Commercial Real Estate Glossary

The rate at which available space in a market is leased or sold over a given time period. Positive net absorption means more space is being occupied than vacated. Absorption rate is a key indicator of market health and demand — lenders use it to assess how quickly a newly developed or repositioned property might stabilize.

The gradual repayment of a loan's principal balance through scheduled payments over the loan term. A 30-year amortization schedule with a 10-year term means the loan payment is calculated as if it were a 30-year loan, but the full balance comes due at year 10 — at which point the borrower must refinance or pay off the remaining balance.

As-Is value is the current market value of a property in its present condition. As-Stabilized value is the projected value once the property reaches market occupancy after renovation or lease-up. Bridge and construction lenders typically lend against as-is value but underwrite to as-stabilized value to assess exit feasibility.

A loan that can be transferred from the current borrower to a buyer, allowing the buyer to take over the existing debt at its original terms (rate, amortization, remaining term). Assumable loans are particularly valuable in high-rate environments — a buyer who can assume a 3.5% fixed-rate loan avoids today's 6.5%+ market rates. Most CMBS and agency loans are assumable subject to lender approval of the new borrower.

Short-term financing (typically 12–36 months) used to "bridge" the gap between a property's current state and its eligibility for permanent financing. Bridge loans are the primary tool for value-add acquisitions, lease-up plays, and transitional properties that don't yet qualify for bank or agency debt. Rates typically run 7%–10.5% on an interest-only basis. See also: Hard Money Loan.

The lump-sum payment due at a loan's maturity date representing the remaining unpaid principal balance. Commercial mortgages almost universally have balloon payments because loan terms (5–15 years) are shorter than amortization schedules (20–30 years). Borrowers must either refinance or sell the property to satisfy the balloon.

A unit of measure equal to 1/100th of 1 percent. 100 basis points = 1.00%. Used to express interest rate spreads, fee amounts, and yield changes. 50 bps above the 10-year Treasury means the lender's spread over the benchmark rate is 0.50%.

The ratio of a property's Net Operating Income (NOI) to its market value or purchase price. Cap rate = NOI ÷ Property Value. A 6.5% cap rate on a $5M property implies $325,000 in NOI. Lower cap rates indicate higher valuations relative to income (typical in primary markets); higher cap rates indicate lower valuations (typical in secondary/tertiary markets). Cap rates are the primary valuation benchmark in commercial real estate.

Annual pre-tax cash flow divided by total equity invested. Unlike IRR, cash-on-cash is a point-in-time metric that doesn't account for appreciation or sale proceeds — it measures annual income yield on equity deployed. A 7% cash-on-cash means for every $1M invested, the property produces $70,000/year in distributable cash after debt service.

A type of fixed-income security backed by a pool of commercial real estate loans. Lenders originate commercial mortgages, pool them, and sell bonds backed by the pool to investors. CMBS loans typically offer the highest leverage, competitive fixed rates, and non-recourse structure — at the cost of complexity, defeasance prepayment requirements, and servicer rigidity. Most CMBS conduit loans range from $2M to $100M+.

A commercial mortgage originated with the intent to be securitized (sold into a CMBS pool) rather than held on the lender's balance sheet. Because conduit lenders are originating to sell, they follow standardized underwriting criteria set by rating agencies and institutional bond buyers. Conduit loans are characterized by fixed rates, 10-year terms, non-recourse, and defeasance prepayment.

A short-term loan that funds the development or major renovation of a commercial property. Unlike a term loan, construction loan proceeds are drawn in stages (draws) as work is completed and verified. Interest accrues only on drawn amounts. Construction loans typically carry variable rates, 18–36 month terms, and require the borrower to have a firm takeout commitment (permanent loan or sale) before funding.

An appraisal methodology that estimates value by adding land value to the depreciated replacement cost of improvements. Most commonly used for special-use properties (churches, schools, hospitals) where comparable sales are limited. Less commonly relied upon for income-producing commercial properties where the income approach is primary.

The ratio of a property's Net Operating Income to its annual debt service (principal + interest payments). DSCR = NOI ÷ Annual Debt Service. A 1.25x DSCR means the property generates 25% more income than needed to cover loan payments. Most commercial lenders require a minimum DSCR of 1.20x–1.30x. A DSCR below 1.0x means the property's income does not cover debt service — this is the most common trigger for loan default.

