cherry picking” properties out of a cross-collateralized pool.

REMIC: see Real Estate Mortgage Investment Conduit.

Remittance Report: A report sent by the servicer of a CMBS transaction to each certificate
holder on a periodic distribution date which provides detailed information about the current

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distribution; copies of the remittance reports are also sent to the underwriter and trustee. There
are no fixed standards for the information to be included in remittance reports and, in fact,
there is a wide variety of formats. Typically, remittance reports are distributed monthly.

Rent Step-Up: A lease agreement in which the rent increases at given intervals for a fixed
amount of time or for the life of the lease.

REO: see Real Estate Owned.

Replacement Reserve Account: see Deferred Maintenance Account.

Reps and Warranties: The representations (or “reps”) and warranties made by a mortgage
lender about the quality of the loans. Many reps and warranties survive the securitization
process, and are still enforceable once the mortgage has been included in a security. With CMBS
the reps and warranties language focuses on the issue of fraud and misrepresentation.

Reserve Funds: A form of credit enhancement whereby a portion of the bond proceeds are
retained to cover losses on the mortgage pool. Also called reserve accounts.

Residual: Refers to any cash flow remaining after the liquidation (full payoff) of all classes of
securities in a CMBS. Multiple-asset, multiple-class CMBS frequently have a residual.

Resolution Trust Corporation (RTC): An agency created by the Financial Institutions

Reform, Recovery and Enforcement Act of 1989 designed to assume the assets of failed financial
institutions, principally savings and loan institutions (S&Ls or thrifts) and dispose of those
assets. The RTC can be credited with profoundly expanding the CMBS market by assuming a
large volume of these securities, often with substantial credit
enhancement to make them palatable to investors. The RTC charter expired in 1995, and all
remaining assets and duties were transferred to the FDIC.

Retail Property: Property types range from super-regional shopping centers with a gross
leasable area greater than one million sq. ft. to small stores with single tenants.

Revenue Per Available Room (RevPAR): Total hotel revenue over a specified time period
divided by the number of available rooms in the hotel in that period

Reverse Earn-Out Loans: A mortgage loan that, like an earn-out loan, is made on a property
or properties that do not yet possess stabilized cash flows. Unlike an earn-out loan, a reverse
earn-out is sized at origination on the basis of specific criteria (generally DSCR) not yet
achieved, or achieved but not yet shown to be consistent. If specified criteria (generally a DSCR
of 1.2x–1.4x) are not met by a specified date, the loan is resized down. The difference between
the outstanding balance of the loan and the resized balance must be paid down by the borrower
from other sources, which may
not result in a further encumbrance of the property, or with an outside preferred equity
investment. Also see Earn-Out Loan.

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Reversionary Cap Rate: The capitalization rate applied to the expected ultimate sale
price/value of a building after a multiple-year holding period. Typically about 50 basis points
higher than a going-in cap rate.

Reversion/Reversionary Value: The expected value of a building during a theoretical sale

after a several-year holding period; used to calculate the reversionary cap rate.

Right of Substitution: The legal right to replace collateral, parties or other components in a
contractual obligation. For example, a mortgage may allow the release of certain property from
the collateral as long as other acceptable collateral replaces it.

Right to Cure: In the event that a contractual obligation between two parties (e.g., a ground
lease) is breached or defaulted, the right to cure permits a specified and interested third party
(e.g., a lender) to assume the responsibilities of one of the parties (e.g., the borrower) to
perform under the agreement (e.g., pay rent) on behalf of the defaulting party to preserve their
interests (e.g., their lien position). Often, holders of subordinate debt have the right to cure any
default on the primary debt.

Risk Based Capital (RBC): The amount of capital (or net worth) an investor must identify
and allocate to absorb a potential loss on an investment or investment class. This requirement
was established by institutional regulatory bodies in the last few years because of losses at
various types of financial institutions. The amount of risk-based capital that is required varies
among asset classes depending on perceived risk (e.g., is different for mortgages or rated bonds)
and is typically expressed as a percent of the amount at risk.

Rollover: Term used to describe the expiration of a lease. Large rollover concentrations in a
given time period are undesirable, since this leads to the landlord’s exposure to a potentially
weaker market and to the possibility of a debt service coverage ratio below one.

RTC: see Resolution Trust Corporation.

Rule 144A: see SEC Rule 144A.

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S
Seasoning: The length of time elapsed since the origination of a mortgage loan—i.e., the longer
a loan has been outstanding and performing to its terms, the more “seasoned” it is. The
presumption is that more seasoned loans have a lower probability of default. A loan that has
been outstanding for perhaps three years but shows a poor pay history (e.g., several late pays,
particularly beyond 30 days), is not considered seasoned because of its performance.

