CRE finance glossary
The terms lenders use, in plain English — with the formulas, typical thresholds, and worked examples behind each one.
Amortization
Amortization is the schedule over which loan principal is paid down, typically 25–30 years for commercial mortgages. Because commercial loan terms are usually much shorter (5–10 years), the loan does not fully pay off during the term — the remaining balance is due as a balloon payment at maturity.
As-Stabilized Value
As-stabilized value is an appraiser's estimate of what a property will be worth once it reaches stabilized occupancy at market rents, as opposed to as-is value, which reflects current condition and occupancy. Construction and bridge loans are frequently sized as a percentage of as-stabilized value, since the collateral's current state understates what it will support once the plan is executed.
Balloon Payment
A balloon payment is the remaining loan principal due in a lump sum when a commercial mortgage matures. Because commercial loans typically carry 5–10 year terms but amortize over 25–30 years, most of the original balance is still outstanding at maturity and must be refinanced, paid off, or the property sold.
Bridge Loan
A bridge loan is short-term commercial financing — typically 1–3 years, interest-only, floating rate — used while a property is repositioned, leased up, or awaiting permanent financing. Bridge lenders underwrite the business plan and as-stabilized value rather than current income, accepting DSCRs as low as 1.10x or below.
Cap Rate (Capitalization Rate)
The capitalization rate is a property's net operating income divided by its value or purchase price. It expresses the unlevered annual return: a building bought for $10 million producing $600,000 NOI trades at a 6% cap rate. Lower cap rates mean higher prices and typically signal lower perceived risk.
Capital Stack
The capital stack is the layered combination of financing sources behind a commercial real estate deal, ranked by repayment priority: senior debt at the bottom, then mezzanine debt, then preferred equity, then common equity at the top. Lower layers carry lower risk and lower return; each layer is repaid in full before the layer above it sees a dollar.
Cash-Out Refinance
A cash-out refinance replaces an existing loan with a larger one, returning the difference to the owner as cash. It converts accumulated equity — from appreciation, loan paydown, or NOI growth — into liquid capital without selling the property or triggering capital gains tax on the proceeds.
CEMA (Consolidation, Extension and Modification Agreement)
A CEMA is a New York refinancing structure in which the new lender takes assignment of the existing mortgage instead of recording a new one, so mortgage recording tax applies only to new money above the old balance. On commercial mortgages in New York City — taxed at up to 2.8% — CEMA savings can reach six figures.
Construction Loan
A construction loan funds ground-up development or major rehabilitation, disbursed in draws as work is completed rather than as a lump sum. Loans are sized by loan-to-cost (typically 75–85% maximum) and projected as-stabilized value, with interest paid only on funds drawn. Most convert to or are replaced by permanent financing at completion.
Debt Yield
Debt yield is net operating income divided by the loan amount — the return a lender would earn on its loan basis if it took the property back. Unlike DSCR, it ignores interest rate and amortization, making it a rate-proof measure of leverage. Commercial lenders typically require a debt yield of at least 8%.
Defeasance
Defeasance is a prepayment mechanism, common on CMBS loans, in which the borrower doesn't pay off the loan directly but instead buys a portfolio of government securities that replicates its remaining payment stream, pledging those securities in place of the property. The property is then released free and clear while the securities continue servicing the debt.
Documentary Stamp Tax (Florida)
Florida taxes promissory notes secured by mortgages at $0.35 per $100 of loan amount (Fla. Stat. §201.08), plus a nonrecurring intangible tax of 0.2% on the mortgage (§199.133). Together they add roughly 0.55% to Florida commercial mortgage closing costs — about $27,500 on a $5 million loan.
DSCR (Debt Service Coverage Ratio)
DSCR measures whether a property's income covers its loan payments: net operating income divided by annual debt service. A DSCR of 1.25x means income exceeds payments by 25%. Commercial lenders typically require at least 1.25x on stabilized properties and 1.10–1.20x on bridge or acquisition loans.
Estoppel Certificate
An estoppel certificate is a signed statement from a tenant confirming key lease terms — rent, term, security deposit, and that the landlord isn't in default — delivered to a buyer or lender relying on the accuracy of the rent roll. Lenders on leased commercial properties typically require estoppels from major tenants as a closing condition.