A private investment vehicle that raises capital from institutional and high-net-worth investors to originate commercial real estate loans. Debt funds operate outside the traditional bank and agency regulatory framework, allowing them to underwrite more creatively, move faster, and take on deal types banks won't touch. They are a primary source of bridge and value-add financing. Rates are typically higher than bank or agency but with more flexibility and speed.

A prepayment mechanism used in CMBS loans that allows a borrower to be released from a loan by replacing the property as collateral with a portfolio of U.S. Treasury securities that replicate the loan's remaining payment schedule. The Treasury portfolio is placed in a special-purpose entity (SPE) that assumes the loan obligation. Defeasance does not pay off the loan — the loan continues, with the borrower released and Treasuries substituted as collateral. Transaction costs typically run $50,000–$150,000+. See also: Yield Maintenance.

Capital repairs or improvements that have been postponed. Lenders routinely assess deferred maintenance during underwriting and may escrow funds at closing (an "immediate repairs escrow") to ensure the work gets done. Significant deferred maintenance reduces appraised value, limits loan proceeds, and signals potential future capital requirements that affect cash flow projections.

A predetermined schedule of loan fund disbursements tied to construction milestones. The lender (or a construction monitor) verifies completed work before releasing each draw. Construction loans are typically funded 10–20% at closing with the remainder drawn over the construction period. Controlling the draw schedule protects lenders against fraud and contractor non-performance.

A commercial or investment property loan underwritten primarily on the property's debt service coverage ratio rather than the borrower's personal income. Common in the 1–4 unit investment property market and small commercial deals. The lender determines eligibility based on whether rental income covers the proposed mortgage payment, without requiring W-2s, tax returns, or income verification. Not to be confused with the commercial DSCR underwriting metric above.

Potential Gross Income (PGI) minus vacancy and credit loss, plus other income (parking, laundry, late fees, etc.). EGI represents the income a property actually collects, as opposed to the theoretical income if all space were 100% occupied and all tenants paid on time.

Total distributions received divided by total equity invested. An equity multiple of 2.0x means you received $2 for every $1 invested. Unlike IRR, equity multiple doesn't account for the time value of money — a 2.0x over 3 years is much better than 2.0x over 10 years. Equity multiples of 1.5x–2.5x are common targets for value-add investments.

The assumed capitalization rate at which a property will be valued and sold at the end of the investment hold period. Used in pro forma modeling to calculate projected sale proceeds. Underwriters typically apply an exit cap rate 25–50 basis points above the entry cap rate to be conservative — the assumption that buyers may value the property slightly less generously in the future than today.

A formal real estate appraisal that complies with the Financial Institutions Reform, Recovery, and Enforcement Act standards. Required by federally regulated lenders (banks, credit unions) for most commercial loans. A full FIRREA appraisal includes income, sales comparison, and cost approaches to value, is performed by a certified appraiser, and typically costs $3,000–$10,000+ depending on property complexity. Bridge and hard money lenders may accept broker price opinions (BPOs) for smaller or faster deals.

An interest rate that moves with a reference benchmark — most commonly SOFR (Secured Overnight Financing Rate), which replaced LIBOR. Bridge loans and construction loans are almost always floating rate. The loan note might read: "SOFR + 350 bps" — meaning if SOFR is 5.30%, the all-in rate is 8.80%. Most floating-rate loans are interest-only, with caps purchased to protect against rate spikes.

An agreement that locks in today's interest rate for a permanent loan that will close in the future — typically 3–12 months out. Used most commonly on construction loans where the developer wants certainty on the permanent financing rate before the building is complete. Forward rate locks typically carry a premium of 25–75 basis points over spot rates.

Full-recourse means the borrower (and often personal guarantors) are personally liable for the loan. If the property doesn't cover the debt, the lender can pursue the borrower's personal assets. Non-recourse means the lender's only remedy is the property — they cannot pursue the borrower personally (except for "bad boy carve-outs" for fraud, waste, or environmental violations). CMBS loans are typically non-recourse. Bank loans are typically full-recourse.

The capitalization rate at acquisition — NOI in Year 1 divided by the purchase price. The going-in cap rate establishes the starting yield on a property investment. Compare to exit cap rate (the assumed value at sale) and stabilized cap rate (the yield once the property reaches market occupancy after renovation or lease-up).

A long-term lease (typically 50–99 years) of the land beneath a building, under which the tenant (the building owner) pays rent to the landowner. The building owner finances and operates the improvements. Ground leases create a bifurcated ownership structure — leasehold (building) and fee (land) — that affects financing. Most conventional lenders require a subordinated ground lease or special provisions to lend against leasehold interests.

