If you are new to the world of private capital bridge lending (sometimes called hard money lending) as it relates to commercial real estate investing, the jargon used can be confusing.   Here are some quick definitions of common terms and abbreviations to help get you understand these terms:

• ARV (after rehab/repairs value) – The potential value of a property after planned renovations have been completed.
• As-is Value – The current value of the property right now without any construction done to improve the property. .
• Cross Collateralize – A type of lending in which one or more assets are used as additional collateral for loan against another property.
• Default – Failure to abide by the terms of the loan (such as making monthly payments or paying off the loan when it is due).
• Distressed property – A property that is in poor condition, has not be well-maintained, needs rehabilitation, is underperforming, or is close to defaulting; these are often viewed by savvy investors as prime fix-and-flip opportunities.
• Draw Schedule – A payment plan established between lender and borrower for construction and renovation projects that determines when the funds will be distributed to the borrower based on the value of the work completed at certain specified points.
• Exit Strategy – Plan developed by the borrower to pay off the loan.
• Foreclosure – In Colorado, the process through which a lender takes ownership of a property after a borrower has defaulted on a loan.
• Hard money lender – see Private Capital Lender.
• Holdback – Partial amount of a construction loan that is not released until a certain stage is reached (see draw schedule).
• Holding Costs – The costs of holding onto your investment for a period of time (e.g., while renovations are completed), which can include interest payments, property taxes, maintenance fees, insurance, and utilities.
• Interest rate – The cost, usually expressed as a percentage, that a borrower agrees to pay to the lender for the privilege of borrowing an amount of money. Interest rates for private loans are higher than those from banks to cover the increased risk for the lender.
• Lien – A legal claim to an asset that is filed with the county clerk as evidence of the lender’s claim upon the real estate until the loan against the asset has been repaid. Most hard money and private capital lenders prefer to issue first-position liens, though second position loans are possible in some situations.
• Liquidity – The speed at which an asset can be sold off for cash.
• Loan points – An origination fee where one point is equal to one percent of the principal loan amount.
• LTV (loan-to-value) – The ratio of the amount of the loan request to the appraised property value. Private lenders usually cap their LTVs at 65-75% but will often use an ARV instead an As-is Value. Many private capital bridge lenders   will not require using the lower of the appraised value or the purchase price as banks must do but instead will use the appraised value even if it is higher than the actual purchase price.
• Maturity Date – The final payment date of a loan when the principal amount (and any remaining interest) must be paid in full.
• NOI (net operating income) – A calculation used to value income-producing real estate investments; NOI is equal to the income a property generates minus the operating expenses (not including depreciation and interest expense)
• Private Capital Lender – An individual or group of individuals who lend money (usually their own funds or a pool of funds that they control) directly to real estate investors. Such lenders focus on the value of the asset securing the loan over the borrower’s credit score and global debt picture. Also known as private lenders, bridge lenders, or hard money lenders.
• Private Capital Bridge Loan – A loan secured by commercial or residential real estate. These loans are typically short-term, lasting between six months to two years, and may carry higher interest rates (9-12%) than bank loans.  Borrowers of private capital bridge money are willing to pay higher rates for the quick closings and lack of red tape that the private lender offers.  These loans are sometimes referred to as hard money loans.
• Proof of funds – Documentation from a lender affirming that the borrower has secured the necessary funds to complete a transaction.
• Property flipping – Buying a property and renovating it to increase its value so that it can be sold for a profit.
• Refinance – Replacing an existing loan with a new one. This is a common exit strategy for private capital loans when a borrower wants to hold onto a property as a long-term investment.
• ROI (return on investment) – Calculates the amount of profit from an investment by dividing the net profit by the cost of the investment (should include initial purchase price as well as rehab or holding costs).
• Scope of Work – Outline of scheduled renovations on the property with anticipated costs and expected timetable of completion dates.
• Short Sale – When a property is sold for less than is owed on the seller’s mortgage. This typically requires approval by the lien-holder . Savvy real estate investors try to find sellers in a short sale position in order to get a good buy.
• Title – Proof of ownership of a real estate asset.
• Title insurance – Indemnity insurance that protects the holder from financial losses in the event of a defect in a property’s title.
• Underwriting – Assessment of risk and reward for a particular investment conducted by the lender prior to approving the loan. Private capital bridge lenders (hard money lenders) typically place greater importance on the ratio between the property appraised value and their loan amount than they do on the borrower’s credit history or their global cash flow.

If you have more questions about private capital loan terms or our loan programs, check out our Hard Money Loan Terms guide  under Lending Guidelines or contact Montegra at 303-377-4181 or loans@montegra.com.