Gross Lease
In a gross lease, the landlord pays property taxes, insurance, and maintenance out of collected rent, and the tenant pays a single flat rent figure — the opposite of a triple net lease. A modified gross lease splits the difference: the tenant typically reimburses some expenses, often increases over a base year, while the landlord retains others.
Hard Money Loan
A hard money loan is short-term, asset-based financing from a private lender, underwritten primarily on the property's value and the borrower's exit plan rather than credit or income documentation. Speed and flexibility come at a cost — rates typically run in the low-to-high teens plus several points of origination — best suited for time-sensitive deals with a clear, near-term exit.
Interest-Only (IO) Period
An interest-only period is a stretch of a loan — often the first one to five years, or the full term on bridge loans — during which payments cover interest but no principal. IO lowers the payment, which raises cash-on-cash returns and DSCR, but the loan balance doesn't shrink, leaving a larger balloon at maturity.
LTC (Loan-to-Cost Ratio)
Loan-to-cost is the loan amount divided by the total project cost — land, hard construction costs, soft costs, and financing costs. It applies to construction and heavy-rehab loans, where there is no stabilized value yet. Construction lenders typically cap LTC around 75–85%, requiring the sponsor to contribute the remaining equity.
LTV (Loan-to-Value Ratio)
Loan-to-value is the loan amount divided by the property's appraised value, expressed as a percentage. A $7.5 million loan on a $10 million property is 75% LTV. Commercial lenders typically cap LTV at 65–75% depending on asset class and transaction type — lower for construction and land, higher for stabilized multifamily.
Mezzanine Debt
Mezzanine debt sits between senior mortgage debt and equity in the capital stack. It's secured not by the property itself but by a pledge of the ownership entity's equity interests — a UCC lien — and typically carries a low-to-mid-teens interest rate to compensate for its subordinate position and faster, but riskier, remedy on default.
Mortgage Recording Tax (New York)
New York imposes a tax on recording a mortgage, under NY Tax Law §253 plus local additions. For commercial mortgages of $500,000 or more in New York City, the combined rate reaches 2.8% of the loan amount — among the highest closing costs in the country. A $5 million mortgage generates roughly $140,000 of recording tax.
NNN Lease (Triple Net Lease)
A triple net (NNN) lease requires the tenant to pay property taxes, insurance, and maintenance directly, on top of base rent — the three 'nets.' Because the tenant bears nearly all operating costs, the landlord's net operating income sits close to gross rent collected, and NNN properties typically carry lower operating expense ratios than gross-leased buildings.
NOI (Net Operating Income)
Net operating income is a property's annual revenue minus operating expenses — taxes, insurance, utilities, management, repairs — before loan payments, income taxes, depreciation, and capital expenditures. NOI is the foundation of commercial real estate underwriting: it drives value (via cap rate), loan size (via DSCR and debt yield), and deal comparisons.
Operating Expense Ratio
The operating expense ratio is a property's operating expenses divided by its effective gross income. Typical ratios run roughly 35–45% for multifamily, 40–50% for office, and lower for triple-net retail or industrial where tenants bear most costs. Lenders flag ratios far outside these bands as understated expenses or mismanagement.
Permanent Loan
A permanent loan is long-term commercial mortgage financing on a stabilized, income-producing property — typically a 5 to 10-year term with 25 to 30-year amortization, priced at a fixed or floating rate tied to Treasuries, swaps, or SOFR. Banks, life insurance companies, CMBS conduits, and agency lenders are the primary sources.
Personal Guarantee
A personal guarantee is a sponsor's promise to personally repay a loan in full, or a portion of it under a partial guarantee, if the property and other collateral fall short. It's distinct from standard non-recourse 'bad-boy' carve-outs, which impose personal liability only for specific bad acts — a guarantee creates direct liability for the debt itself.
Phase I Environmental Site Assessment (ESA)
A Phase I Environmental Site Assessment is a lender-required review of a property's environmental condition — historical records, regulatory database searches, and a site visit — performed to industry standard without soil or groundwater sampling. It identifies recognized environmental conditions (RECs) that could indicate contamination, which typically trigger a more invasive Phase II before closing.
