Private Lending Dictionary
Compiled by Kevin Kim and Anthony Geraci
Private Lending - The Basics
What Is Private Lending?
Industry Term
- Refers to a subset of the mortgage industry that concentrates on loans secured by real estate made by businesses that do not qualify as banks or other depository institutions.
- This can include commercial real estate and residential real estate.
Variations
- Hard Money Lending
- Synonymous to Private Lending; however...
- Some view Hard Money lending as a more aggressive form of private lending that purely focuses on the value of the real estate and does not value creditworthiness or other traditional underwriting criteria thereby creating a negative reputation.
- Others argue that this is NOT the case and it’s just another term for the industry.
- Point of Note: Borrowers will often refer to it as Hard Money Lending.
- Private Money Lending
- Synonymous to Private Lending or Hard Money Lending; however...
- Usually associated with smaller, individual lenders who are less restrictive in their underwriting guidelines.
- Ex: Jeff Smallowitz
- Asset Based Lending
- NOT the same as private lending
- Asset Based Lending is a larger industry of financing that expands beyond real estate into other hard assets including accounts receivables, equipment, etc.
Residential Transitionary Lending ("RTL")
- A term coined by the institutional investors used to describe short term loans (less than 12 months) secured by residential real estate.
- This is typically associated with residential real estate investment properties (Business purpose) as opposed to primary residences.
- AKA: A fancy term for "Fix & Flip Lending."
Business Purpose Lending ("BPL")
- A term coined by the institutional investors used to describe private lending that focuses on residential investment properties.
- Includes “RTL” or Fix & Flip Loans and DSCR / Term Rental Loans.
Property Types
Residential Real Estate / Single Family Residential / 1-4 Family
- Real estate intended for personal residence or dwelling between 1 unit houses up to 4 unit apartments – e.g. “1-4 Family / SFR”
Commercial Real Estate ("CRE")
- Multifamily - 5+ unit multifamily (apartments)
- Other Commercial Real Estate
- Retail Centers, Office, Medical, Hospitality (Hotels/Motels), Senior Living, Mixed Use
Loan Types
Bridge Loan
- A temporary loan which “bridges” the borrower from one event (either a purchase or a refinance) to the next (either a further refinance or the sale of the property)
Fix & Flip Loan / Rehabilitation ("Rehab") Loan
- A Bridge Loan specifically made to a borrower whose strategy is to take a dated, unimproved or impaired single family residence (home) to improve it and eventually sell for a profit.
Ground-Up Construction Loan
- A Bridge Loan specifically made to a borrower whose strategy is to fully develop land to construct a building on it.
- Unlike Rehab loans, there is no improvements on the property to add onto, hence why it is built from the “ground up.”
- A loan that is secured by a piece of land.
- The loan may secure “raw land,” which is land that has no entitlements on the property, or “entitled land,” which does have entitlements on the property.
Debt-to-Service Coverage Ratio Loans ("DSCR Loans")
- A loan that is secured by property that produces income, i.e., a multi-family property or industrial property.
- The loan requires a specific income produced to debt incurred ratio called a “Debt-to-Service Coverage Ratio” which varies by lender and property type secured.
- A Junior Loan which typically serves in a bridge capacity.
- These loans typically have higher interest rates and/or equity in the underlying property.
Shared Appreciation Mortgage
- A type of mezzanine loan which is made typically at a reduced or no interest rate which will share in any economic appreciation of the property the loan resides on.
Senior Loan
- Any type of loan that sits in a position senior to in relation to another loan.
- Any type of loan that sits in a position junior in relation to another loan.
Non-Performing Loan ("NPL") / AKA "Distressed Debt"
- Any loan which is not performing in relation to its terms. Typically this means the borrower has failed to live up to its payment obligations or the note has matured without being paid off.
Reperforming Loan ("RPL")
- Any loan that is now performing as agreed upon but at one time was a non-performing loan.
Private Lender Business Models
- General industry term
- A lender that is not a bank or financial institution that concentrates on making loans secured by SFR or CRE.