SEC: see Securities and Exchange Commission.

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SEC Rule 144A: A legislation originally contained in the Securities Act of 1934 that restricts
the sale of bonds not registered with the Securities and Exchange Commission (SEC).
Unregistered certificates can only be sold to “qualified investors,” principally institutional
investors, who can demonstrate that they meet certain standards of net worth and/or income
and are therefore deemed to be sophisticated investors. Also see Private Placements and
Qualified Institutional Buyers (QIB).

Secondary Market: The trading of securities that have been previously issued. Also see
primary market.

Securities: The generic term applied to Certificates of Ownership of the funds or assets of a
trust fund. These undivided interests are issued by the trustee in amounts of $100,000 until less
than $100,000 remains, then in amounts of $1,000. The certificates are usually issued in
lettered classes starting with Class A, the highest-rated class. Each class is risk-rated by one or
more of the major rating agencies. If the higher risk first-loss class is included in the security
and sold rather than being held by the seller, the class is rated as “NR” (not rated). The “not
rated” risk-rating is used for securities not qualifying for the minimum risk rate.

Securities Act of 1933: This act established registration requirements and antifraud
provisions. It requires new issues to be registered with the SEC and meet prospectus
requirements. New issues can be exempt from these requirements if certain conditions are met.

Securities and Exchange Commission (SEC): The regulatory agency charged with
establishing the proper procedures for the registration and sale of publicly-traded securities and
monitoring that these procedures are maintained in the interest of a fair public market.

Securitization: The creation of a new financial instrument representing an undivided interest

in a segregated pool of assets such as commercial mortgages. The ownership of the assets is
usually transferred to a legal trust or special purpose, bankruptcy-remote corporation to protect
the interests of the security holders.

Self-Amortizing Loans: Loans for which the full amount of the principal will be completely
paid off at the loan’s termination pursuant to the loan’s payment schedule. Also called fully
amortizing loans.

Senior Pieces: Security classes, or tranches, that are rated as investment grade, therefore
appropriate for regulated institutional investors (i.e., triple-A, double-A, single-A, and triple-B).

Senior/Subordinate Structure: A common structure used in CMBS involving a

prioritization of cash flows. For example, in a simple two class senior/subordinate structure
(also known as an A/B structure),
a) Class A will receive all cash flow up to the required scheduled interest and principal
payment;
b) The subordinate class, Class B, provides credit enhancement to Class A, and

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c) Class B will absorb 100% of losses experienced on the collateral until cumulative losses
exceed Class B’s amount; thereafter Class A will absorb all losses.

Also known as a sequential pay structure.

Sequential Pay Structure: see Senior/Subordinate Structure.

Servicer: Party responsible for the administration of mortgage loans in a CMBS transaction,
acting for the benefit of the certificate-holders. The servicer’s responsibilities include reporting
to the trustee, collecting payments from borrowers, advancing funds for delinquent loans,
negotiating workouts or restructures (as permitted by the pooling and
servicing agreement) and taking defaulted properties through the foreclosure process. Also see
Master Servicer and Special Servicer.

Servicing Advances: Generally defined as customary, reasonable and necessary out-of-pocket

costs and expenses incurred by the master servicer or special servicer in connection with the
servicing of a mortgage loan after an event of default, delinquency or other unanticipated event
or in connection with the administration of an REO property. These advances are paid by the
master servicer or sometimes the special servicer and are generally reimbursable from future
payments and other collections. In all cases, the required servicing advances are detailed in the
pooling and servicing agreement.

Servicing Transfer Event: An event that triggers the transfer of the management of a
mortgage loan from the master servicer to the special servicer. A servicing transfer event occurs
when a borrower has defaulted or, in the reasonable judgment of the master servicer, is likely to
default and be unable to cure within a reasonable time. In this event, the master servicer can
transfer the day-to-day handling of the account to the special servicer until such time as the
special servicer determines that the default has been cured and that the loan is now a corrected
mortgage loan.

Shadow Anchor Retail: A major retail tenant that provides significant drawing power to a
retail center but which itself may not be part of the particular shopping center or the specific
collateral—for example, a shopping center consisting of several in-line stores with a Wal-Mart
on an outparcel that is not collateral for the loan but serves as an anchor. Although the Wal-
Mart is not part of the shopping center, the store nonetheless serves as a shadow anchor to the
other property and in-line stores.

SPC: Special Purpose Corporation. see Special Purpose Entity.

SPE: see Special Purpose Entity.

