Commercial Lending Glossary

The gradual repayment of a loan through regular installment payments over time. In commercial loans, amortization periods are typically 20-30 years, though the loan term may be shorter (requiring a balloon payment).

A large lump sum payment due at the end of a loan term when the amortization period exceeds the loan term. For example, a 10-year loan with 25-year amortization will have a balloon payment at year 10.

Short-term financing (typically 6-36 months) used to bridge the gap between acquisition/renovation and permanent financing. Often used for value-add properties or quick closings.

The ratio of a property's Net Operating Income to its current market value or purchase price. Formula: Cap Rate = NOI / Property Value. Used to evaluate property value and compare investments.

The annual pre-tax cash flow divided by the total cash invested. Measures the return on the actual cash invested, not the total property value.

Loans pooled together and sold as bonds to investors. CMBS loans typically offer non-recourse terms but have strict prepayment penalties and less flexible servicing.

Another term for CMBS loans. Called 'conduit' because lenders act as a conduit, originating loans then selling them into securitized pools.

Short-term financing for building new commercial properties or major renovations. Funds are disbursed in stages (draws) as construction progresses.

The total annual principal and interest payments required on a loan. Also called Annual Debt Service (ADS).

The ratio of Net Operating Income to annual debt service. Formula: DSCR = NOI / Annual Debt Service. A DSCR of 1.25x means the property generates 25% more income than needed to cover loan payments.

The ratio of Net Operating Income to the loan amount. Formula: Debt Yield = NOI / Loan Amount. Used by lenders to assess risk independent of property value fluctuations.

A prepayment method where the borrower substitutes Treasury securities for the loan collateral, allowing the original payment stream to continue to investors. Common in CMBS loans.

The predetermined schedule of construction loan disbursements tied to completed project milestones (foundation, framing, completion, etc.).

Potential Gross Income minus vacancy and collection losses, plus other income. Represents the realistic income a property will generate.

The owner's financial interest in a property. Calculated as property value minus outstanding debt. Also refers to the cash investment required from the borrower.

The plan for how a borrower will repay a loan at maturity. For bridge loans, this might be refinancing to permanent debt or selling the property.

Government-sponsored enterprise that purchases and guarantees multifamily loans, providing liquidity to the market. Known for competitive rates on stabilized multifamily properties.

Government-sponsored enterprise similar to Fannie Mae, also purchasing and securitizing multifamily loans. Offers various loan products for multifamily properties.

Building a new property from the ground up on vacant land or after demolishing an existing structure.

An individual or entity that personally guarantees loan repayment. Even on non-recourse loans, guarantors typically remain liable for 'bad boy' carve-outs.

Asset-based financing from private lenders, typically at higher interest rates and lower LTVs. Used for quick closings, distressed properties, or credit-challenged borrowers.

Funds set aside from loan proceeds to make interest payments during construction when the property isn't generating income.

A loan payment structure where only interest is paid during a specified period, with no principal reduction. Common in bridge loans and some permanent financing.

The time required to achieve stabilized occupancy after construction or significant renovation. Lenders often provide interest-only periods during lease-up.

A preliminary agreement outlining proposed loan terms before formal commitment. Also used in property purchase negotiations.

The ratio of loan amount to total project cost. Formula: LTC = Loan Amount / Total Cost. Used primarily in construction lending.

The ratio of loan amount to property value. Formula: LTV = Loan Amount / Property Value. Lower LTV means more equity and less lender risk.

The date when the entire loan balance becomes due and payable. For loans with balloon payments, this is when the balloon is due.

Subordinate debt that sits between senior debt and equity in the capital stack. Secured by ownership interests rather than real property, with higher rates reflecting higher risk.

The property's income after operating expenses but before debt service and income taxes. Formula: NOI = Effective Gross Income - Operating Expenses.

Financing where the lender's recovery is limited to the collateral property, not the borrower's personal assets (except for carve-out provisions).

Costs to operate a property including property taxes, insurance, utilities, maintenance, management fees, and reserves. Does not include debt service.

An upfront fee charged by lenders to process and underwrite a loan, typically expressed as a percentage of the loan amount (e.g., 1% or 1 point).

Long-term financing (typically 5-30 years) for stabilized properties, as opposed to short-term bridge or construction financing.

An environmental site assessment identifying potential contamination issues. Required for most commercial loans and involves records review and site inspection.

Fees paid to a lender expressed as a percentage of the loan amount. One point equals 1% of the loan amount.

The maximum rental income a property could generate if fully occupied at market rents, before vacancy and collection losses.

An investment position between senior debt and common equity, with priority over common equity for distributions but subordinate to debt.

A fee charged for paying off a loan before maturity. Common structures include yield maintenance, defeasance, and step-down penalties.

Projected financial statements showing expected future performance, often used to underwrite value-add or development deals.

An agreement where the lender guarantees a specific interest rate for a set period, protecting the borrower from rate increases before closing.

Financing where the lender can pursue the borrower's personal assets if the collateral is insufficient to cover the debt after default.

Replacing an existing loan with a new loan, often to obtain better terms, extract equity (cash-out refinance), or extend the maturity.

A document listing all tenants, their units, lease terms, and rents. A critical underwriting document for income-producing properties.

An SBA loan program combining bank financing with a second mortgage from a Certified Development Company, offering up to 90% LTV for owner-occupied properties.

The SBA's primary business loan program, offering flexible terms for various purposes including owner-occupied commercial real estate.

The primary mortgage loan with first priority claim on the property. In case of default, senior debt is paid before mezzanine debt or equity.

A benchmark interest rate that has largely replaced LIBOR as the reference rate for floating-rate commercial loans.

The margin added to an index rate to determine the loan interest rate. For example, SOFR + 3.00% means a 3% spread over SOFR.

A property achieving typical market occupancy (usually 90%+) with consistent operations. Required for most permanent financing.

A prepayment penalty structure that decreases over time, such as 5-4-3-2-1 (5% penalty in year 1, 4% in year 2, etc.).

A preliminary document outlining proposed loan terms including rate, LTV, term, fees, and key conditions. Not legally binding like a commitment letter.

The previous 12 months of operating statements, used to evaluate actual property performance for underwriting.

The lender's process of analyzing the borrower, property, and market to assess risk and determine loan terms.

An investment strategy involving buying properties below market value, making improvements, and increasing income to create value.

A prepayment penalty calculated to compensate the lender for lost interest income, typically making prepayment uneconomical. Common in agency and CMBS loans.