Commercial Lending Glossary

The process of paying off a loan through regular scheduled payments over a set period. A 30-year amortization means the loan is fully paid off in 30 years at the scheduled payment amount. Longer amortization = lower monthly payments but more total interest paid.

A short-term loan (typically 6 to 36 months) used to bridge the gap between acquiring a property and securing permanent financing. Bridge loans close fast, require less documentation, and are used for value-add acquisitions, distressed properties, or time-sensitive deals.

Net Operating Income divided by the property purchase price or current market value. A $1M property generating $70,000 NOI has a 7.0% cap rate. Higher cap rates indicate higher yield (and typically higher risk). Cap rates are used to compare investment properties and estimate value.

Refinancing an existing mortgage for more than the current balance and taking the difference as cash. Used to access equity in a property without selling it. Commercial cash-out refinances are subject to LTV limits (typically 65 to 75%) and DSCR requirements.

Loans bundled together and sold as bonds to investors. CMBS loans offer competitive rates and high loan amounts but come with strict prepayment penalties (defeasance or yield maintenance), limited flexibility, and no ability to modify terms. Common for stabilized, income-producing properties.

A short-term loan that funds the construction of a new building or major renovation. Funds are disbursed in draws as construction milestones are completed. After construction, the loan is typically refinanced into a permanent mortgage. Lenders underwrite based on the completed value (ARV).

The total annual cost of a loan — principal repayment plus interest. A $1M loan at 7.5% on a 30-year amortization has annual debt service of approximately $83,800. Debt service is the denominator in the DSCR calculation.

A prepayment method used in CMBS loans where the borrower substitutes the collateral (the property) with a portfolio of government securities that generate the same cash flows as the original loan. Defeasance is expensive and complex — it is a major reason borrowers avoid CMBS loans on properties they may sell or refinance.

A predetermined schedule of loan disbursements tied to construction milestones. The lender releases funds as each phase is completed and inspected. Borrowers typically pay interest only on drawn funds, not the full loan commitment.

Net Operating Income divided by Annual Debt Service. A DSCR of 1.25x means the property generates 25% more income than its debt obligations. Most lenders require a minimum DSCR of 1.20x. A DSCR below 1.0x means the property does not generate enough income to cover its loan payments.

The plan for repaying a short-term loan (bridge or hard money). Common exit strategies include refinancing into a permanent loan, selling the property, or completing a value-add renovation and then refinancing. Lenders evaluate exit strategy viability before approving bridge loans.

Purchase price divided by annual gross rental income. A $1.2M property generating $120,000/year in gross rent has a GRM of 10. GRM is a quick screening tool — it does not account for expenses, vacancies, or financing costs. Lower GRM = better value (all else equal).

A long-term lease (typically 50 to 99 years) where a tenant leases the land and builds or owns the improvements on it. Ground leases complicate financing because the lender does not have a fee simple interest in the land. Many lenders will not finance ground lease properties, or require specific lease terms.

An asset-based loan from a private lender where approval is based primarily on the property value rather than borrower creditworthiness. Hard money loans close in days, have higher rates (9 to 14%), and are used for fix-and-flip, distressed acquisitions, or when speed is critical.

A portion of a construction or bridge loan set aside to cover interest payments during the loan term. Instead of making monthly payments from operating cash flow, the borrower draws from the interest reserve. This is common on construction loans where the property is not yet generating income.

A loan where the borrower pays only interest for a set period (typically 1 to 5 years) before principal payments begin. I/O loans have lower monthly payments, which improves DSCR and cash flow. After the I/O period, payments increase as principal amortization begins.

The loan amount divided by the total project cost (land + construction + soft costs). Used for construction and renovation loans. A $1.5M loan on a $2M project has a 75% LTC. LTC is distinct from LTV — LTV is based on value, LTC is based on cost.

The loan amount divided by the appraised value of the property. A $750K loan on a $1M property has a 75% LTV. Lower LTV = less risk for the lender = better rates and terms for the borrower. Most commercial lenders cap LTV at 65 to 80% depending on loan type and property.

A hybrid of debt and equity financing that sits between senior debt and equity in the capital stack. Mezzanine lenders take a pledge of the ownership interest in the borrowing entity (not a mortgage on the property). Rates are higher (10 to 15%) but mezzanine allows borrowers to increase total leverage beyond what a senior lender will provide.

A property that combines residential and commercial uses — typically retail or office on the ground floor with apartments above. Mixed-use properties are common in NYC and Long Island. Lenders typically discount commercial income by 10 to 20% in underwriting due to higher vacancy risk.