Special Purpose Entity (SPE): A bankruptcy-remote entity established by the borrower(s)

at the loan level and the issuer at the securities level whose sole asset is the property or
properties being financed. The SPE protects the lender and, ultimately, the certificate holders of
a security, from having the underlying property involved in bankruptcy proceedings against the
borrower on the property; in the event of a bankruptcy or insolvency of the borrower or issuer,

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an automatic stay would apply and delay payments to investors. Rating agencies generally
request counsel to provide “true sale” opinions on the sale from the transferor to the issuer and
“non-consolidation opinions” confirming that the entity is indeed bankruptcy remote. Also
called a special purpose corporation (SPC) or special purpose vehicle (SPV).

SPV (Special Purpose Vehicle): see Special Purpose Entity.

Special Servicer: A party in addition to the master servicer that is responsible for managing
loans that go into default and conducting the “work-out” or foreclosure process, e.g., liquidating
of loans and advancing the proceeds to the trustee. There are various types of special servicers:
a) Those that retain first-loss pieces;
b) Those that invest in B-pieces in return for special servicing rights; and
c) Those that are appointed solely because of their specialized asset management
d) expertise.

Special Servicing Fee: see Workout Fee.

Standby Fee: The portion of the special servicer’s compensation that accrues with each
mortgage loan, including performing as well as specially serviced mortgage loans and those
which have been converted to REO. This fee accrues at the standby fee rate and is payable by the
master servicer from its master servicing fee.

Startup Day: The first day on which interests in the REMIC are issued.

Stress Test: A series of tests performed by the rating agency which project the performance of
the mortgage pool under varying scenarios or stress related assumptions. The rating agency
determines the likelihood of timely repayment using historical loan experience for the collateral
type and its own statistical database concerning probability of default and severity of loss. The
stress tests to which the pooled loans are submitted include analysis of the mortgage
documents, real property collateral, tax structure, geographical distribution, loan servicing and
administration issues. For example, a stress test might assess the impact of a change in interest
rates on debt-service coverage ratios (DSCRs).

Structuring: The process of combining mortgages and the creation of corresponding CMBS
classes in such a way as to achieve the highest price for a transaction, based on capital market
factors prevailing at that time. Also see Waterfall.

Subordinate Ground Lease: An lease on a parcel of land in which the rights attributable to
the lease are junior, or secondary, to another more senior obligation.

Subordinate Lien: A collateralized secondary loan, or mortgage, in which the rights to the
collateral are junior, or subordinate, to another debt or obligation.

Subordination: A form of credit enhancement that determines the structure of a CMBS

transaction, in terms of the distribution of the risk of credit loss via the face amount allocated to
each discrete rating class. Also see Senior/Subordinate Structure and Waterfall.

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Sub-Performing Loan: A loan that is making partial or full interest and principal payments,
but with a debt service coverage ratio (DSCR) that would be unacceptable if underwritten at this
time. A loan may be classified as sub-performing even if monthly payments are current if the
loan-to-value ratio (LTV) or other primary value indicator suggests that the loan is unlikely to
be able to pay off in full at maturity.

Sub-Servicer: A servicer contractually engaged by the master or special servicers to perform

some of the real estate services required under pooling and servicing agreements, such as
property inspections, foreclosure services or individual loan administration. The master or
special servicer is legally responsible for the activities of the sub-servicers. Sub-servicers are
more likely to be engaged for specialized property types or if there is a small number of loans, a
subset of the total portfolio, in a given area.

Survivability: The enforceability of reps and warranties made by the lender prior to the
securitization process, after the creation of the securities.

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T
Tax Reform Act (TRA), 1986: Reversed many of the tax reforms of 1981. Properties that
were profitable in the tax environment of 1981-1986 were not economically viable after the TRA.
Many markets had become oversupplied due to tax advantaged construction of properties which
the underlying economic and demographic demand could not support. As a result, TRA
triggered a sharp drop in new construction, particularly of apartments. Also see Economic
Recovery Tax Act, 1981.

Tenant Concessions: see Concessions.

Tenant Improvements (TI): These include the costs of new carpeting, painting, walls,
cleanings, etc. The cost is borne generally by the landlord; tenants are often provided with a
maximum TI allowance (expressed in dollars per square foot) that the owner will contribute
toward improvements. In markets with strong demand, TI may be passed on to the tenant in
terms of higher rent. In times of weaker demand, TI allowances may be more generous, thereby
adding uncertainty to net cashflow from a building.

Terrorism Risk Insurance Program Reauthorization Act for 2007: The terrorist
attacks on September 11th, 2001 resulted in the horrible loss of life and insured damages of
approximately $35 billion. The attacks also created tremendous uncertainty in the insurance
market, which was further exacerbated by the threat of future terrorist attacks and the inability
to price for terrorism risks. Consequently, reinsurers stopped writing coverage and primary
insurers withdrew, or tried to withdraw, from the market, which led to dramatic increases in the
price of commercial property-casualty insurance. Commercial policyholders soon faced

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exclusions for terrorism in standard insurance policies, and coverage became extremely
expensive and altogether unavailable in certain areas.