- SFR loans are usually BPL - RTL and DSCR
- CRE loans are typically short term bridge loans.
- Private lenders may include any of the below.
- In the context of mortgage loans:
- Brokers are businesses or individuals that arrange loan requests from borrowers to be submitted for funding to other lenders.
- Brokers act as facilitators or intermediaries on behalf of others to fund, sell, or buy loans.
- In the context of private lending:
- Direct lenders are private lenders that are able to fund loans directly in their own name.
- Direct lenders typically are also direct to the borrower and do not rely exclusively on third party brokers.
Balance Sheet Lender
- Balance sheet lenders are direct lenders but source their funds from their own balance sheet – meaning the capital to fund the loans belongs to them.
- Capital is typically funded through debt or equity infusion from the owners of the company, third party investors, or financial institutions.
Wholesale Lender
- Wholesale lender is a broad term that encapsulates correspondent, white label, aggregator, and table funder.
- A wholesale lender is a lender that focuses on finding their loans through third party origination (“TPO”) – meaning they rely on brokers and other originating lenders to fund or buy loans.
- A private lender that funds loans in a unique way referred to as “tablefunding” or “shadow funding”.
- A table funder will fund the loan at the closing table in the name of the originating lender so it appears the originating lender is closing the loan in their name. The table funder will then buy the loan immediately after closing in a company that is very generic sounding.
- Ex: Roc Capital.
Correspondent Lender
- A correspondent lender is usually a broker/ originator that originates loans through a correspondent program offered by a wholesale lender.
- Correspondent lenders can be differentiated because they are usually enrolled with a “correspondent program” that is designed to incentivize origination.
White Label Lender
- White label lenders will appear to be direct lenders utilizing their own brand but will be “white labeling” the capital and/or infrastructure of a larger direct lender or institutional investor.
- In the context of private lending – an aggregator is a business that buys or acquires loans from third party lenders/originators.
- Aggregators are usually institutional investors themselves or resell the loans to institutional investors.
- Many aggregators offer wholesale lending, table funding, and loan purchasing together as a holistic means to acquire more loans.
- Aggregators usually buy the loans in an advantageous way to the seller allowing the seller to retain a part of the interest rate (“spread’) and the origination fees.
Lender Finance
- Lender finance is a general term in which lenders will provide other lenders the financing they need to fund new loans.
- Warehouse Line of Credit / “WLOC”
- A warehouse line of credit is a revolving line of credit that allows a private lender to draw funds from the line and use those funds to fund part or all of new loans or recapitalize part or all of existing loans on the books.
- “Warehouse” feature refers the fact the loans are intended to be “warehoused” temporarily and prepared for sale to the secondary market.
- In Private Lending this is not always the case. Many Warehouse Lines of Credit are long term with no limit on timing.
- Master Repurchase Agreement
- A lender financing arrangement that is similar to a WLOC but results in a part or all of the loan being temporarily “purchased” by the lender and repurchased by the lender when taken off the line.
- Usually offered by non-bank lender finance organizations.
- Credit Facility
- A general term to refer to any line of credit offered to private lenders. Can include WLOCs.
- Lender financing program that is on a loan by loan basis. The lender will provide financing secured by a particular loan.
- In the context of private lending – an aggregator is a business that buys or acquires loans from third party lenders/originators.
- Aggregators are usually institutional investors themselves or resell the loans to institutional investors.
- Many aggregators offer wholesale lending, table funding, and loan purchasing together as a holistic means to acquire more loans.
- Aggregators usually buy the loans in an advantageous way to the seller allowing the seller to retain a part of the interest rate (“spread’) and the origination fees.
Correspondence
- A correspondent lender is usually a broker/ originator that originates loans through a correspondent program offered by a wholesale lender.
- Correspondent lenders can be differentiated because they are usually enrolled with a “correspondent program” that is designed to incentivize origination.
- Correspondence programs are offered by wholesale lenders, financial institutions and institutional investors.
