Commercial Real Estate Glossary
Plain-language definitions of 31 commercial real estate and lending terms. Every entry covers what the term means, how it is calculated or applied, and why it matters when you are structuring or underwriting a deal. Built for brokers, borrowers, and anyone navigating CRE financing.
B
Balloon Payment
A balloon payment is a large lump-sum payment due at the end of a commercial loan term when the amortization period extends beyond the loan's maturity date. Most commercial real estate loans, including CMBS, bank, and life company loans, have balloon payments.
Basis Points (BPS)
A basis point is one hundredth of a percentage point (0.01%). Commercial real estate lenders, brokers, and investors use basis points to express small changes in interest rates, spreads, and yields.
Bridge Loan
A bridge loan is a short-term commercial real estate loan, typically 6 to 36 months, used to 'bridge' the gap between acquiring or renovating a property and securing long-term permanent financing.
C
Cap Rate
Cap rate measures the rate of return on a commercial property based on its Net Operating Income relative to its value. Learn the formula, how to use it, and what cap rates mean for your deals.
Carve-Outs (Bad Boy Guarantees)
Carve-outs, commonly called bad boy guarantees, are specific exceptions to the non-recourse protection in commercial real estate loans that allow the lender to pursue the borrower personally if certain prohibited actions occur.
Cash-on-Cash Return
Cash-on-cash return measures the annual pre-tax cash flow you earn relative to the total cash you invested in a property. Learn the formula, how it differs from cap rate, and what experienced brokers consider a strong return.
CMBS
A Commercial Mortgage-Backed Security (CMBS) is a fixed-income investment product secured by a pool of commercial real estate loans. CMBS lending offers borrowers non-recourse, fixed-rate financing on stabilized properties, typically with 5-, 7-, or 10-year terms and 25- to 30-year amortization.
Conduit Loan
A conduit loan is a commercial real estate loan originated by a lender with the intent to pool it into a CMBS securitization. Learn how conduit loans work, typical terms, and when they make sense for your deal.
Construction Loan
A construction loan is a short-term, interest-only commercial real estate loan that funds the ground-up development or major renovation of a property, with draws released in stages as construction milestones are completed.
D
Debt Yield
Debt yield measures a property's net operating income as a percentage of the total loan amount. It is the primary underwriting metric for CMBS and institutional commercial real estate lenders.
Defeasance
Defeasance is a prepayment method for commercial real estate loans where the borrower substitutes government securities for the loan collateral, allowing the property to be released from the mortgage without triggering a prepayment penalty.
DSCR
DSCR (Debt Service Coverage Ratio) measures whether a property's income covers its debt payments. Learn the formula, how lenders use it, and what it means for your deals.
H
Hard Money Loan
A hard money loan is a short-term, asset-based loan secured by real estate, funded by private lenders rather than banks. Learn how hard money works, typical terms, costs, and when it makes sense for commercial deals.
HUD 221(d)(4)
HUD 221(d)(4) loans provide FHA-insured, non-recourse financing for ground-up multifamily construction and substantial rehabilitation. Learn how they work, who qualifies, and when they make sense.
HUD 223(f)
HUD 223(f) loans provide FHA-insured, non-recourse, long-term financing for the acquisition or refinance of existing stabilized multifamily properties. Learn the terms, eligibility, and how brokers use them.
L
Loan-to-Cost (LTC)
Loan-to-cost (LTC) is a ratio that compares the amount of a commercial real estate loan to the total cost of a project, used by lenders to determine how much financing to offer on construction and value-add deals.
Loan-to-Value (LTV)
Loan-to-Value (LTV) measures how much of a property's value a lender will finance. Learn the formula, typical LTV limits by loan type, and how LTV shapes your deals.
N
Net Operating Income (NOI)
Net Operating Income (NOI) is a property's total income minus operating expenses, excluding debt service and capital expenditures. It is the foundation of commercial real estate valuation and loan underwriting.
Non-Recourse Loan
A non-recourse loan limits the lender's recovery to the collateral property itself. If the borrower defaults, the lender can seize the property but cannot pursue the borrower's personal assets. Learn how non-recourse works, which CRE loan types offer it, and what the carve-outs are.
P
Preferred Equity
Preferred equity is an investment in a commercial real estate deal that sits between the senior mortgage and common equity in the capital stack. Preferred equity investors receive a priority return before common equity holders but take on more risk than senior lenders.
Prepayment Penalty
A prepayment penalty is a fee charged to a borrower who pays off a commercial real estate loan before its maturity date, designed to protect the lender's expected interest income over the loan term.
S
SBA 504 Loan
An SBA 504 loan provides long-term, fixed-rate financing for commercial real estate and major equipment through a unique three-party structure. Learn the funding breakdown, eligibility, and how brokers use 504 loans.
SBA 7(a) Loan
An SBA 7(a) loan is a government-guaranteed small business loan administered by the Small Business Administration. It is the SBA's most common loan program, covering working capital, equipment, real estate, and business acquisition up to $5 million.
Special Purpose Entity
A special purpose entity (SPE) is a legal entity created to own a single commercial real estate asset and isolate it from the sponsor's other business risks. Learn why lenders require SPEs, how they work, and what brokers need to know.
Special Servicer
A special servicer is a third party that takes over management of a CMBS loan when it defaults, becomes at risk of default, or requires a workout. Learn what triggers special servicing, what the servicer does, and what it means for borrowers and brokers.
Step-Down Prepayment
A step-down prepayment penalty is a declining percentage charged for early loan payoff in commercial real estate. The penalty decreases over the loan term on a preset schedule, making it progressively cheaper to prepay as the loan ages.
Frequently Asked Questions
What terms should commercial mortgage brokers know?
At minimum, brokers should understand DSCR, cap rate, NOI, LTV, debt yield, amortization, defeasance, yield maintenance, and the major loan program types (CMBS, SBA 504, SBA 7(a), Fannie Mae, Freddie Mac, HUD/FHA, bridge, and hard money). These terms come up in virtually every deal.
What is the difference between DSCR and debt yield?
DSCR (Debt Service Coverage Ratio) measures NOI relative to annual debt service payments and is affected by the interest rate and amortization schedule. Debt yield measures NOI as a percentage of the total loan amount, making it independent of loan terms. Lenders often use both: DSCR to assess payment risk, debt yield to assess recovery risk.
What is the most important metric in CRE lending?
Net Operating Income (NOI) is the foundation. Every other metric -- DSCR, cap rate, debt yield, cash-on-cash return -- is derived from or directly dependent on NOI. Get NOI wrong and every downstream calculation is off.
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