A personal guaranty makes the borrower personally liable for the loan. A completion guaranty is specific to construction loans and obligates the guarantor to complete the project regardless of cost overruns. Most bank construction loans and some bridge construction loans require both. Agency and CMBS permanent loans may only require a personal guaranty for "bad boy" carve-outs.

Asset-based, short-term financing secured by commercial real property. Hard money lenders underwrite the property's value and the borrower's exit strategy — not income history, W-2s, or credit score. Rates typically run 9%–13% with 2–4 origination points, on 12–24 month interest-only terms at 60%–75% LTV. Hard money is appropriate for distressed acquisitions, auction purchases, and deals that need to close in under two weeks. See also: Bridge Loan.

A portion of loan proceeds withheld at closing and released based on the completion of specific conditions — most commonly renovation work (a "rehab holdback") or lease execution (a "leasing holdback"). Common in bridge and construction loans. The borrower draws from the holdback as milestones are achieved and verified by the lender or a third-party inspector.

A financial derivative that limits the maximum interest rate on a floating-rate loan. Required by most bridge and construction lenders on floating-rate loans. The borrower pays a premium at closing for the cap, which pays out if the benchmark rate (SOFR) rises above the cap strike rate. A "3-year SOFR cap at 4.00%" costs the borrower a one-time fee and ensures their SOFR rate never exceeds 4.00% during the loan term, regardless of market moves.

A loan structure where payments consist entirely of interest — no principal is repaid during the IO period. At maturity, the full principal balance is due. Bridge and construction loans are almost always fully IO. Some permanent loans offer a 2–5 year IO period before switching to amortizing payments. IO loans improve cash flow during the early years of ownership but leave the full balance due at the balloon.

The annualized return rate that makes the net present value of all cash flows (including sale proceeds) equal to zero. IRR accounts for both the magnitude and timing of cash flows, making it the most comprehensive measure of investment performance. A 15% IRR means the investment compounded at 15% per year. Target IRRs for CRE equity investments typically range from 10%–18%+ depending on risk profile and leverage.

A partnership between a capital partner (providing most of the equity) and an operating partner (providing the deal expertise and day-to-day management). In typical CRE joint ventures, the LP (limited partner/capital partner) contributes 80%–90% of equity, the GP (general partner/operating partner) contributes 10%–20%, and profits are split through a "waterfall" structure with preferred returns and promoted interest. JVs are common for larger value-add and development deals where sponsors need more equity than they can provide alone.

The loan amount as a percentage of the property's appraised value. LTV = Loan Amount ÷ Appraised Value. A $7M loan on a $10M property = 70% LTV. Higher LTV means more leverage and more risk for the lender. Conventional bank loans typically cap at 65%–75% LTV. Bridge loans may go to 80%+ LTV on stabilized assets. Construction loans often express leverage as LTC (Loan-to-Cost) instead.

The loan amount as a percentage of total project cost (land + construction + soft costs). Used primarily for construction loans. LTC = Loan Amount ÷ Total Project Cost. Most construction lenders cap at 65%–75% LTC. A $10M construction loan on a $15M total project cost = 67% LTC.

A commercial mortgage originated by a life insurance company for its own investment portfolio. Life companies are among the most conservative and lowest-cost commercial lenders, offering fixed rates often 25–50 basis points below comparable CMBS rates. They typically require low LTVs (55%–65%), high DSCR (1.30x+), and prefer high-quality stabilized assets in major markets. Life company loans often allow yield maintenance or step-down prepayment instead of defeasance.

A period at the beginning of a loan term during which the borrower cannot prepay the loan at all — even by paying a penalty. CMBS loans typically have a 2–3 year lockout, after which defeasance or yield maintenance is available until the open prepayment window near maturity.

Subordinate financing that sits between the senior mortgage and equity in the capital stack. Mezzanine loans are secured by a pledge of the borrower's ownership interest in the entity that owns the property — not a second mortgage on the real estate itself. This distinction is critical: mezzanine lenders use a UCC foreclosure (much faster than real property foreclosure) to enforce their rights. Mezzanine rates typically run 10%–15% and are used to fill the gap between senior loan proceeds and available equity.

A concentration of commercial real estate loan maturities in a short time period, creating a surge of refinancing demand. The 2026 CRE maturity wall involves approximately $875 billion in loans scheduled to mature — roughly 17% of all outstanding commercial mortgages, per the Mortgage Bankers Association — originating from the 2019–2021 low-rate lending surge combined with loans extended from 2024–2025.

