Commercial Mortgage Loan Real Estate Glossary
This glossary explains common commercial real estate, private lending, and business-purpose financing terms in plain language. Terms can vary by lender, property type, jurisdiction, and loan program, so borrowers should review their specific loan documents and consult qualified advisors before making financing decisions.
Real Estate Financing Questions & Answers
What is an adjustable-rate mortgage?
An adjustable-rate mortgage, or ARM, is a loan with an interest rate that can change over time based on an index plus a lender margin. ARMs may offer an initial fixed-rate period, then adjust at scheduled intervals subject to caps, floors, and the terms in the note.
What is amortization?
Amortization is the process of repaying a loan through scheduled payments that reduce principal and pay interest over time. Some commercial loans are amortized over a longer period than the actual loan term, which can create a balloon payment at maturity.
What is an annual percentage rate, or APR?
APR is a standardized way to express the cost of credit as a yearly rate. It may include the interest rate plus certain finance charges, depending on the loan type and applicable disclosure rules. APR is more common in consumer lending than in many business-purpose commercial transactions.
What is an appraisal?
An appraisal is an independent opinion of property value prepared by a qualified appraiser. In commercial real estate, the appraiser may consider income, comparable sales, replacement cost, lease terms, market conditions, and the property's highest and best use.
What is after-repair value, or ARV?
ARV is the estimated value of a property after planned renovations or construction are completed. It is commonly used in fix-and-flip, bridge, construction, and value-add real estate financing.
What is a balloon payment?
A balloon payment is a larger final payment due at the end of a loan term. It usually occurs when the loan term is shorter than the amortization schedule, such as a five-year commercial loan amortized over 20 or 25 years.
What is a basis point?
A basis point is one one-hundredth of one percent. For example, 100 basis points equals 1.00%, and 25 basis points equals 0.25%.
What is a bridge loan?
A bridge loan is short-term financing used to solve a timing need, such as acquiring, refinancing, renovating, completing construction, or repositioning a property before permanent financing or a sale is available.
What is a capitalization rate?
A capitalization rate, or cap rate, is a valuation metric calculated by dividing net operating income by property value or purchase price. It is commonly used to compare income-producing properties, but it does not account for financing, tax treatment, or future capital costs by itself.
What are capital expenditures?
Capital expenditures, often called CapEx, are major property costs that extend the useful life or value of an asset. Examples may include roof replacement, HVAC systems, elevators, parking lot work, major plumbing, and structural repairs.
What is a cash-out refinance?
A cash-out refinance replaces an existing loan with a new loan that is larger than the current payoff amount, allowing the borrower to access available equity. Approval depends on value, leverage, cash flow, credit, property type, and lender guidelines.
What are closing costs?
Closing costs are fees and expenses paid to complete a transaction. They may include title charges, escrow fees, legal fees, recording fees, lender fees, appraisal fees, environmental reports, surveys, insurance, reserves, and other third-party costs.
What is CMBS financing?
CMBS stands for commercial mortgage-backed securities. In a CMBS transaction, commercial mortgage loans are pooled and sold into the capital markets. CMBS loans often have detailed servicing requirements, reserve structures, and prepayment provisions.
What is a commercial mortgage?
A commercial mortgage is a loan secured by income-producing or business-purpose real estate, such as multifamily, office, retail, industrial, mixed-use, hospitality, self-storage, or owner-occupied commercial property.
What is debt service?
Debt service is the required loan payment obligation, usually including principal and interest. Some loans may also require reserves, escrow payments, or other monthly obligations.
What is debt service coverage ratio, or DSCR?
DSCR compares a property's net operating income to its annual debt service. A DSCR above 1.00 means income exceeds debt service before other owner-level expenses. Many commercial lenders look for a DSCR above 1.20 or 1.25, but requirements vary by program and risk profile.
What is due diligence?
Due diligence is the review process used before closing a real estate loan or purchase. It may include title, survey, appraisal, leases, rent rolls, financial statements, property condition, environmental reports, zoning, insurance, entity documents, and borrower background information.
What is an environmental site assessment?
An environmental site assessment evaluates potential environmental risk at a property. A Phase I Environmental Site Assessment is common in commercial lending and may recommend additional testing if recognized environmental concerns are found.
What is equity?
Equity is the difference between a property's value and the debt secured by it. For example, a property valued at $1,000,000 with $650,000 in debt has approximately $350,000 in equity before transaction costs.
What is escrow?
Escrow can refer to a neutral third party that holds funds and documents for a transaction, or to lender-held accounts used to pay items such as property taxes, insurance, repairs, tenant improvements, or replacement reserves.
What is an exit strategy?
An exit strategy is the borrower's plan for repaying or retiring a loan. Common exits include sale, refinance into permanent debt, business cash flow, completion of construction, stabilization of rents, or payoff from another capital event.
What is a fixed-rate mortgage?
A fixed-rate mortgage has an interest rate that remains the same for the fixed-rate period. This can help borrowers plan payments, although other costs such as taxes, insurance, and reserves may still change.
What is hard money financing?
Hard money financing is usually short-term, asset-focused financing from a private lender or private capital source. It is often used when speed, collateral value, property condition, or transaction complexity does not fit conventional lending guidelines.
