Commercial real estate loan glossary
Plain definitions of the terms lenders use to size, price, and structure commercial real estate loans.
- Loan size
- $1M to $100M
- Coverage
- Nationwide, commercial purpose only
- Review
- A principal reviews every request
- Amortization
- Amortization is the schedule over which a loan's principal is repaid through regular payments of principal and interest. On most commercial real estate loans the amortization period is longer than the loan term, so payments stay lower and a balloon balance is due at maturity. The amortization choice changes the payment, DSCR, and the amount left to refinance.
- As-is value and as-stabilized value
- As-is value is the market value of a property in its current physical condition, use, and zoning on the appraisal's effective date. As-stabilized value is a prospective market value as of the date the property is projected to reach stabilized occupancy. Lenders on bridge and construction loans often receive both in the same appraisal and size proceeds against one or both.
- Bad boy carve-out guarantee
- A bad boy carve-out guarantee is a guarantee, signed by a sponsor or parent entity on a non-recourse commercial loan, that creates personal liability only if specific acts or events occur, such as fraud, misapplied rents, an unpermitted transfer, or a voluntary bankruptcy. It keeps the sponsor from harming the collateral while the loan otherwise remains non-recourse.
- Balloon payment
- A balloon payment is the principal still owed when a loan matures because the term is shorter than the amortization schedule. On a commercial real estate loan it is often most of the original balance. Borrowers usually repay it by refinancing or selling the property, which makes the property's income, value, and interest rates at maturity the main risk.
- Bridge loan
- Short-term financing for a property in transition, such as a lease-up, renovation, repositioning, or a closing that cannot wait for permanent debt. A bridge loan is repaid by a refinance or sale once the business plan is complete. Learn more
- Cap rate
- A cap rate, or capitalization rate, is a property's net operating income divided by its price or value. It is the unlevered annual yield an owner would earn if the property were bought with all cash. Lenders care because appraisers convert income to value with a cap rate, and value sets the maximum loan under a loan-to-value limit.
- Capital stack
- The layers of capital that fund a property, ranked by priority of repayment: senior debt first, then mezzanine debt, preferred equity, and common equity. Each layer below carries more risk and requires a higher return. Learn more
- Cash-out refinance on commercial property
- A commercial cash-out refinance replaces an existing loan with a larger new loan and returns the difference, after payoff and closing costs, to the owner. The new loan is sized to the property's current appraised value and income, whatever the owner originally paid. Lenders apply loan-to-value, DSCR, and often debt yield tests, and they review how the cash will be used.
- CMBS loan
- A CMBS loan is a commercial mortgage that a lender originates with the plan to pool it with other loans and sell it into a trust that issues commercial mortgage-backed securities. These loans are often called conduit loans. They are typically fixed-rate, non-recourse apart from carve-outs, and sized mainly on the property's cash flow, with servicing handled by a master servicer and a special servicer after closing.
- Commitment letter
- A commitment letter is the lender's written agreement to make a specific commercial loan, issued after credit approval and subject to the conditions it lists. It restates the approved amount, rate mechanics, term, guarantees, and reserves, and it sets an expiration date. Once the borrower signs and pays any commitment fee, the terms are far firmer than a term sheet.
- Completion guarantee
- A completion guarantee is a promise by a construction loan sponsor or parent entity to finish the project lien-free, on the approved plans and budget, and to pay any cost overruns beyond the loan and equity. It protects the construction lender from holding a half-built project. Nearly every construction loan requires one, even when the permanent takeout will be non-recourse.
- Construction draw and draw schedule
- A construction draw is a periodic request to fund completed work out of the construction loan, and the draw schedule is the projected timing and amount of those requests over the build. Lenders fund draws in stages, after inspection and document review, so loan dollars never get ahead of the value in place on the site.
- Debt fund
- A debt fund is a private investment vehicle that pools money from investors and uses it to make commercial real estate loans. It is a non-bank lender, so it does not take deposits and is not subject to the regulatory capital rules that govern banks. Debt funds focus on bridge, construction, and transitional loans where speed, flexible structure, and higher leverage matter more than the lowest rate.
- Debt service
- The total principal and interest payments on a loan over a period, usually measured annually for underwriting. Learn more
- Debt service coverage ratio (DSCR)
- The debt service coverage ratio (DSCR) is a property's net operating income divided by its annual loan payments. It shows how many times the income covers the debt. Commercial lenders set a minimum DSCR and reduce the loan amount until the property meets it, so coverage often decides how much a sponsor can borrow.
