Glossary

Absolutely Triple Net Bondable: Lessee pays all costs associated with operation of property.

Acceptance of Lease/Loan: To accept the terms and conditions of and to enter into a transaction.

Account Executive (AE): Representative to contact when looking for a lease/loan.

Account Manager (AM): Representative to contact when looking for a lease/loan in Canada.

Accrued Interest: The amount of interest that has accumulated since the last loan payment. It is the amount of interest that the financial institution is entitled to, but is not due until the payment date.

ACH: Automated Clearing House. Automatic draw or draft made from a checking/depository account on a specified date each month.

Acquisition: One business entity taking over controlling interest in another. Also, franchisees taking over operation of an existing store(s).

Advances: Disbursements of loan funds based on appraised value, purchase price, or cost to construct real property.

Advertising Fee: A fee paid by the franchisee to the franchisor for corporate advertising expenditures, usually less than 3% of the franchisee's annual sales, and usually paid in addition to the royalty fee. Not all franchisors charge advertising fees.

Amortization: The repayment of a loan by periodic payments of principal and interest.

Application: Document to be completed by the borrower that provides detailed information on the borrowing entity, the person(s) controlling the operation, the amount of the loan the borrower desires and the description of collateral. See also, Credit Application.

Appraisal: Professional opinion or estimate of the value of property, in most states by licensed appraisers.

Area Franchise (a/k/a Development Agreement, Master Franchise): A franchise granted to develop a defined geographical area. May include strict performance schedule and franchise sales rights.

Area Representative: An employee of the franchise company whose responsibility is to regularly visit with, and assist franchise owners within an assigned geographical territory.

Assets: Owned real or personal property that can be used for payment of debt.

Balance Sheet: Financial statement that gives an accounting picture of property owned by a company and of claims against the property on a given date.

Balloon Payment: A final payment due at the end of a loan. The larger payment is the result of a loan being amortized over a period longer than the actual term of the loan.

Bankruptcy: An individual or organization unable to meet debt obligations petitions a federal district court for reorganization of debts or liquidation of assets or similar proceedings, or an involuntary petition is filed by creditors of the individual or organization.

Basis Point: Refers to one hundredth (0.01) of a full percentage point in yield. Example: An interest rate of 5 percent is 500 basis points. 4.50% is 50 basis points less than 5.00%.

Bid Letter: The initial letter sent to the borrower specifying the terms of the transaction. The bid letter is subject to credit review and approval.

Blended Rate: The average of two loans with different rates. Example: When financing equipment and real estate with a single loan, the rate of each product is combined. The final rate of the equipment loan is likely to be higher than it would be if financed separately, however, the rate for the real estate loan is likely to be lower than it would be if financed by itself.

Blended Term: The average of two loans with different terms. Example: When financing equipment and real estate with a single loan, the terms of each product are combined. The final term of the equipment loan is likely to be longer than it would be if financed separately, however, the term of the real estate loan is likely to be shorter than it would be if financed by itself.

Borrower: Legal entity, person or business that acquires debt financing from a money source.

Bridge Loan: A type of temporary financing which is extended to a borrower until permanent financing is secured. At that time, funds from the new permanent financing are used to pay off the bridge loan.

Business Format Franchising: The franchisor licenses the franchisee to use product, service and trademark. Also, the franchisor teaches the franchisee the entire business format, including marketing, selling, inventory, accounting, personnel procedures, etc. The franchisor provides support through training and communications to the franchisee for the duration of their business relationship.

Business Plan: A comprehensive planning document which describes a business' development objectives and how and where the resources needed to accomplish the objectives will be obtained and utilized.

Business Tax Return: Business tax forms submitted to the Internal Revenue Service to report a company's annual taxable income.

Buy-Sell Agreement: A legal document between a buyer and seller detailing the specifics for the selling of a business.

Certificate of Occupancy (CO): Document issued by local government agency signifying that a building conforms to local code regulations and is in a condition to be occupied.

Collateral: Assets used as security for a lease/loan.

Commercial Paper: A short-term note (normally 30 to 270 days) issued by corporations with good credit ratings. Rates can be found in financial sections of newspapers like the Wall Street Journal and on websites.

Commercial Real Estate: Property intended for use by retail, wholesale, office, hotel, service users, manufacturing or other industrial purposes-not residential property.

Commitment Letter: A letter sent to the borrower stating the final terms & conditions of the lease/loan approval.

Company-owned Outlet: Stores established and operated by the franchisor which are identical in appearance to franchised outlets.

Compounding Period: The period of time for which interest is computed.

Consolidated Financial Statements: Statements that report the combined operating results, financial position, and cash flows of two or more legally separate but affiliated companies as if they were one economic entity.

Consolidated Financial Statements: Statements that report the combined operating results, financial position, and cash flows of two or more legally separate but affiliated companies as if they were one economic entity.