In response, Congress enacted the “Terrorism Risk Insurance Act of 2002 (TRIA)”, which has
served as the structure for the program that exists today. TRIA created a public-private
partnership between the federal government, the property-casualty insurance industry and
commercial policyholders to share future insured losses from international acts of
terrorism. The program was extended in 2005 and again in December 2007.

Third Party Pool Insurance: Protects investors from any losses on the mortgage loans. The
bond insurer, paid an annual fee by the issuer, will absorb the losses. The CMBS is usually never
rated higher than the credit rating of the third-party issuer. A form of credit enhancement.

TI: see Tenant Improvements.

TRA: see Tax Reform Act, 1986.

Tranche: Each discretely-rated class of CMBS securities, which is typically paid a coupon
stipulated at the time of issue and principal based on a predetermined payment sequence.
Typically, lower-rated tranches have higher coupons and longer lives, since they receive no
principal payments until the higher-rated tranches have been retired or paid off.

Triple-Net Lease: A lease whereby the tenant pays rent, real estate taxes, expenses as well as
maintenance fees. This implies no running costs for the owner.

Trustee: The trustee for a CMBS holds the mortgage collateral documents, issues the
certificates of beneficial ownership (the securities), passes all funds from the master servicer to
the bondholders, and distributes statements on distributions and the status of the collateral.
Acts as a supervisor to the master servicer and special servicer. Ensures that the servicers act in
accordance with the pooling and servicing agreement. If there is a violation of the agreement,
the trustee has the right to assume the authority of or appoint a new servicer. The trustee
represents the trust that holds the legal title to the collateral for the benefit of all class holders of
the security. Trustees must carry out their duties according to the indentures established within
the trust indenture.

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U
Unit Mix: The ratio of 1BR to 2BR apartments in multifamily properties. The general trend has
been toward a higher percentage of 2BR apartments since they provide more flexibility to
families and lifestyle renters.

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V
Value: Unless otherwise specified, the value of a mortgaged property is its fair market value
determined in an appraisal obtained by the originator when the loan is first made.

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W
Waterfall: A term used to describe the cash flow pay-out priority of a CMBS. The cash flow
from the pool of mortgages typically pays principal plus interest to the highest-rated tranche,
while paying only interest on the lower-rated tranches (the coupon payment having been
stipulated at the time of issue). After all of the certificates from the highest-rated tranche have
been retired or paid down, the cash flow then is dedicated to paying principal as well as interest
to the next-highest rated tranche. Since lower rated tranches receive principal payments only
after higher-rated tranches are paid down, they typically have longer average lives.

WAC: see Weighted Average Coupon.

WAL: see Weighted Average Life.

WAM: see Weighted Average Maturity.

Weighted Average Coupon (WAC): The average coupon or interest payment on a set of
mortgages, weighted by the size of each mortgage in the pool.

Weighted Average Life (WAL): The average time until all scheduled principal payments are
expected to have been made, weighted by the size of each mortgage in the pool.

Weighted Average Maturity (WAM): The average time before a set of mortgages will be
retired, weighted by the size of each mortgage in the pool.

Workout Fee: A portion of the special servicer’s compensation payable for each corrected
mortgage loan, as specified by the pooling and servicing agreement. This fee is payable out of
and is calculated by applying a workout fee rate to each collection of interest and principal
(including scheduled payments, prepayments, balloon payments and payments at maturity) for
a mortgage loan as long as it remains a corrected mortgage loan. This fee ceases to be payable if
the loan becomes a specially serviced
mortgage loan again or becomes an REO property.

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Y
Yield Maintenance: A prepayment premium that makes investors whole for any loss in yield
resulting from a prepayment; i.e., the penalty compensates the lender for scheduled interest
payments above a risk-free rate that would have been made if no prepayment had occurred. The
fee is designed to make investors indifferent to prepayments and to make refinancing
unattractive and uneconomical to borrowers. Also see Defeasance.

Yield Spread: The difference in yield between a security and a benchmark, typically U.S.
Treasuries of the same maturity.

Yield to Maturity: The calculated rate of return an investor will receive as of a certain date if a
long-term, interest-bearing investment, such as a bond, is held to its maturity date. The
calculation takes into account purchase price, face value, time to maturity, coupon yield and the
time between interest payments.

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The CREFC CMBS glossary is always changing. If you have suggestions for term additions,
please contact us.

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