Table Funding
- Shadow Funding
- A private lender that funds loans in a unique way referred to as “tablefunding” or “shadow funding”.
- A table funder will fund the loan at the closing table in the name of the originating lender so it appears the originating lender is closing the loan in their name. The table funder will then buy the loan immediately after closing in a company that is very generic sounding.
White Label
- White label lenders will appear to be direct lenders utilizing their own brand but will be “white labeling” the capital and/or infrastructure of a larger direct lender or institutional investor.
High Net Worth Investors
- Rich investors
- Synonymously used with “Accredited Investors” which is a legal term of art set forth under Securities laws. The definition includes:
- Individual: $1MM net worth less primary residence or $200,000 adjusted gross income for the past 2 years or $300,000 for husband & wife or Passed Series 7, 65 or 82 in Good Standing.
- Individual: $1MM net worth less primary residence or $200,000 adjusted gross income for the past 2 years or $300,000 for husband & wife or Passed Series 7, 65 or 82 in Good Standing.
- Entities: $5MM in assets or all owners are individually accredited investors.
- Trusts: $5MM in assets
- Legal Definition: “Family offices” are entities established by wealthy families to manage their wealth and provide other services to family members, such as tax and estate planning sevices.
- Many of them are Registered Investment Advisers.
- Practical Definition: A business organization that is primary funded by one or multiple wealthy families to allocate capital into investments strategies and manage those investments.
Registered Investor Advisers ("RIA")
- Section 202(a)(11) of the Act defines an investment adviser as any person or firm that: for compensation; is engaged in the business of; providing advice to others or issuing reports or analyses regarding securities.
- Practical Definition: RIAs advise and typically manage investments on behalf of individuals and companies. Their objective is to recommend certain investments and manage portfolios of investments for a fee.
Broker Dealers
- A broker is any person engaged in the business of buying or selling securities for the account of others. A dealer is any person engaged in the business of buying or selling securities, but for their own account.
- These professionals act as intermediaries to sell securities on behalf of issuers.
- Aggregators
- In the context of private lending – an aggregator is a business that buys or acquires loans from third party lenders/originators.
- Aggregators are usually institutional investors themselves or resell the loans to institutional investors.
- Many aggregators offer wholesale lending, table funding, and loan purchasing together as a holistic means to acquire more loans.
- Aggregators usually buy the loans in an advantageous way to the seller allowing the seller to retain a part of the interest rate (“spread’) and the origination fees.
- Pension Plans
- Retirement plans that pool cash contributions from certain employee groups and make investments. Ex: Calpers, CalSters – are both for State of California employees.
- Many of them are associated with government agency employees or unions.
- Ex: Calpers, CalSters – are both for State of California employees.
- Life Insurance Companies
- Companies that sell life insurance policies
- To ensure they are able to provide policy growth life insurance companies make investments into various public and private investments.
- Banks
- Types of Banks
- National Banks (E.g. Chase)
- Regional Banks (E.g. Western Alliance)
- Local Banks (E.g. Partners Bank of California)
- Banks also make loans on real estate and thereby compete with our clients.
- They also lend to private lenders in the form of “Warehouse Lines of Credit”.
- Investment Banks
- An investment bank is a financial services company that acts as an intermediary in large and complex financial transactions.
- An investment bank is usually involved when a startup company prepares for its launch of an initial public offering (IPO) and when a corporation merges with a competitor.
- It also has a role as a broker or financial adviser for large institutional clients such as pension funds.It also has a role as a broker or financial adviser for large institutional clients such as pension funds.
- These also include buying mortgages, investing in securitizations, and so on.
- Publicly Traded REITs
- REIT = Real Estate Investment Trust.
- A type of fund that invests in real estate related assets and have certain tax benefits.
- Public REITs are registered and publicly traded on an exchange like the New York Stock Exchange.
- Private equity describes investment partnerships that buy and manage companies before selling them.
- Private equity firms operate these investment funds on behalf of institutional and accredited investors.