Copyright: The exclusive right of a person to use, and to license to others, an intellectual property such as a book, pamphlet, or other published material.

Covenants: Formal conditions or promises that are written into transaction agreements. See also, Special Conditions.

Credit Analyst: An underwriter who reviews credit requests.

Credit Application: Initial document to be completed by the borrower that provides detailed information on the borrowing entity and the person(s) controlling the operation.

Credit Bureau: A reporting agency that assembles credit histories on individual or business entities.

Credit Bureau Report: A report showing what a person has borrowed on credit and the payment history to the creditor. This report also shows liens, collection accounts and past bankruptcies.

Credit History: A historic record of how debt has been repaid.

Credit Tenant: A tenant in the mortgaged property that meets the following criteria: revenues of $25,000,000, net worth of $5,000,000, and must meet real estate credit underwriting guidelines.

Credit Worthiness: A measure of an individual's or company's past and future ability and willingness to repay debts.

Debt Consolidation: The combining of debt from different financial institutions or products into one loan.

Debt Service Coverage: Cash required in a given period for payment of interest and current principal.

Default: Failure to carry out the terms of a contract.

Delinquency: Failure to make a payment on the payment due date.

Demand Feature: A provision allowing for the financial institution to demand the balance to be paid-in-full within a specific time period due to the default of the contract.

Demographics: Macro-economic information around a business; population, income, major traffic generators, etc. See also, economic demand generator.

Deposit: Money submitted with the loan application showing the intention to enter into a loan contract. See also, Documentation Fee.

Developer: One who prepares raw land for construction and sells lots to a builder. In some cases, the developer retains the title.

Development Agreement (see Area Franchise)

Disclosure Document: All franchisor companies are required by the FTC to provide this document to prospective franchisees at the first personal meeting, and at least ten days prior to the prospective franchisee signing a franchise agreement or paying the franchisor money to buy the franchise. The purpose of this document is to aid the prospective franchisee in evaluating the franchise company.

Documentation Fee: A fee charged to a borrower for documentation and various filing fees. The fee may be either a flat fee or a percentage.

Documentation Specialist: Individual who coordinates the documentation and funding of a lease or loan.

Earnings Claim: Any oral, visual or written representation to a prospective franchise owner or for general dissemination in the media which states or suggests a specific level or range of potential or actual sales, income, gross or net profit.

Earnings Claim Document: A special disclosure document which the FTC says must be used when statements about profits are made to prospective franchise owners. This document incorporates the prescribed format and language required in describing past or projected financial performance.

EBITDA: Earnings before interest, taxes, depreciation and amortization. EBITDA is a measure of the cash flow available to make debt payments.

Economic Demand Generator: Sources of business income, primarily from customers. See also, Demographics.

Encroachment: Any franchise owner (or the franchise company) attempting to sell products or services within an area of territory which has been assigned to or designated exclusively for another owner.

Environmental Indemnity: Protection against loss and liability as a result of litigation or other proceedings related to damage to air, water, wildlife and other natural surroundings.

Environmental Site Assessment: Planning document that assesses the environmental impact created by a proposed business.

Equipment: New or used personal property. See also, FF&E.

Expiration of Term: In a franchise agreement, the date upon which the contract expires if it is not renewed.

Fair Market Value: Price at which an asset or service is sold by seller to buyer, assuming both have reasonable knowledge of relevant market facts.

Federal Trade Commission (FTC): The U.S. government agency involved in franchising. The agency is located in Washington, D.C.

Fees: Fees charged based on a percentage of the transaction amount. See also, Documentation Fee.

Fee Simple Ownership: Absolute legal ownership.

Furniture, Fixtures & Equipment(FF&E): Fixtures comprise personal property attached to real estate property so that it cannot be removed without damage. Furniture & Equipment is not so attached, and can be moved. See also, Equipment.

Financial Statements (F/S): Consists of two parts, a balance sheet and a profit & loss (P&L, or income) statement.

• A balance sheet states how much a business is worth (Assets - Liabilities = Equity or Net Worth).
• A P&L statement shows how much a business makes (Sales - Costs = Profits or Income).

First Deed of Trust: Instrument used to create a lien on real estate property in which the borrower conveys title to a trustee, who holds it as security for the benefit of the lender. In some states, a mortgage will be used in lieu of a First Deed of Trust.

Fixed Rate: Predetermined, nonadjusting rate of interest applied to the principal balance of a loan.

Floating Rate: Variable interest rate with adjustments made periodically and tied to some interest rate benchmark such as Commercial Paper or Canadian Banker's Acceptances in Canada. See also, Variable Rate.

Franchise: A business in which the owner (franchisor) of a product, service, or method obtains distribution through affiliated dealers (franchisees) and offers assistance in such areas as organizing, training, marketing and managing in return for a consideration.