- Debt yield
- Debt yield is a property's net operating income divided by the loan amount, expressed as a percentage. It tells a lender what annual return it would earn on the loan balance if it had to take the property back. Because the interest rate, amortization, and cap rate play no part in it, a lower rate or longer amortization cannot raise it.
- Defeasance
- Defeasance is a way to release a property from a fixed-rate commercial loan, most often a CMBS loan, by replacing the real estate collateral with government securities whose cash flows cover every remaining loan payment. The loan stays outstanding and is assumed by a successor entity. The cost depends mainly on how current Treasury yields compare with the loan's interest rate.
- Entitlements in real estate development
- Entitlements are the government approvals that give a property the legal right to be developed for a specific use, density, and design, such as zoning, site plan approval, subdivision or plat approval, variances, and environmental clearances. Lenders care because a site without the entitlements for the planned project is worth what it can legally become today, and most construction lenders will not fund until approvals are final.
- Estoppel certificate
- An estoppel certificate is a signed statement from a tenant confirming the key facts of its lease, such as rent, term, security deposit, and whether either party is in default. Commercial lenders require estoppels because the tenant generally cannot later claim facts that contradict what it certified, which lets the lender underwrite the leases as they actually stand.
- Guaranteed maximum price (GMP) contract
- A guaranteed maximum price (GMP) contract is a construction agreement where the owner pays the contractor's actual cost of the work plus a fee, up to a stated ceiling, and the contractor absorbs cost overruns above that ceiling for the defined scope. Construction lenders favor GMP contracts because they shift part of the overrun risk away from the borrower and the loan.
- Interest rate cap
- An interest rate cap is a hedge a borrower buys to limit how high the index on a floating-rate loan can go. If the index, usually a version of SOFR, rises above the cap's strike rate, the cap provider pays the difference on the notional amount. Lenders require caps on many bridge and construction loans so debt service stays payable if rates climb.
- Interest reserve
- An interest reserve is a line in the construction or bridge loan budget that pays the monthly interest from loan proceeds until the property produces enough income to cover debt service. Lenders require it because a project under construction has no cash flow, and they want interest paid on schedule without depending on the sponsor writing a check each month.
- Interest-only commercial loan
- An interest-only commercial loan requires payments of interest alone for all or part of the term, so the principal balance does not decline during that period. It lowers early payments and improves cash flow. The tradeoff is a larger balance at maturity, and many lenders still size the loan on an amortizing payment or allow less leverage in exchange.
- Lease-up
- Lease-up is the period after a property is built, renovated, or emptied when the owner signs tenants until occupancy and income reach a stabilized level. During lease-up, rental income usually falls short of debt service and operating costs. Lenders underwrite the pace and cost of lease-up closely, because it determines the interest reserve and when the loan can be refinanced.
- Loan-to-cost (LTC)
- Loan-to-cost (LTC) is the loan amount divided by the total cost of a project, including land, hard costs, soft costs, and financing costs. Construction and heavy renovation lenders use it to make sure the sponsor funds a meaningful share of the budget. It is usually tested alongside loan-to-value on the completed or stabilized property.
- Loan-to-value (LTV)
- Loan-to-value (LTV) is the loan amount divided by the property's value, stated as a percentage. It measures how much equity sits beneath the lender if the property has to be sold. Commercial lenders cap LTV by property type and program, and on a purchase they generally measure it against the lower of the price and the appraised value.
- Mezzanine financing
- Mezzanine financing is a loan that sits behind the first mortgage and is secured by a pledge of the ownership interests in the entity that owns the property, rather than by a lien on the real estate. It fills the gap between the senior loan and the sponsor's equity. Sponsors use it to raise total leverage without selling ownership to a joint venture partner.
- Mini-perm loan
- A mini-perm loan is a short-term permanent loan, often built into a construction loan, that takes over once the project is complete and lets the owner carry the property for a few years before long-term financing. It gives the building time to lease up and build an operating history, so the sponsor can refinance into a permanent loan on stronger numbers or sell.
- Net operating income (NOI)
- Net operating income (NOI) is a commercial property's annual income after vacancy, credit loss, and operating expenses, and before loan payments, depreciation, capital expenditures, and income taxes. It is the starting point for nearly every lending test, including DSCR, debt yield, and the appraised value a loan-to-value limit is measured against.
- Non-recourse loan
- A non-recourse loan is a commercial real estate loan where the lender's remedy on default is limited to the property and its income, with no claim on the borrower's or sponsor's other assets for a shortfall. Nearly every non-recourse loan still carries carve-outs, so the sponsor becomes personally liable if listed bad acts or events occur.