Debt Fund
- A debt fund is a pooled investment vehicle that invests, funds, buys, or sells debt.
- In private lending – they typically hold short term loans like Bridge Loans, Fix & Flip Loans and Construction Loans.
- Debt funds are usually funded by high net worth investors, pension plans, family offices or RIAs.
Securitization
- Securitization is a pool of assets that repackages them into interest-bearing securities. An issuer designs a marketable financial instrument by merging financial assets, commonly mortgage loans or consumer or commercial debt. Investors that purchase these securities receive the principal and interest payments of the underlying assets.
- Securitizations are commonly offered by institutional investors that buy mortgages such as Fannie Mae, Freddie Mac, etc.
- In Private Lending they are also done by institutional investors such as Kiavi, Toorak etc.,
- The significance of a Securitization is they allow a larger sum of capital to be available to the private lending sector thereby allowing more loans to be funded.
- Private Label Securitization – Private label securitizations are securitizations that are not issued by a Government Agency or Government Sponsored Program.
- Rated Securitization – A rated securitization is a securitization that has been rated by a rating agency. Rating agencies are companies that evaluate the risk of the portfolio of loans in the securitization and give it a grade. Ex: S&P, KBRA, Moody’s. Many securitization investors require a rating to ensure they’ve met their due diligence requirements.
Underwriting and Servicing Terminology
Principal Balance
- The total monetary balance outstanding at a given time on a loan.
Interest Rate
- Fixed Interest Rate: A loan whose interest rate that stays the same throughout the life of the loan.
- Step Interest Rate: A loan whose interest rate adjusts to another fixed interest rate at a pre-determined point in time. There can be multiple rate steps in the loan, or just one.
- Variable Interest Rate: A loan whose interest rate adjusts to another fixed interest rate at a pre-determined point in time. There can be multiple rate steps in the loan, or just one.
- Annual Percentage Rate ("APR"): A calculation to help borrowers compare different loans as the APR contemplates the interest rate as well as the initial finance charges borrowers pay for.
- Dutch Interest: Dutch interest refers to a loan which charges interest on the entire loan amount committed, but not yet distributed, on behalf of the borrower.
- Non-Dutch Interest: A loan which charges interest on funds distributed on behalf of the borrower.
Loan Fees
- Origination Fees: A loan whose interest rate that stays the same throughout the life of the loan.
- Underwriting Fees: A loan whose interest rate adjusts to another fixed interest rate at a pre-determined point in time. There can be multiple rate steps in the loan, or just one.
- Late Fees: Late fees are typically charged as a percentage of the payment due if the borrower is a number of days late.
- Exit Fees: Sometimes charged for additional compensation, an Exit Fee is a fee due at the end of the loan and paid when the loan is paid off.
- An interest reserve is an account used to make interest payments on the loan.
- Also known as Prepaid Interest
Construction Reserve / Draws
- Construction reserves or draws are funds held in reserve to finish the construction of a project.
- They are typically split up into many disbursements called “draws” and there are certain milestones to be achieved prior to the next draw being received.
Valuation Terms
- Loan to Value ("LTV"): LTV refers to a percentage calculated by dividing the loan amount by the value of the property.
- As-Is Value: As-is value is the value of the property as it stands at the time of valuation, without any regard to improvements.
- After Repaired Value (“ARV”): After repaired value is the dollar amount attributed to a property that has been valued as if fully improved.
- Loan to Cost (“LTC”): LTC refers to a percentage calculated by dividing the loan amount by the purchase price of the property.
- Combined Loan To Value (“CLTV”): CLTV refers to a percentage calculated by adding up all of the loans senior to the proposed debt and divided by the property value.
- Appraisal: A valuation by a licensed appraiser who estimates the value of a given property.
- Desktop Appraisal: An appraisal done by either a licensed appraiser from their computer remotely with never visiting the property.
- Broker Price Opinion (“BPO”): A BPO is like an appraisal except is it provided by a real estate broker or mortgage broker. Brokers are able to express an opinion of value based on their experience.