Franchisee: A person or entity to whom the right to conduct the business is granted by the franchisor.

Franchise Agreement: A written contract detailing the mutual responsibilities of franchisors and franchisees.

Franchise Fee: A one-time fee paid by the franchisee to the franchisor to "buy into" the franchise.

Franchisor: The parent company that grants, for a fee or other consideration, the right to use the name and system of business operations.

Ground Lease: A lease of vacant land or land exclusive of any building on it. Usually a net lease.

Historical Financial Statement: Balance sheets and income statements showing the operations of the business for a period of years.

Improvements: Enhancements made to land or building with the intent to increase the visual appeal and value of the property.

Income Statement: P&L (profit & loss) statement showing how much profit a business makes during its operation cycle. Sales - Costs = Income. See also, Financial Statements.

Interest Rate: Cost of financing, expressed as a percentage rate per period of time.

Landlord Subordination (Waiver): A document signed by a landlord which waives the landlord's rights to collateral or leased equipment.

Late Fee: A fee charged when a payment is not received on the payment due date. Usually a flat fee but also may be a percentage.

Lease Agreement: A document entered into between a landlord (lessor) and a tenant (lessee) giving the lessee exclusive right to use its property or equipment for a specified period of time in return for periodic payments.

LIBOR (London Interbank Offered Rate): Rate that the most creditworthy international banks dealing in Eurodollars charge each other for loans.

Limited Liability Company (LLC): A limited liability company is a business structure best described as a hybrid between a partnership and a corporation - a "pass through" of all profits and losses to the owners without taxation of the entity itself, as in a partnership, and a shield from personal liability, as in a corporation.

Line-of-Credit (LOC): A loan that may be borrowed against and paid down during its term. These loans usually have a covenant/special condition attached stating that the loan must have a zero balance for a specified period of time.

Loan: Transaction wherein a lender provides funds to a borrower on the condition that the funds are paid back over time with interest.

Loan Amount: Dollar amount funded to a borrower to purchase items to be used in the course of business or to finance equipment owned by the borrower.

Loan Application: Document to be completed by the borrower that provides detailed information on the borrowing entity, the person(s) controlling the operation, the amount of the loan the borrower desires and the description of collateral the borrower wants to secure the loan with. See also, Credit Application.

Loan Closing: Date on which loan funds are actually disbursed.

Loan-to-Value: The difference between the actual loan amount funded to the borrower and the value of collateral received as security for the loan.

MAI Appraisal: An appraisal prepared by a general appraiser certified by the Appraisal Institute.

Market Analysis Data: Demographic data about the local market environment.

Master Franchise (See Area Franchise)

Mortgage: Debt instrument by which the borrower gives the lender a lien on real property as security for the repayment of a loan.

Net Cash Flow: An accounting presentation showing how much of the cash generated by the business remains after expenses-including interest-and principal repayment on financing are repaid.

Offer: An oral or written proposal to sell a franchise to a prospective franchisee upon understood general terms and conditions.

Operating Manual: Comprehensive guidelines advising the franchisee on how to operate the franchised business. It covers all aspects of the business, including general business procedures. It may be separated into different manuals addressing such subjects as accounting, personnel, advertising, promotion and maintenance.

Owner-Occupied: Property occupied by the borrower.

Orderly Liquidation Value: Value that equipment would yield at an arm's length auction or liquidation sale.

Partners: Individuals in a legal relationship for the purpose of conducting a business enterprise. See also, Partnership.

Partnership: A partnership is one of two categories: general and limited.

• A general partnership is an association of at least two or more persons who co-own a business. Partnerships are formed when two or more persons agree to share ownership, management, profits, and liabilities of a business venture.
• A limited partnership is a partnership where only general partners may run the business, while limited partners cannot perform any management functions. However, limited partners may contribute capital, share in the profits, and are limited from liability. All limited partnerships must have at least one general partner, who remains personally liable for all debts and liabilities of the partnership, and any number of limited partners.

Payment Schedule: Timetable of payments.

Perfected First Security Interest: Status ascribed to security interests after certain events, such as filings and taking possession of collateral, have occurred, whereunder there are no other liens or encumbrances prior in right.

Personal Financial Statement (PFS): Balance sheet showing personal assets and liabilities. A personal financial statement shows how much net worth one has, while a tax return shows how much income one makes.

Personal Guaranty: A pledge made by the operator or owner of a business which obligates the operator or owner to personally repay some or all of the debt of a business should the business default on its payment obligations.

Prepayment Penalty: A fee charged for early payment of a transaction balance as compensation for income lost as a result of such prepayment.

Principal Balance: Remaining loan amount from which interest is calculated.

Proforma Financial Statement: A business owner's forward looking outlook on a company's operations. See also, Projections.

