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Glossary
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.
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Glossary
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.
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Glossary
RBC
See Risk Based Capital.
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Glossary
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 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.
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Glossary
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.
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Glossary
Real Estate Owned (REO)
A mortgaged property that has been acquired by a trust or lender through foreclosure or deed in lieu of foreclosure. Also see
Other Real Estate Owned (OREO).
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Glossary
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.
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Glossary
Recapture Provisions
Provisions that permit the owner to cancel a lease and regain control of the space after the tenant vacates the space.
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Glossary
Recreational Property
A property designed for a recreational specialized use. Includes sports arenas, country clubs and marinas.
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Glossary
Red Herring, or “Red”
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Glossary
Refinance Rate
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Glossary
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 .
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Glossary
REIT
See Real Estate Investment Trust.
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Glossary
Release Provision
1) A provision to release certain collateral under a mortgage for a previously agreed upon amount and under previously agreed upon conditions, 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.
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Glossary
REMIC
See Real Estate Mortgage Investment Conduit.
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Glossary
Remittance Report
A report made available by the trustee or collateral administrator of a CMBS transaction to each certificate holder and certain other parties on a periodic distribution date which provides detailed information about the current distribution. While there is variability in these reports by preparer, they contain commonly presented data, much of which is prescribed by SEC filing requirements for publicly filed transactions. Typically, remittance reports are distributed monthly.
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Glossary
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.
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Glossary
REO
See Real Estate Owned.
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Glossary
Repayment Risk
The possibility that the borrower may not repay loan at maturity.
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Glossary
Replacement Reserve Account
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Glossary
Reps and Warranties:
The representations (or “reps”) and warranties made by a mortgage lender regarding the mortgage loans it sells into the securitization, covering loan documents and enforceability, title insurance, borrower structure, required insurance coverage, property condition and environmental diligence, and other characteristics relating to the mortgage loan and diligence undertaken during loan origination. Reps and warranties survive the securitization closing, and are enforceable against the seller, subject to either limitations in the mortgage loan purchase agreement or the applicable law statute of limitations. Rep exceptions relieve the seller of its liability/responsibility to the trust/investors to the extent of the exceptions. Thus, reps and warranties should be reviewed for their completeness (and compared to the CREFC Model reps), and exceptions should be evaluated for the impact on the quality of and risks attendant to the related loan.
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Glossary
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.
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Glossary
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.
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Glossary
Resolution Trust Corporation (RTC)
An agency created by the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) 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.
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Glossary
Retail Property
Property types that involve selling or marketing goods or services to consumers. Such properties can range from super-regional shopping centers with a gross leasable area greater than one million sq. ft. to small stores with single tenants.
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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.
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Glossary
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.Learn
Glossary
Reversionary Cap Rate
The capitalization rate applied to the expected ultimate sale price/value of a building after a multiple-year holding period.
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Glossary
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.
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Glossary
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.
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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.
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Glossary
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.
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Glossary
Risk Retention
On October 22, 2014, the federal regulatory agencies responsible for implementing regulations under the Dodd-Frank Wall Street Reform and Consumer Protection Act (itself passed in July 2010) finalized the risk retention rules for Asset Backed Securities (ABS) transactions, including CMBS transactions. Under the final rules, which went into effect December 24, 2016, any financial institution that securitizes a pool of CMBS mortgages and offers the bonds to investors must retain at least 5% of the credit risk associated with those bonds. This risk retention can be held in one of three ways: retaining a “vertical interest” (or “VRR”) of 5% of each tranche; retaining a “horizontal interest” (or “HRR”) of 5% residual interest in the first-loss position where the value of the strips are based on actual deal proceeds as opposed to notional balances (i.e. market value rather than par value); or by retaining an “L shaped interest” (or “LRR”) which is a hybrid between the vertical and horizontal strips, seeking the ideal balance between risk and returns. The final rules contain a CMBS-specific alternative to satisfy a sponsor’s risk retention obligation, permitting the acquisition of a subordinate horizontal interest (i.e., the B-piece) in the CMBS transaction by a third-party purchaser (or a majority-owned affiliate of the third-party purchaser) that agrees to hold the horizontal interest subject to conditions similar to the requirements that would be applicable to the sponsor’s retention of a horizontal interest.
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Glossary
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.
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RTC
See Resolution Trust Corporation.
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Glossary
Rule 144A