What is an interest-only loan?
An interest-only loan requires payments of interest only for a set period, with principal due later through amortization, refinance, sale, or balloon payment. Interest-only structures can improve near-term cash flow but do not reduce principal during the interest-only period.
What is a lease assignment?
A lease assignment gives a lender rights to rents or leases as additional collateral. It is common in commercial real estate lending and may allow the lender to collect rents after certain default events.
What is loan-to-value, or LTV?
LTV compares the loan amount to the property's appraised value or purchase price, depending on the lender's policy. A $700,000 loan on a $1,000,000 property equals 70% LTV.
What is loan-to-cost, or LTC?
LTC compares the loan amount to the total project cost. It is commonly used for construction, renovation, and value-add transactions where the total budget includes acquisition, improvements, soft costs, financing costs, and reserves.
What is a lockout period?
A lockout period is a time after closing when the borrower is restricted from prepaying the loan. Lockouts are common in some commercial and securitized loan structures.
What is a margin?
A margin is the spread a lender adds to an index to calculate the interest rate on a floating-rate loan. For example, if the index is 5.00% and the margin is 3.00%, the note rate would be 8.00% before any caps, floors, or other adjustments.
What is maturity?
Maturity is the date when the loan term ends and the outstanding balance must be paid, refinanced, extended, or otherwise resolved under the loan documents.
What is mezzanine financing?
Mezzanine financing is subordinate capital that sits behind senior debt and ahead of common equity in the capital stack. It is often used in larger commercial real estate transactions but carries higher risk and pricing than senior mortgage debt.
What is a mini-perm loan?
A mini-perm loan is intermediate-term financing, often used after construction or repositioning and before long-term permanent financing. Terms commonly range from a few years to several years, depending on the asset and lender.
What is net operating income, or NOI?
NOI is income from a property after operating expenses, but before debt service, depreciation, income taxes, and owner-specific expenses. It is a key metric for valuing income-producing real estate and underwriting commercial loans.
What is a net lease?
A net lease requires the tenant to pay some property expenses in addition to rent. In a triple-net lease, often called NNN, the tenant typically pays taxes, insurance, and maintenance, subject to the lease terms.
What is nonrecourse financing?
Nonrecourse financing generally limits the lender's recovery to the collateral rather than the borrower's personal assets. However, nonrecourse loans usually include carve-outs, sometimes called bad-boy guarantees, for fraud, waste, misrepresentation, bankruptcy-related actions, and other specified events.
What are points?
Points are fees expressed as a percentage of the loan amount. One point equals 1.00% of the loan amount. Points may be charged by lenders, brokers, or capital providers depending on the transaction.
What is a prepayment penalty?
A prepayment penalty is a charge or formula that applies when a borrower pays off a loan before a permitted date. Common commercial structures include fixed percentage penalties, step-down penalties, yield maintenance, defeasance, and lockout periods.
What is private lending?
Private lending is financing from private capital sources rather than traditional banks or government-backed programs. It can be useful for time-sensitive, transitional, complex, or asset-based scenarios, but pricing and terms vary widely.
What is recourse financing?
Recourse financing allows the lender to pursue the borrower or guarantor personally for repayment if collateral proceeds are not enough to satisfy the debt, subject to the loan documents and applicable law.
What is refinancing?
Refinancing replaces an existing loan with a new loan. Borrowers may refinance to change loan terms, access equity, reduce or stabilize payments, extend maturity, complete a construction exit, or move from short-term to permanent financing.
What are replacement reserves?
Replacement reserves are funds set aside for future major repairs or replacements. Lenders may require monthly deposits or an upfront reserve for items such as roofs, HVAC systems, parking surfaces, appliances, or life-safety improvements.
What is SOFR?
SOFR stands for Secured Overnight Financing Rate. It is a benchmark rate based on overnight transactions collateralized by U.S. Treasury securities and is commonly used in many U.S. floating-rate financial contracts after the transition away from LIBOR.
What is SBA financing?
SBA financing refers to business loans supported by the U.S. Small Business Administration, commonly through programs such as SBA 7(a) and SBA 504. These programs may be used for eligible owner-occupied commercial real estate, business acquisition, working capital, equipment, and other qualifying business purposes.
What is a stabilized property?
A stabilized property generally has occupancy, income, expenses, and operations that are consistent enough for permanent financing underwriting. A property may be considered transitional if it is under construction, being renovated, newly leased, or not yet producing stable income.
What are tenant improvements?
Tenant improvements are alterations made to leased space for a tenant's use. They may include walls, flooring, lighting, plumbing, HVAC changes, signage, or specialized buildout costs.
What is title insurance?
Title insurance protects against certain title defects, liens, or ownership claims that existed before the policy date. Lenders typically require a lender's title policy, and buyers may purchase an owner's title policy.
What is underwriting?
Underwriting is the lender's review of the borrower, property, collateral, cash flow, credit, valuation, title, legal structure, exit strategy, and overall risk before approving and closing a loan.
What is yield maintenance?
Yield maintenance is a commercial loan prepayment formula intended to compensate the lender or investor for lost interest when a loan is paid off early. The calculation can be complex and should be reviewed carefully before closing.
