Commercial Lending Glossary
Plain-English definitions of the terms lenders, brokers, and investors use every day. Formulas, worked examples, and why each one matters to your deal.
Amortization
The schedule that repays a loan's principal over time through regular payments.
Balloon Payment
A large principal balance due at the end of a loan term that was not fully amortized.
Bridge-to-Perm
A financing path that uses a short-term bridge loan first, then converts to permanent financing once the property stabilizes.
Capital Stack
The layers of financing in a deal, ranked by repayment priority from senior debt to common equity.
Capitalization Rate (Cap Rate)
The ratio of net operating income to property value, used to gauge return and estimate what a property is worth.
Cash-on-Cash Return
Annual pre-tax cash flow divided by the cash invested, measuring the yield on your equity.
Debt Service Coverage Ratio (DSCR)
The ratio of a property's net operating income to its annual debt service, showing how comfortably income covers loan payments.
Debt Yield
Net operating income divided by the loan amount, a leverage-independent measure of lender risk.
Ground Lease
A long-term lease of land where the tenant owns the building but not the ground beneath it.
Interest-Only Period
A stretch at the start of a loan when payments cover only interest, not principal.
Loan-to-Cost Ratio (LTC)
The loan amount as a percentage of total project cost, used mostly on construction and value-add deals.
Loan-to-Value Ratio (LTV)
The loan amount as a percentage of a property's appraised value, showing how much of the purchase a lender will finance.
Mezzanine Debt
Subordinate financing that sits between senior debt and equity, often secured by a pledge of ownership interests.
Net Operating Income (NOI)
A property's income after operating expenses but before debt service, income taxes, and capital costs.
Prepayment Penalty
A fee charged for paying off a loan before maturity, protecting the lender's expected yield.
Recourse
A loan feature that lets the lender pursue the borrower's personal assets if the collateral does not cover the debt.
Replacement Reserves
Money set aside regularly to fund future capital repairs and replacements at a property.
SOFR (Secured Overnight Financing Rate)
The benchmark rate that floating-rate commercial loans price over, based on overnight Treasury-backed borrowing.
Stabilized Property
A property leased and operating at market occupancy with steady, reliable income.
Term Sheet
A non-binding summary of proposed loan terms a lender offers before formal underwriting.