Commercial Real Estate Finance Glossary

Acquisition Loan

Financing used to purchase an existing commercial property. These loans can be short-term bridge loans for quick closings or permanent financing for stabilized assets. Acquisition loans typically require a 20-30% down payment and are underwritten based on property cash flow and borrower experience.

Amortization

The gradual repayment of a loan through scheduled payments that include both principal and interest. In commercial real estate, loans may be fully amortizing (paid off completely over the term) or partially amortizing with a balloon payment due at maturity.

Asset Management

The ongoing operation and oversight of real estate investments to maximize value and returns. This includes lease management, property maintenance, capital improvements, and strategic decision-making to enhance property performance and investor returns.

Basis Points

A unit of measurement equal to 1/100th of a percentage point (0.01%). Commonly used in commercial real estate finance to describe interest rate differences, fees, or spreads. For example, 50 basis points equals 0.50%.

Bridge Loan

Short-term financing typically used to “bridge” the gap between immediate capital needs and long-term financing. These loans usually have terms of 6 months to 3 years and are often used for acquisitions, renovations, or developments before permanent financing is secured.

Breakeven Ratio

A financial metric that measures the occupancy rate needed for a property’s income to cover all operating expenses and debt service. Calculated by dividing total expenses plus debt service by gross potential income.

Cap Rate

The capitalization rate, calculated by dividing a property’s net operating income by its current market value or purchase price. Used to evaluate investment returns and compare properties. Higher cap rates generally indicate higher risk/return investments.

Capital Advisory

Professional services that help real estate investors and developers identify, structure, and secure optimal financing solutions. This includes debt placement, equity raising, and strategic financial planning for real estate projects.

Cash-on-Cash Return

A return metric that measures the annual cash income earned on the cash invested. Calculated by dividing annual pre-tax cash flow by the total cash invested. This metric helps investors evaluate the efficiency of their cash investment.

Construction Loan

Short-term financing used to fund the construction of new buildings or major renovations. These loans typically have variable rates, require interest-only payments during construction, and convert to permanent financing upon completion.

Debt Service Coverage Ratio (DSCR)

A key underwriting metric that measures a property’s ability to service its debt. Calculated by dividing net operating income by annual debt service. Most lenders require a DSCR of at least 1.20-1.25x for commercial properties.

Direct Lending

When financial institutions or alternative lenders provide capital directly to borrowers without intermediaries. Direct lenders often offer more flexible terms and faster decisions than traditional bank lending.

Distressed Assets

Properties experiencing financial difficulty, physical deterioration, or management problems that create investment opportunities. These assets often sell below market value and require capital and expertise to restore performance.

Equity

The ownership interest in a property, calculated as the property value minus outstanding debt. In real estate finance, equity can refer to cash contributed by investors or the accumulated value appreciation and principal paydown over time.

Exit Strategy

The planned method for realizing returns on a real estate investment. Common exit strategies include sale to third parties, refinancing to extract equity, or long-term hold for ongoing cash flow.

Family Office

Private wealth management entities that serve ultra-high-net-worth families. Many family offices invest in commercial real estate directly or through partnerships, providing an important source of equity capital.

Fixed-Rate Loan

A loan with an interest rate that remains constant throughout the term. Fixed-rate loans provide payment predictability but may carry higher initial rates than variable-rate alternatives.

Gross Rent Multiplier

A quick valuation metric calculated by dividing property price by gross rental income. While less precise than cap rate analysis, it provides a useful comparison tool for similar properties.

Ground-Up Development

The construction of new buildings on vacant land or after demolition of existing structures. Ground-up development typically requires construction loans and carries higher risk but potentially higher returns than existing property investments.

Hard Money Loan

Asset-based financing that relies primarily on property value rather than borrower creditworthiness. These loans typically have higher rates and shorter terms but can close quickly and with less documentation than conventional financing.

Holdback

Funds held in escrow by lenders until certain conditions are met. Common in construction loans where a portion of loan proceeds are held until construction milestones are achieved or in acquisition loans pending property improvements.

Industrial Outdoor Storage (IOS)

A type of commercial real estate property used for storing equipment, vehicles, containers, or materials outdoors. Typically located on industrial-zoned land, IOS sites often feature minimal structures and are valued for their large lot size, accessibility, and proximity to transportation routes. Common tenants include logistics, construction, and infrastructure companies.