A short-to-medium term permanent loan (3–7 years) used as interim financing after a construction loan but before a long-term permanent loan. Mini-perms allow the project to stabilize and generate track record before the borrower refinances into a longer-term life company, CMBS, or agency loan.

Effective Gross Income minus all operating expenses (taxes, insurance, maintenance, management, utilities, reserves), before debt service. NOI is the central underwriting metric in commercial real estate — every valuation, DSCR calculation, and cap rate computation starts here. NOI is calculated before depreciation, income taxes, and capital expenditures (though good underwriting models a capital reserve).

A lease structure in which the tenant pays base rent plus their proportionate share of property taxes, insurance, and maintenance/operating expenses. In a "true" NNN lease (common in single-tenant retail), the tenant pays all expenses and the landlord receives pure net income with minimal management. NNN assets (net-lease) are popular with 1031 exchange buyers and income-focused investors for their passive income characteristics.

Total operating expenses divided by Effective Gross Income. A 40% OER means 40 cents of every dollar of income goes to operating expenses. OER benchmarks vary by property type: multifamily typically runs 35%–45%; office 40%–55%; industrial 20%–35%. Unusually low OERs deserve scrutiny — they may indicate deferred maintenance or understated expenses.

An upfront fee charged by the lender at loan closing, expressed as a percentage of the loan amount. One "point" = 1% of the loan amount. A $5M loan with 1.5 points = $75,000 origination fee paid at closing. Bridge and hard money loans typically carry 2–4 points. Bank and life company loans often carry 0.25–1.0 points. Origination fees increase the effective (all-in) cost of capital, which is why it's important to evaluate rate and points together.

An equity investment that has priority over common equity in the capital stack. Preferred equity investors receive a fixed preferred return (typically 8%–14%) before common equity participates in profits. Unlike mezzanine debt, preferred equity is technically an ownership interest — not a loan — but is structured with debt-like return characteristics and control rights that allow the preferred investor to take over management if the preferred return goes unpaid. Used similarly to mezzanine to fill the gap between senior debt and common equity.

A fee charged when a borrower repays a loan before its scheduled maturity. Commercial mortgage prepayment structures include: step-down schedules (5-4-3-2-1%), yield maintenance (calculated penalty based on Treasury rate differential), defeasance (Treasury collateral substitution), and open prepayment (no penalty). The structure is negotiated at origination and has a major impact on exit flexibility and costs.

A financial projection of a property's future income, expenses, and cash flows. The pro forma is the underwriter's statement of what the property will produce — not what it produces today. Sophisticated lenders distinguish between the "T-12" (trailing 12 months actual results) and the sponsor's pro forma, and underwrite to a "UW" (underwritten) figure that may differ from both. Aggressive pro formas with unrealistic rent growth, occupancy assumptions, or understated expenses are common sources of loan defaults.

See: Interest Rate Cap

See: Full-Recourse vs. Non-Recourse

The risk that a borrower will not be able to obtain new financing on acceptable terms when the existing loan matures. Key refinancing risks: rising interest rates that reduce DSCR at the new rate; declining property values that reduce loan proceeds; tightened lender underwriting standards; and lender appetite shifts by property type. Refinancing risk is why commercial real estate investors model conservative assumptions and maintain adequate liquidity.

A schedule listing all tenants in a property, with details on each lease: unit/suite, tenant name, leased square footage, lease start and expiration dates, current rent, rent per square foot, and lease terms. The rent roll is the foundational document in commercial real estate underwriting — lenders and investors study it to assess income stability, lease rollover risk, and occupancy. A "clean" rent roll has long-term leases, creditworthy tenants, and staggered expirations.

The estimated cost to construct an equivalent building from scratch in today's market. Used as a valuation sanity check — properties trading below replacement cost may present acquisition opportunities (since building new would cost more), while those trading above replacement cost signal strong market conditions or property-specific premium attributes. New construction is generally not feasible unless achievable rents support land and construction costs at a reasonable development yield.

The process of pooling loans and selling bonds backed by those loan pools to investors. CMBS (commercial mortgage-backed securities) is the primary form of securitization in commercial real estate. Securitization allows lenders to recycle capital (originate, pool, and sell), while giving investors access to diversified real estate debt exposure. The CMBS market issues $50–$100B+ in new securities annually.