A residential building with 5 or more units. Properties with 2 to 4 units are classified as residential; 5+ units are commercial. Multifamily financing uses commercial underwriting standards: DSCR, rent rolls, operating statements, and commercial appraisals.

Gross rental income minus vacancy allowance minus operating expenses (taxes, insurance, management, maintenance, utilities). NOI does not include debt service or depreciation. NOI is the numerator in both the DSCR and cap rate calculations — it is the most important number in commercial real estate underwriting.

A loan where the lender can only pursue the collateral (the property) in the event of default — not the borrower personally. Most CMBS loans are non-recourse. Non-recourse loans typically require higher credit quality, lower LTV, and stronger DSCR than recourse loans.

A commercial mortgage where the borrower occupies at least 51% of the property for their own business operations. Owner-occupied loans are underwritten differently from investment properties — the business cash flow supplements or replaces rental income in the DSCR calculation.

A form of financing that sits above common equity but below debt in the capital stack. Preferred equity investors receive a fixed return before common equity holders receive distributions. Unlike mezzanine debt, preferred equity is not secured by a mortgage or pledge — it is a direct equity interest with preferred economic rights.

A fee charged when a borrower pays off a loan before its maturity date. Common structures include step-down penalties (5-4-3-2-1%), yield maintenance, and defeasance. Prepayment penalties protect lenders from reinvestment risk. Always understand the prepayment structure before committing to a loan.

A non-bank lender that funds loans from its own capital or from private investors. Private lenders (like Flex V Capital) offer faster approvals, more flexible underwriting, and the ability to finance properties that banks decline. Rates are typically higher than bank rates but lower than hard money.

A loan where the lender can pursue the borrower personally — beyond just the collateral — in the event of default. Most commercial loans under $5M are recourse. Recourse loans typically offer better rates and higher LTV than non-recourse loans because the lender has additional protection.

A document listing all tenants in a property, their unit, lease start and end dates, monthly rent, and any concessions. Lenders require a current rent roll as part of the loan application for any income-producing property. The rent roll is used to calculate gross income for DSCR underwriting.

A Small Business Administration loan program for owner-occupied commercial real estate. The 504 structure involves a bank (50%), a Certified Development Company (40%), and the borrower (10% down). Rates are fixed and below-market. Maximum loan: $5.5M. Requires owner-occupancy of 51%+.

The most common SBA loan program. Can be used for real estate, equipment, working capital, or business acquisition. Maximum loan: $5M. Rates are variable (Prime + 2.75% to 4.75%). Requires personal guarantee and owner-occupancy for real estate. Longer approval timeline than conventional loans.

The first-position mortgage on a property — the loan with the highest priority claim on the collateral in the event of default. Senior debt has the lowest risk and therefore the lowest rate. All other financing (mezzanine, preferred equity, common equity) is subordinate to senior debt.

The benchmark interest rate that replaced LIBOR for most floating-rate commercial loans. SOFR is based on overnight Treasury repo transactions and is published daily by the Federal Reserve Bank of New York. Many bridge loans and adjustable-rate commercial mortgages are indexed to SOFR + a spread.

A property that has reached its target occupancy (typically 90%+) and is generating its projected income. Stabilized properties qualify for permanent financing (DSCR loans, commercial mortgages). Unstabilized or value-add properties typically require bridge or construction financing until they reach stabilization.

Insurance that protects the lender (and optionally the owner) against losses from defects in the property title — liens, encumbrances, ownership disputes, or errors in public records. Lenders require a lender title insurance policy on every mortgage. The borrower pays the premium at closing.

The process by which a lender evaluates a loan application — analyzing the borrower creditworthiness, the property value, income, and market conditions to determine whether to approve the loan and at what terms. Commercial underwriting focuses heavily on DSCR, LTV, and property cash flow.

The percentage of units in a property that are unoccupied at a given time. Lenders apply a standard vacancy factor (typically 5 to 10%) to gross rental income even on fully occupied properties to account for future vacancies. A 5% vacancy factor on $10,000/month gross rent reduces underwritten income to $9,500/month.

A real estate investment strategy where the investor acquires a property below its potential value, improves it (through renovation, lease-up, or management improvements), and then refinances or sells at a higher value. Value-add properties typically require bridge financing during the improvement phase.

A short-term business loan used to fund day-to-day operations — payroll, inventory, accounts receivable gaps, or seasonal cash flow needs. Working capital loans are not secured by real estate. They are underwritten based on business revenue and cash flow.

A prepayment penalty that requires the borrower to pay the lender the present value of the remaining interest payments, discounted at a Treasury rate. Yield maintenance ensures the lender receives the same yield as if the loan had not been prepaid. It is common in life insurance company and CMBS loans.