Interest-Only Payment

Loan payments that cover only interest charges without principal reduction. Common during construction periods or for bridge loans, these payments reduce current cash flow requirements but don’t build equity through principal paydown.

Internal Rate of Return (IRR)

A comprehensive return metric that considers the time value of money, calculating the discount rate that makes the net present value of all cash flows equal to zero. IRR is widely used to evaluate and compare real estate investments.

Leverage

The use of borrowed capital to increase investment returns. In real estate, leverage allows investors to control larger assets with less cash but also amplifies both gains and losses.

Loan-to-Cost (LTC)

The ratio of loan amount to total project cost, commonly used in construction and development financing. LTC ratios typically range from 70-80% for development projects.

Loan-to-Value (LTV)

The ratio of loan amount to property value, a key underwriting metric used by lenders to assess loan risk. Most commercial loans have LTV limits of 70-80% depending on property type and quality.

Mezzanine Financing

A hybrid debt-equity financing structure that typically carries higher interest rates than senior debt but offers additional upside participation. Mezzanine financing fills the gap between senior debt and equity in capital structures.

Multifamily

Residential properties with multiple units, including apartments, condominiums, and townhomes. Multifamily properties are a major commercial real estate asset class with active debt and equity markets.

Net Operating Income (NOI)

A property’s gross income minus operating expenses, excluding debt service and capital expenditures. NOI is the key metric used for property valuation and loan underwriting.

Non-Recourse Loan

Debt secured only by the collateral property, limiting lender recovery to the asset itself. Borrowers are not personally liable beyond the collateral, though loans often include “bad boy” carve-outs for fraud or mismanagement.

Permanent Financing

Long-term financing typically used to refinance construction loans or bridge loans after property stabilization. Permanent loans usually have terms of 5-30 years with amortization schedules.

Preferred Equity

An investment structure that provides priority over common equity for distributions and liquidation proceeds while offering higher returns than debt. Preferred equity often includes conversion rights or participation in upside returns.

Pre-Development

The early phase of development projects involving land acquisition, entitlements, design, and financing arrangement before construction begins. Pre-development activities are typically funded by equity or specialized pre-development loans.

Recourse Loan

Debt that holds borrowers personally liable beyond the collateral property. In default situations, lenders can pursue borrower assets beyond the property to satisfy the debt obligation.

Refinancing

Replacing existing debt with new financing, typically to improve terms, extend maturity, or extract equity. Refinancing can be rate-and-term focused or cash-out to return capital to investors.

Repositioning

Implementing capital improvements and operational changes to increase a property’s income, value, and market position. Repositioning strategies often require bridge financing and specialized expertise.

Senior Debt

The primary loan in a capital structure that has first claim on property cash flow and liquidation proceeds. Senior debt typically offers the lowest interest rates but has the most restrictive terms.

Stabilized Property

A property that has achieved steady occupancy levels and predictable cash flow. Stabilized properties are generally easier to finance and receive more favorable loan terms than transitional assets.

Syndication

The pooling of capital from multiple investors to acquire or develop real estate. Syndications allow individual investors to participate in larger deals and provide sponsors with equity capital.

Take-Out Loan

Permanent financing arranged to repay construction or bridge loans upon project completion. Take-out loans are often committed before construction begins to ensure end loan availability.

Tenant Improvement

Capital expenditures made to customize space for tenant needs. Tenant improvement costs can be funded through loan proceeds, tenant improvement allowances, or separate financing arrangements.

Underwriting

The analysis process lenders use to evaluate loan applications and determine approval, terms, and conditions. Underwriting examines property performance, borrower qualifications, and market conditions.

Upside Potential

The opportunity for returns beyond base case projections through rent growth, occupancy improvements, or property appreciation. Upside potential is particularly important in value-add investment strategies.

Value-Add

An investment strategy involving the acquisition of properties with below-market performance that can be improved through capital investment, better management, or repositioning to increase returns.

Variable Rate Loan

A loan with interest rates that fluctuate based on market indices such as SOFR or Prime Rate. Variable rates may start lower than fixed rates but create payment uncertainty over the loan term.

Yield

The return generated by an investment, typically expressed as an annual percentage. In real estate, yield can refer to current income return, total return including appreciation, or risk-adjusted returns.

Yield Maintenance

A prepayment penalty structure that compensates lenders for lost interest income when loans are paid off early. Yield maintenance penalties can be substantial, particularly in declining rate environments.