The first-priority, lowest-risk position in the capital stack. Senior lenders have the first claim on property income and sale proceeds. In a default, the senior lender is paid first before mezzanine lenders, preferred equity, or common equity see anything. Because of this priority position, senior debt carries the lowest return requirement — typically the market interest rate, not a profit-sharing arrangement.

The benchmark interest rate that replaced LIBOR in U.S. commercial real estate lending (transition completed 2023). SOFR is based on overnight Treasury repurchase agreement transactions. Most floating-rate CRE loans today are indexed to "Term SOFR" — a forward-looking rate for 1-month or 3-month periods, which is more practical for loan payment calculations than overnight SOFR.

The number of basis points added to a benchmark rate (SOFR, Treasury, Prime) to determine a loan's interest rate. A loan at "SOFR + 275 bps" has a spread of 275 basis points. Lender spreads reflect credit risk, property type risk, and competitive market conditions. Spreads are the primary lever lenders negotiate on after the loan amount and term are established.

A declining prepayment penalty schedule, typically expressed as a percentage of the outstanding loan balance. A 5-4-3-2-1 schedule means: 5% penalty in Year 1, 4% in Year 2, 3% in Year 3, 2% in Year 4, 1% in Year 5, and open (no penalty) in Year 6+. Common on bank and life insurance company loans. More predictable and often less expensive than yield maintenance in a low-rate environment.

A permanent loan commitment that will replace a construction or bridge loan when the project completes or stabilizes. Lenders for construction loans typically require a takeout commitment before funding — evidence that a long-term lender has agreed to refinance the project. For development deals, the takeout is often from a life company, bank, or agency lender; for value-add bridge deals, the "takeout" may simply be a conventional bank refinance once the property stabilizes.

Improvements made to leased space to meet a tenant's specific requirements. TI allowances are negotiated as part of the lease and paid by the landlord (or built into the loan). In office and retail, significant TI costs are the norm for new or renewing tenants. TI obligations represent real future capital requirements that must be modeled in cash flow projections and factored into underwriting.

Insurance that protects the lender (lender's policy) or owner (owner's policy) against defects in the property's title — undisclosed liens, encumbrances, ownership disputes, or errors in public records. Required by virtually every commercial mortgage lender. A lender's policy insures the lender's mortgage position up to the loan amount; an owner's policy protects the owner's equity. Both are purchased at closing.

The analysis process by which a lender evaluates the risk and feasibility of making a loan. Commercial real estate underwriting analyzes: property income and expenses (the T-12 actuals), the lender's underwritten NOI (which may differ from the sponsor's pro forma), DSCR at the loan terms, LTV vs. appraised value, sponsor experience and financial strength, and market conditions. The underwriter's job is to stress-test the deal and determine whether the lender's capital is adequately protected.

An investment strategy in which the investor acquires a property below its stabilized value and creates value through renovation, re-leasing, management improvements, or repositioning. Value-add deals typically use bridge financing during the execution phase and refinance into permanent debt at stabilization. The return profile sits between core (low risk/return) and opportunistic (highest risk/return).

The percentage of a property's total leasable area that is currently unoccupied. Market vacancy rates are tracked by property type and geography and serve as a key supply/demand indicator. Lenders typically use a "stabilized vacancy" assumption in underwriting that reflects long-term market vacancy rather than current physical occupancy — which can be higher or lower than the market norm.

The priority order in which cash distributions flow to different investors in a joint venture. A typical CRE waterfall: (1) Return of capital to all investors; (2) Preferred return to LP (e.g., 8% annually); (3) Catch-up to GP; (4) Split of remaining profits (e.g., 70% LP / 30% GP). The promoted interest ("carry") is the GP's share of profits above the preferred return — the economic incentive for the operating partner to outperform.

A prepayment penalty calculated as the present value of the lender's lost interest income for the remaining loan term. The formula compares the loan's fixed rate to the current Treasury rate for the equivalent remaining term — the larger the spread, the larger the penalty. Yield maintenance is the standard prepayment structure for life insurance company and bank portfolio loans. Key insight: penalties move inversely with rates — expensive when rates fall, cheaper when rates rise. Most loans have a 1% floor. See also: Defeasance.

Stabilized NOI divided by total project cost. The primary underwriting metric for development deals — it answers the question "what return does this building produce on my all-in cost?" Yield-on-cost must exceed the going-in market cap rate to create value from development. A 7.5% yield-on-cost in a 6.0% cap rate market implies significant value creation; a 5.5% yield-on-cost in the same market means the developer is building at a loss.