Commercial Real Estate Financing Glossary
A comprehensive guide to debt, equity, and capital markets terminology for real estate developers and investors.
A
Accredited Investor
An individual or entity that meets SEC criteria for investing in private securities offerings. For individuals, this typically means $200,000+ annual income ($300,000 with spouse) or $1 million+ net worth excluding primary residence.
Acquisition Loan
Financing used to purchase an existing property. May be structured as permanent debt, bridge financing, or a combination depending on the property's stabilization status.
Learn more →Amortization
The gradual repayment of a loan principal through scheduled payments over time. Fully amortizing loans pay off entirely by maturity; partially amortizing loans have a balloon payment at the end.
Anchor Tenant
A major tenant in a retail or commercial property that draws traffic and adds credibility. Lenders often evaluate anchor tenant credit quality when underwriting retail financing.
As-Is Value
The current market value of a property in its present condition, without accounting for future improvements or lease-up.
As-Stabilized Value
The projected market value of a property after renovations are complete and the property reaches stabilized occupancy (typically 90-95%).
B
Bad Boy Carve-Outs
Exceptions to non-recourse loan provisions that trigger personal liability for the borrower. Common triggers include fraud, misappropriation of funds, environmental violations, and voluntary bankruptcy filing.
Balloon Payment
A lump-sum payment due at loan maturity for the remaining principal balance. Common in commercial loans with shorter amortization periods than the loan term.
Bridge Loan
Short-term financing (typically 12-36 months) used to bridge the gap between acquisition or renovation and permanent financing. Often used for value-add, lease-up, or transitional properties.
Learn more →Burn-Off (Recourse Burn-Off)
A loan provision that converts recourse debt to non-recourse after certain conditions are met, such as achieving stabilized occupancy or reaching a target DSCR.
C
Cap Rate (Capitalization Rate)
A property's Net Operating Income divided by its value or purchase price. Used to evaluate investment returns and compare properties. A lower cap rate indicates higher relative pricing.
Capital Stack
The full structure of debt and equity used to finance a real estate project. Typically includes senior debt, mezzanine debt, preferred equity, and common equity, ordered by payment priority.
Learn more →Carve-Out Guarantees
Personal guarantees on specific loan provisions. The guarantor is liable only for specific events, not the full loan balance.
Cash-on-Cash Return
Annual pre-tax cash flow divided by total cash invested. A measure of equity return that doesn't account for appreciation or principal paydown.
CMBS (Commercial Mortgage-Backed Securities)
Loans pooled together and sold as bonds to investors. CMBS loans are typically non-recourse with fixed rates and 5-10 year terms, best suited for stabilized properties.
Learn more →Co-GP (Co-General Partner)
An equity partner who joins as a general partner alongside the lead sponsor. Co-GPs often bring capital, experience, or balance sheet strength to satisfy lender requirements.
Completion Guarantee
A guarantee that a construction project will be completed according to plans and specifications. Required by most construction lenders.
Construction Loan
Short-term financing for ground-up development or major renovation. Funds are drawn in stages as construction progresses.
Learn more →Cost Segregation
A tax strategy that accelerates depreciation by identifying building components that can be depreciated over shorter timeframes (5, 7, or 15 years instead of 27.5 or 39 years).
D
Debt Fund
A private investment fund that provides commercial real estate loans. Debt funds often fill the gap between traditional bank lending and hard money, offering flexibility on transitional assets.
Debt Service
The total amount of principal and interest payments required on a loan over a given period, typically expressed monthly or annually.
Debt Service Coverage Ratio (DSCR)
Net Operating Income divided by Debt Service. Measures a property's ability to cover loan payments from rental income. Most lenders require a minimum DSCR of 1.20x to 1.25x.
Learn more →Debt Yield
Net Operating Income divided by Loan Amount. A risk metric used by lenders that measures return independent of interest rate or amortization. Typical minimums range from 8% to 10%.
Defeasance
A prepayment mechanism for CMBS and some other loans where the borrower purchases government securities that replicate the remaining loan payments, allowing release of the property.
