Commercial Real Estate Financing Glossary

Plain-English definitions of the terms lenders and brokers actually use — each with formulas, worked examples, and the questions borrowers ask.

Underwriting Metrics

  • Debt Service Coverage Ratio (DSCR) — DSCR measures a property's ability to cover its annual debt payments using its net operating income.
  • Loan-to-Value (LTV) — LTV expresses a loan amount as a percentage of a property's appraised value, showing how much equity cushion a lender has against a decline in value.
  • Loan-to-Cost (LTC) — LTC compares the loan amount to the total project cost — acquisition price plus renovation, construction, or carrying costs — rather than to the property's finished value.
  • Debt Yield — Debt yield measures a loan's risk independent of interest rate or amortization by dividing a property's NOI by the loan amount, showing the lender's return if it had to foreclose and hold the asset unlevered.
  • Net Operating Income (NOI) — NOI is a property's total income minus operating expenses, before accounting for debt service, income taxes, depreciation, or capital expenditures.
  • Cash-on-Cash Return — Cash-on-cash return measures the annual pre-tax cash flow an investment produces relative to the actual cash equity invested, ignoring financing leverage's effect on total return and appreciation.
  • Internal Rate of Return (IRR) — IRR is the annualized rate of return that sets the net present value of all projected cash flows (including the eventual sale) to zero, capturing both the timing and magnitude of cash flows over an investment's full hold period.
  • Equity Multiple — Equity multiple is the total cash an investor receives back over the life of an investment (distributions plus sale proceeds) divided by the total cash they invested, expressed as a multiple like 1.8x or 2.2x.
  • Break-Even Occupancy — Break-even occupancy is the minimum occupancy rate at which a property's income exactly covers its operating expenses and debt service, with no cushion left over.

Market & Valuation

  • After-Repair Value (ARV) — ARV is the projected market value of a property after planned renovations or repairs are completed, used by bridge and rehab lenders to size loans on value-add deals.
  • Capitalization Rate (Cap Rate) — Cap rate is the ratio of a property's net operating income to its current market value or purchase price, used to compare relative pricing across income-producing real estate.

Loan Types

  • Bridge Loan — A bridge loan is a short-term financing tool, typically 6 to 36 months, used to acquire, reposition, or stabilize a commercial property before securing permanent financing or selling the asset.
  • Permanent (Agency) Loan — A permanent loan is long-term, stabilized financing — typically 5 to 30 years — placed on an income-producing property once it has reached consistent occupancy and cash flow.
  • DSCR Loan — A DSCR loan is a rental-property loan program that qualifies borrowers based on the subject property's cash flow rather than personal income or employment, making it popular with real estate investors who don't fit conventional debt-to-income underwriting.
  • Hard Money Loan — A hard money loan is a short-term, asset-based loan funded by private lenders rather than banks, prioritizing speed and property value over borrower credit or income.
  • SBA 504 Loan — The SBA 504 loan program finances owner-occupied commercial real estate and heavy equipment through a structure combining a conventional bank loan (50% of project cost), a below-market, government-guaranteed second mortgage from a Certified Development Company (up to 40%), and a small business down payment (typically 10%).
  • SBA 7(a) Loan — The SBA 7(a) loan is the SBA's most flexible and widely used loan program, usable for real estate purchases, business acquisitions, equipment, working capital, or debt refinancing, backed by a partial government guaranty (typically 75–85%) that reduces lender risk.
  • CMBS Loan — A CMBS (Commercial Mortgage-Backed Securities) loan is originated by a conduit lender and then pooled with other commercial mortgages, securitized, and sold to bond investors in tranches of varying risk and yield.

Deal Structure

  • Mezzanine Debt — Mezzanine debt sits between senior mortgage debt and equity in the capital stack, secured not by the real estate itself but by a pledge of the ownership interests in the entity that owns the property.
  • Preferred Equity — Preferred equity is capital invested in a real estate deal that receives a priority (preferred) return and repayment ahead of common equity holders but ranks below all debt in the capital stack.
  • Capital Stack — The capital stack is the full layered structure of financing used to fund a real estate deal, ranked by seniority and risk: senior debt at the bottom (lowest risk, lowest return), then mezzanine debt, then preferred equity, then common equity at the top (highest risk, highest potential return).
  • Amortization — Amortization is the process of paying down a loan's principal balance over time through scheduled payments that include both interest and principal.
  • Balloon Payment — A balloon payment is the large lump-sum principal balance due at the maturity of a loan whose amortization schedule is longer than its actual term.
  • Interest-Only (IO) Period — An interest-only period is a portion of a loan's term during which the borrower pays only accrued interest, with no principal reduction, keeping monthly payments lower and improving DSCR.
  • Fully Amortizing Loan — A fully amortizing loan is structured so that the loan term and the amortization period are identical, meaning scheduled payments pay off both interest and principal completely by the end of the term with no balloon payment due.
  • Construction Draw Schedule — A construction draw schedule governs how construction or renovation loan proceeds are disbursed to the borrower incrementally as work is completed and verified, rather than all at once at closing.
  • Term Sheet / Letter of Intent (LOI) — A term sheet (or letter of intent) is a preliminary, mostly non-binding document outlining the proposed key terms of a loan or transaction — amount, rate, term, leverage, fees, and major conditions — before full underwriting and legal documentation begin.
  • Recourse vs. Non-Recourse — Non-recourse debt limits a lender's remedy on default to the pledged property itself, without personal liability for the borrower's other assets, while recourse debt allows the lender to pursue the borrower personally for any deficiency.
  • Personal Guaranty — A personal guaranty is a borrower principal's contractual promise to personally repay some or all of a loan if the borrowing entity defaults, exposing the guarantor's personal assets beyond the pledged real estate.

Prepayment & Exit

  • Defeasance — Defeasance is a prepayment method, common on CMBS loans, where the borrower replaces the property as loan collateral with a portfolio of government securities that replicate the loan's remaining payment stream.
  • Yield Maintenance — Yield maintenance is a prepayment penalty formula that compensates the lender for lost interest income if a loan is paid off early, calculated as the present value of the difference between the loan's note rate and a current benchmark rate (typically a Treasury yield) over the remaining term.
  • Prepayment Penalty — A prepayment penalty is any fee or charge a lender imposes when a borrower pays off a loan before its scheduled maturity, compensating the lender for lost future interest income.
  • Cash-Out Refinance — A cash-out refinance replaces an existing loan with a new, larger loan against the same property, with the borrower pocketing the difference in cash after paying off the original balance and closing costs.
  • Maturity Default — A maturity default occurs when a borrower fails to pay off or refinance the outstanding loan balance (often a balloon payment) by the loan's stated maturity date, even if all prior payments were made on time.