- Personal guarantee
- A personal guarantee is a promise by an individual or parent company to repay some or all of a commercial loan if the borrowing entity does not. Because most properties are held in single-purpose LLCs, the guarantee gives the lender a second source of repayment beyond the real estate. Its scope can be full, limited to a dollar amount or percentage, or triggered only by specific acts.
- Phase I environmental site assessment
- A Phase I environmental site assessment (ESA) is a report, prepared by an environmental professional, that reviews a property's history, government records, and current condition to identify likely contamination without sampling soil or groundwater. In the United States it is usually performed under ASTM E1527-21, which EPA recognizes as satisfying its All Appropriate Inquiries rule at 40 CFR Part 312. Commercial lenders require one because contamination can impair collateral value and create cleanup liability for the borrower.
- Preferred equity
- Preferred equity is an ownership investment in a property-owning entity that receives its return and its capital back before the common equity does. It ranks behind all mortgage and mezzanine debt. Sponsors use it to fill a funding gap when the senior lender will not allow mezzanine debt, or when they want flexible terms without giving up control of the deal.
- Prepayment penalty and step-down prepayment
- A prepayment penalty is a charge a commercial borrower pays to repay a loan before a set date. Common forms are a step-down prepayment, which charges a fixed percentage of the balance that declines each year, yield maintenance, defeasance, and lockouts. Lenders use them to protect expected interest income, so the structure should match the borrower's likely sale or refinance date.
- Rate lock
- A rate lock is an agreement that fixes the interest rate, or the index component of it, on a commercial loan before closing. It protects the borrower if benchmark rates rise while the loan is being documented. In return, the borrower usually posts a deposit and accepts liability for the lender's hedging loss, called breakage, if the loan does not close on the locked terms.
- Recourse
- Personal or corporate liability for a loan beyond the property. Full recourse makes a guarantor liable for the entire balance, while partial recourse limits the guaranty.
- Rent roll
- A rent roll is a property-level schedule listing each unit or suite with its tenant, lease dates, contract rent, deposits, and occupancy status as of a specific date. Lenders use it as the starting point for underwriting income, then test it against leases, bank deposits, and the trailing 12 operating statement to see whether the rent on paper is rent that is actually collected.
- Retainage
- Retainage is the portion of each progress payment that an owner holds back from the contractor until the work is complete and accepted. Construction lenders track it closely because it gives the project money to finish punch-list items or replace a contractor who walks away, and because the held amount still has to be funded before the loan can close out.
- SBA 504 loan
- An SBA program for owner-occupied commercial real estate that combines a bank first mortgage with a second loan from a certified development company, allowing a lower borrower equity contribution. Learn more
- SOFR in commercial real estate loans
- SOFR, the Secured Overnight Financing Rate, is a benchmark interest rate that measures the cost of borrowing cash overnight with Treasury securities as collateral. The Federal Reserve Bank of New York publishes it each business day. Floating-rate commercial real estate loans use SOFR as the index and add a fixed spread, so the borrower's rate moves as SOFR moves.
- Subordination, non-disturbance, and attornment agreement (SNDA)
- An SNDA, or subordination, non-disturbance, and attornment agreement, is a 3-party agreement among a tenant, the landlord, and the landlord's lender. The tenant subordinates its lease to the mortgage, the lender agrees not to disturb the tenant after a foreclosure if the tenant is not in default, and the tenant agrees to recognize the new owner as landlord. Lenders use SNDAs to keep the rent stream in place if they ever take the property back.
- Takeout loan
- A takeout loan is the long-term financing that repays a construction loan or bridge loan once a property is complete and producing stable income. It takes the short-term lender out of the deal. Construction and bridge lenders look closely at the likely takeout, because the loan they make depends on a future lender being willing to refinance it.
- Term sheet
- A term sheet is a short, mostly nonbinding summary of the loan a lender is prepared to underwrite, listing the amount, rate, term, amortization, fees, recourse, prepayment, and closing conditions. Borrowers use it to compare offers before paying for third-party reports. Lenders use it to confirm the borrower accepts the core economics before committing credit staff and legal time.
- Trailing 12 (T12) operating statement
- A trailing 12 (T12) operating statement is a month-by-month report of a property's actual income and expenses over the most recent 12 months. Commercial lenders use it as the main evidence of how the property really performs, then adjust it to their own underwriting standards to arrive at the net operating income that sizes the loan.
- Yield maintenance
- Yield maintenance is a prepayment premium on a fixed-rate commercial loan that pays the lender the present value of the interest it loses when the loan is repaid early and the money is reinvested at a lower Treasury yield. The premium grows when Treasury yields fall below the loan rate and shrinks toward a contractual minimum when yields rise.