Draw Schedule
The timeline for releasing construction loan funds as work is completed. Draws are typically tied to construction milestones verified by inspectors.
DSCR Loan
A loan underwritten based on property cash flow rather than borrower income. Popular for investment property acquisitions where rental income covers debt service.
Learn more →E
Earnest Money Deposit (EMD)
A deposit made by a buyer to demonstrate serious intent to purchase. Typically 1-3% of purchase price, held in escrow and credited toward closing costs.
Equity Multiple
Total distributions received divided by total equity invested. A 2.0x equity multiple means the investor received double their original investment (including return of principal).
Exit Cap Rate
The capitalization rate assumed at the time of property sale in a proforma analysis. Used to estimate future sale price and investor returns.
Extension Option
A provision allowing the borrower to extend the loan term beyond initial maturity, typically for 6-12 months. Often subject to fees and performance requirements.
F
Fannie Mae (Federal National Mortgage Association)
A government-sponsored enterprise that purchases and securitizes multifamily loans. Fannie Mae loans offer competitive rates and terms for stabilized apartment properties.
Learn more →Freddie Mac (Federal Home Loan Mortgage Corporation)
A government-sponsored enterprise similar to Fannie Mae, providing liquidity for multifamily lending. Freddie Mac offers various programs for apartment acquisitions and refinances.
Full Recourse
A loan where the borrower is personally liable for the entire loan balance in the event of default. Common in smaller loans and bank financing.
G
Gap Financing
Capital used to fill the gap between senior debt and sponsor equity. May include mezzanine debt, preferred equity, or secondary financing.
Learn more →Going-In Cap Rate
The capitalization rate at the time of acquisition, calculated as Year 1 NOI divided by purchase price.
Ground Lease
A long-term lease of land on which the tenant constructs improvements. Ground lease financing requires specialized structures and longer-term lenders.
Guarantor
An individual or entity that provides a personal guarantee on a loan, accepting liability for repayment if the borrower defaults.
H
Hard Costs
Direct construction costs including labor, materials, and contractor fees. Distinguished from soft costs (permits, design, financing, legal).
Hard Money Loan
Asset-based short-term financing with higher rates and fees, typically provided by private lenders. Used for quick closings, distressed acquisitions, or when traditional financing isn't available.
Learn more →Holdback
A portion of loan proceeds withheld by the lender until certain conditions are met, such as achieving occupancy targets or completing repairs.
I
Interest-Only (I/O)
A loan payment structure where the borrower pays only interest with no principal reduction. Common during initial periods of bridge and construction loans.
Interest Reserve
A portion of loan proceeds set aside to cover interest payments during construction or lease-up, reducing the need for out-of-pocket payments.
Internal Rate of Return (IRR)
The annualized rate of return that makes the net present value of all cash flows equal to zero. A standard measure of investment performance that accounts for timing of cash flows.
J
Joint Venture (JV)
A partnership between two or more parties to develop or invest in real estate. Typically involves a capital partner and an operating partner with complementary strengths.
K
Key Principal
The individual(s) whose experience and financial strength are evaluated for loan qualification. Key principals typically sign carve-out guarantees.
L
Lease-Up
The period during which a newly constructed or renovated property is being leased to reach stabilized occupancy.
Letter of Intent (LOI)
A non-binding document outlining the proposed terms of a transaction. Used in both property acquisitions and financing negotiations.
Loan-to-Cost (LTC)
Loan amount divided by total project cost (acquisition + construction/renovation). Used primarily for development and value-add financing. Typical maximums range from 65% to 80%.
Learn more →Loan-to-Value (LTV)
Loan amount divided by property value. The primary leverage metric for stabilized properties. Typical maximums range from 65% to 75%.
Learn more →Lockout Period
The initial period of a loan during which prepayment is prohibited. Common in CMBS and life company loans.
M
Mezzanine Debt
Subordinate debt secured by the ownership interests in the borrowing entity rather than the property itself. Sits between senior debt and equity in the capital stack.
Learn more →Mini-Perm
A short-term permanent loan (typically 3-7 years) used after construction is complete but before obtaining long-term financing.