Preferred Equity
Preferred equity ranks above common equity but below all debt in the capital stack. It carries no lien on the property, so it isn't secured, but it earns a fixed or accruing preferred return and is paid before common equity in both operating distributions and capital events. It's often used to fill a gap between a senior loan and the sponsor's own equity.
Prepayment Penalty
A prepayment penalty compensates the lender for interest lost when a commercial loan is paid off early. Common structures include step-down penalties (e.g., 5-4-3-2-1% of balance by year), yield maintenance (the present value of remaining interest), and defeasance (substituting bonds as collateral). Most commercial loans carry one.
Pro Forma
A pro forma is a projected income and expense statement for a property, forecasting rent, other income, and operating costs — often assuming stabilized occupancy or rent increases that haven't yet been achieved. Lenders treat an owner's pro forma as a starting point, not a given, typically re-underwriting it to current, in-place figures with conservative assumptions.
Recourse vs. Non-Recourse
A recourse loan lets the lender pursue the borrower's personal assets if the property's value doesn't cover the debt after default. A non-recourse loan limits the lender to the collateral itself — with standard 'bad-boy' carve-outs that restore personal liability for fraud, misappropriation, or unauthorized transfers.
Refinance
Refinancing replaces an existing commercial mortgage with a new loan — to lower the rate, extend the term ahead of a balloon, or pull out equity (a cash-out refinance). Lenders size the new loan on current NOI, current market value, and prevailing rates, so a property's refinance capacity changes with the market.
SNDA (Subordination, Non-Disturbance and Attornment)
An SNDA is a three-part agreement among tenant, landlord, and lender. Subordination puts the tenant's lease below the mortgage in priority; non-disturbance protects the tenant's right to stay if the lender forecloses; attornment requires the tenant to recognize the foreclosing lender as the new landlord. Lenders typically require SNDAs from major tenants at closing.
SOFR (Secured Overnight Financing Rate)
SOFR is the benchmark rate that replaced LIBOR for U.S. dollar lending, fully phased out by mid-2023. It reflects the overnight cost of borrowing cash secured by Treasury repurchase agreements. Floating-rate commercial mortgages typically price as SOFR plus a spread — for example, SOFR + 300 basis points — so the payment resets whenever the index moves.
Stabilization
Stabilization is the point at which a property reaches sustainable, market-typical occupancy — commonly around 90% — at market rents, after lease-up, renovation, or repositioning. Reaching stabilization is usually the trigger that unlocks permanent financing, since permanent lenders underwrite durable in-place income rather than a projected business plan.
Takeout Financing
Takeout financing is the permanent loan expected to repay a construction or bridge loan once a property is completed and stabilized. Construction and bridge lenders often require evidence of a credible takeout — sometimes a forward commitment from a permanent lender locked in before closing — since their underwriting assumes the short-term loan is repaid on schedule rather than extended indefinitely.
Tenant Improvements (TI)
Tenant improvement (TI) allowances are funds a landlord provides to build out or customize leased space — flooring, partitions, fixtures — negotiated into a lease and typically quoted per square foot. Lenders on office and retail deals underwrite a TI/LC (leasing commission) reserve to fund allowances and broker commissions needed to keep the property leased over time.
Term Sheet
A term sheet (or letter of intent) is a lender's non-binding summary of proposed loan terms: amount, rate, term, amortization, fees, recourse, reserves, and covenants. It precedes full underwriting and legal documentation. Though not a commitment, it anchors the negotiation — terms rarely improve after signing.
Vacancy Rate
Vacancy rate is the share of a property's rentable space that is unoccupied, measured either physically (square footage empty) or economically (rent not being collected, including free rent and delinquency). Lenders apply a minimum vacancy factor — typically around 5% — to underwritten income even when a property is fully leased, to build in a cushion for turnover.
Yield Maintenance
Yield maintenance is a prepayment penalty calculated as the present value of the interest a lender would lose from early repayment, discounted at a reinvestment rate such as a comparable Treasury yield. It's designed to make the lender economically indifferent to prepayment — and because it scales with how far rates have fallen since origination, it can become extremely expensive to trigger.