- Mark to Market: A valuation analogizing the value of one piece of property by recent sales of other similarly situated properties.
- Purchase Premium Discount: Obtaining a property at either a higher price (“Premium”) or a lower price (“discount”) than the value of the property.
Debt Service
- A dollar amount needed to cover the payment of a loan, whether interest only or principal and interest.
Cross Collateralization
- Cross-collateralization refers to a loan being secured by more than one piece of collateral, typically more than one property.
Assignment & Allonge
- Assignment & Allonge refers to the assignment of the security instrument (Mortgage or Deed of Trust) and an allonge to the promissory note (essentially “Pay to the Order of New Lender).
- These two documents collectively assign a loan to another party.
Assumption of Mortgage
- A party not obligated on a loan agrees to voluntarily be obligated on the loan and “step into the shoes” of the old borrower.
- An amortization schedule is a schedule of payments over a loan that shows the borrower the amount, the date, and the balance remaining for each month.
Loan Servicing
- Loan servicing is when a third party collects payments from the borrower on behalf of the lender and remits the payments to the lender.
- They will field any phone calls and deal with borrower requests on behalf of the lender.
Loan Payoff
- A document that details the charges and total amount owed on a loan.
- In some states the payoff has the power to bind the Lender and, even if a mistake, require the Lender to release the lien on the property if the payoff amount is received.
Terms re: Default
- Workout: A workout is an agreement between the borrower and lender that, despite the borrower not performing as agreed, the lender will agree to defer or not enforce certain rights if the new “workout” agreement is followed.
- Extensions: An extension is an agreement to extend the maturity date of the loan.
- Modifications: Modifications are an agreement to modify a loan and change the terms such that the loan as modified is the new agreement between the Borrower and Lender. This is different from a workout as a workout does not change the underlying terms of the loan.
- Forbearance: Like a workout, a forbearance is an agreement to not enforce a default against the borrower if the borrower follows the terms of the forbearance.
- Deed in Lieu of Foreclosure: A deed-in-lieu of foreclosure is a type of deed whereby the borrower grants to the Lender the deed to the property in lieu of the Lender foreclosing on it. There is a legal analysis needed to determine whether this is in the best interest of the Lender.
- Short Sale: A short sale occurs when the liens on a property exceed the value of the property, and the borrower works with the lender to take a lesser amount than owed in a third party sale to another buyer.
- “REO”: “Real Estate Owned,” which means a bank or lender has taken the property back at foreclosure.
- Delinquent: A borrower is delinquent when they miss a payment they are obligated to make to the lender.
- Default:A borrower who fails to perform its obligations to a lender on a loan, either on the note or the deed of trust, has defaulted on the loan. This could be monetary (i.e. payment) or performance (failed to do something).
Net Operating Income
- Net Operating Income is what is left over after the rent received from a property is deducted from the expenses.
Weighted Average Coupon (“WAC”)
- WAC means the weighed average interest rate (i.e., “coupon”), in a portfolio of loans.
Weighted Average Life (“WAL”)
- WAL is a similar calculation to WAC, except it measures the weighted average maturity date in a portfolio of loans.
- A personal guaranty is a promise by an individual who is typically a control person of an entity borrower that promises to make the loan good should the entity borrower default.
Limited Guaranty
- Also known as Bad Boy Guaranty / Bad Boy Carveout
- Limited Guaranties are guaranties that limit the obligations of the guarantor on the loan. These are typically limited to the Borrower committing fraud or other “bad boy” actions by the borrower.
Capitalization Rate (“Cap Rate”)
- Capitalization rate is the rate of return on a property that is calculated by taking the Net Operating Income (NOI) divided by the current market value of the asset.
Full Recourse
- A full recourse loan is a loan that has full recourse to a borrower, i.e., the borrower is fully liable on the loan without limitation, including foreclosing on the security for the loan.
Non-Recourse
- A non-recourse loan is a loan that does not have any recourse to the borrower except for foreclosing on the security loan.