Learn more →N
Net Operating Income (NOI)
Total property revenue minus operating expenses (excluding debt service, capital expenditures, and depreciation). The fundamental measure of property financial performance.
Non-Recourse Loan
A loan where the borrower has no personal liability beyond the collateral property, except for specific carve-outs. Standard for CMBS and many institutional loans.
Learn more →O
Operating Expenses
Costs to operate a property including property management, maintenance, utilities (if not tenant-paid), insurance, and property taxes. Does not include debt service or capital expenditures.
P
Participating Debt
A loan where the lender receives a share of property cash flow or appreciation in addition to interest payments.
Pari Passu
Equal in priority. Pari passu debt tranches share equally in collateral and payment priority.
Permanent Loan
Long-term financing (typically 5-30 years) for stabilized properties. Replaces construction or bridge financing after a property achieves occupancy targets.
Learn more →Preferred Equity
Equity investment that receives preferential returns before common equity. Fills the gap between senior debt and sponsor equity, typically with current-pay returns of 10-15%.
Learn more →Preferred Return (Pref)
The minimum return that limited partners receive before the general partner participates in profits. Typically ranges from 6% to 10%.
Prepayment Penalty
A fee charged for paying off a loan before maturity. Structures include yield maintenance, defeasance, step-down percentages, and lockout periods.
Pro Rata Share
Each investor's proportional share of an investment, distributions, and capital calls based on their ownership percentage.
Proforma
A financial projection showing anticipated income, expenses, and returns for a real estate investment. Used to underwrite acquisitions and secure financing.
R
Rate Lock
An agreement that fixes the interest rate for a specified period, protecting the borrower from rate increases before closing.
Recapitalization (Recap)
Restructuring a property's capital stack, often to return equity to investors, bring in new partners, or extend the investment hold period.
Recourse Loan
A loan where the borrower is personally liable for repayment.
Refinance
Replacing an existing loan with a new loan, often to secure better terms, access equity, or extend the financing term.
Learn more →Replacement Cost
The current cost to construct an equivalent property. Used to evaluate whether acquisition prices make sense relative to new construction.
S
SBA 504 Loan
An SBA program providing long-term, fixed-rate financing for owner-occupied commercial real estate. Combines a bank loan, SBA-backed debenture, and borrower equity.
Learn more →Senior Debt
The first-priority loan on a property, with the first claim on collateral in case of default. Typically the largest and lowest-cost component of the capital stack.
Learn more →Soft Costs
Non-construction project costs including design, engineering, permits, legal, financing fees, and interest during construction.
Sponsor
The lead developer or investor responsible for identifying, executing, and managing a real estate project. Also known as the operator or general partner.
Stabilization
The point at which a property reaches target occupancy (typically 90-95%) and operates at projected income levels.
Step-Down Prepayment
A prepayment structure where the penalty decreases over time. Example: 5% in year 1, 4% in year 2, 3% in year 3, etc.
Subordination
The act of placing debt or equity in a junior position, with lower priority for payment than senior obligations.
T
Term Sheet
A document outlining the proposed terms of a loan, including amount, rate, term, amortization, prepayment, and other key provisions. Precedes formal loan documentation.
Trailing 12 (T-12)
A financial statement showing the previous 12 months of actual property performance. Used by lenders to verify current operating results.
Tranche
A portion of a loan or investment with distinct terms, risk profile, or payment priority. A single loan may be divided into A-Note and B-Note tranches.
U
Underwriting
The process of evaluating a loan or investment opportunity. Includes property analysis, market research, financial modeling, and risk assessment.
V
Value-Add
An investment strategy focused on properties that can be improved through renovation, re-tenanting, or operational changes to increase income and value.
W
Waterfall
The order in which cash distributions flow to different classes of investors and debt holders. Typically structured as return of capital → preferred return → profit splits.
Working Capital
Liquid reserves available for property operations, unexpected expenses, or debt service shortfalls. Lenders often require minimum working capital reserves.
Y
Yield Maintenance
A prepayment structure that requires the borrower to compensate the lender for lost interest through maturity. Calculated based on the difference between the loan rate and current treasury rates.