Proposal: The initial paperwork sent to the borrower from the Account Executive spelling out the structure of the transaction, terms and conditions. See also, Bid Letter.

Projections: A forward looking view of a company's operations. See also, Proforma.

Protected Territory: A designated area or geographic boundary granted to the franchisee by the terms of the franchise agreement. The franchisor covenants not to open another franchised or company-owned business of a like or exact nature within the franchisee's protected territory.

Purpose: Borrower's intended use of funds and the business reason for the transaction.

Real Property: Land and what is erected, growing or affixed to it. Also, minerals and waters beneath the surface of the soil.

Refinancing: Paying off one loan with the proceeds from another.

Registration: A requirement in several states that specific information be submitted and approved by state regulatory authorities before franchises may be offered in that state.

Repayment: The pay back of a loan.

Resume: A brief summary of an individual's work history, including name, address, contact information, as well as an outline of work experience.

Revolver: See Line-of-Credit.

Royalties: A regular and/or continuing payment made by the franchisee to the franchisor. The royalty may be a percentage of sales or a fixed or flat periodical recurring fee.

Security: Collateral or other items used to secure a transaction through a financial institution.

Service Mark: The specific statutory definition (U.S.C. Sec 1127) states: "... a mark used in the sale or advertising of services of one person and distinguishes them from the services of others."

Shareholder: Owner of one or more shares of a corporation.

Sole Proprietor: A business that is owned by one person. All income and losses generated by the business are treated as personal and will be filed along with the proprietor's regular tax returns.

Special Conditions: Formal conditions or clauses that are written into a transaction agreement. See also Covenants.

Spread: Difference between cost of funds and lending rate.

Start Date: The activation date of the contract.

Survey: Measurement of the boundaries of a parcel of land, its area and sometimes its topography.

Tenant: A holder of property under a lease or other rental agreement.

Term: Period of time during which the conditions of a transaction will be carried out.

Term Loan: A loan that must be repaid within a specific timeframe.

Terminal Rental Adjustment Lease (TRAC Lease): A tax-oriented lease of motor vehicles or trailers that contains a clause for rent adjustment at the end of the lease.

Termination: A declaration by the franchisor that part or all of the rights and obligations of both parties under the franchise contract cease or have ceased as of a certain date. Certain responsibilities and or claims and damages may survive termination.

Territory: The geographic area in which the franchised or company-owned outlet is located. Some territories are exclusive, while others are not.

Third Party Soft Costs: Various costs incurred during the construction phase of a project, however, not associated with the physical construction of the project such as surveys or site plans.

Title: Evidence of right to possession of land.

Title Policy: Insurance against loss resulting from defects in title to a specifically described parcel of real property.

Trade Dress: The overall visual manner in which a franchise business presents itself to the public, including the dress of its employees, the interior and exterior design of the buildings, its choice of color, etc.

Trademark: Any word, name, symbol, or device, or any combination thereof, adopted and used by a franchise company to identify its goods and distinguish them from those manufactured or sold by others.

Trade Secret: Knowledge in the possession of the franchisor which is revealed to the franchisee by the franchise transaction. Trade secrets may take the form of, inter alia, construction or operating procedures, a formula for mixing ingredients to prepare food, or a customer list.

Treasuries: Debt instruments issued by the U. S. Department of the Treasury.

True Lease: A tax-oriented lease which complies with all IRS guidelines for a true lease.

Turnkey Financing: Financing for the sale of a business which is structured so that the new owner need only "turn the key" in order to commence business.

Underwriting: The action of a credit analyst looking at the information submitted by a borrower and making a credit decision.

Uniform Commercial Code (UCC): A code (laws) which regulates commercial transactions. This code replaced the various state statutes covering chattel mortgages, conditional sales, trust receipts, etc.

Uniform Franchise Offering Circular: A form of disclosure document containing required information supplied by the franchisor to the prospective franchisee. Initially promulgated by the Midwestern Securities Commissioners to provide a uniform method to disclose for the benefit of the franchisor and franchisee, its use is permitted in non-regulated states by FTC Rule 436.

Variable Rate: A transaction with an interest rate that may fluctuate. The rate is often tied to an index that reflects changes in market rates of interest. A fluctuation in the rate causes changes in the payment amount. Limits (cap rate) are placed on the degree to which the interest rate can increase. See also, Floating Rate.

Waiver: A portion of the franchise contract which states that even if the franchise owner, or the franchise company, violate several contractual obligations, the entire contract is not necessarily void or invalid.

Warranty Deed: A deed that warrants that the grantor has title as claimed. It purports to convey property free and clear of all encumbrances, except those noted.

Working Capital: Cash available for daily business operations. Current assets - current liabilities = working capital.

Working Capital Loan: See Line-of-Credit and Revolver.