This glossary provides definitions of key commercial real estate (CRE) terms designed to help investors, borrowers, and industry professionals better understand deal structures, financing concepts, and underwriting metrics, improving clarity across every stage of a real estate transaction.

1031 Exchange: A tax strategy that allows a seller of real property held as an investment to defer the related tax liability by reinvesting proceeds in similar “like-kind” property. Deferred exchanges typically allow 45 days to identify a replacement asset per IRS Code Section 1031.

Agency Loan: A mortgage provided through government-sponsored entities like Fannie Mae or Freddie Mac.

Amortization Period: The time frame over which a loan is repaid through scheduled payments.

Annual Debt Service: The total amount a borrower must pay each year to cover scheduled principal and interest on a commercial real estate loan, as outlined in the amortization schedule.

Balloon Payment: A final loan payment that covers the remaining principal balance when a loan does not fully amortize over its term, often significantly larger than prior payments.

Basis Points (BPS): A unit of measure for interest rates where one basis point equals 1/100 of one percent (100 BPS = 1%).

Break-Even Occupancy: The occupancy level required to cover all operating expenses and debt service.

Bridge Loan: A short-term loan used until permanent financing is secured, typically backed by the subject property or other collateral.

Cap Rate: The capitalization rate used to estimate investment returns, calculated by dividing net operating income (NOI) by a property’s market value.

Capital Expenditures: Funds used for major property improvements or replacements.

Capital Gain: The profit realized from the sale of an asset, calculated as the sale price minus the asset’s cost basis.

Capital Stack: The structure of financing layers in a real estate deal, including debt and equity components.

Cash-on-Cash Return: Annual cash flow divided by total invested cash.

CMBS (Commercial Mortgage-Backed Securities): A financing structure in which commercial real estate loans are pooled and securitized for sale to investors in the capital markets.

Commercial Real Estate Servicing: The ongoing management of a commercial property loan after it has been originated and closed. It includes key functions such as payment processing, escrow and reserve administration, investor reporting, regulatory compliance, and borrower communication throughout the life of the loan.

Construction Loan: A short-term, often interest-only loan used to fund property development or rehabilitation.

Cost Basis: The total cost of a property minus depreciation, used to calculate capital gains or losses.

Debt Service Coverage Ratio (DSCR): A metric used to evaluate a property’s ability to cover loan payments, calculated by dividing income by debt obligations.

Debt Yield: A lender risk metric calculated by dividing NOI by the loan amount.

Draw Schedule: A timeline for disbursing loan funds during construction based on project milestones.

Effective Gross Income (EGI): A property’s income after accounting for vacancy and credit loss, used as a key input in underwriting and net operating income calculations.

Employee Stock Ownership Plan (ESOP): A tax-advantaged retirement plan that invests in employer stock and can act as a business ownership vehicle.

Exit Cap Rate: The projected cap rate at sale used to estimate future property value.

Extension Option: A loan provision allowing a borrower to extend the maturity date under specified conditions such as performance tests and fees, commonly used in agency and floating-rate structures.

Fannie Mae DUS® Small Loan Program: A program offering fixed and variable-rate multifamily loans, typically up to $9 million, for stabilized properties.

Freddie Mac Optigo® Conventional Small Loan: A small-balance multifamily loan program offering flexible fixed-rate financing for loans typically $10 million or less.

Going-In Cap Rate: The cap rate based on purchase price and current income, reflecting initial return.

Hard Costs: Expenses tied to the physical construction of a property, including labor and materials like concrete, drywall, and landscaping.

Interest Rate Cap Agreement: A derivative used in floating-rate loans to limit borrower exposure to rising interest rates, often required in agency and structured financing executions.

Interest Rate Spread: The difference between a benchmark rate and the borrower’s interest rate.

Interest-Only Loan: A loan where only interest is paid for a set period before principal repayment begins.

Internal Rate of Return (IRR): A measure of investment profitability based on projected cash flows over time.

Lender: The individual or institution that provides financing for a commercial real estate transaction.

Leverage: The use of borrowed capital to finance a real estate purchase or refinance.

LIHTC (Low-Income Housing Tax Credit): A federal program providing tax credits to support affordable housing development.

Loan Commitment: A lender’s formal agreement outlining loan terms and conditions.

Loan-to-Cost (LTC) Ratio: A ratio comparing the loan amount to total project cost, used to assess leverage and risk.

Loan-to-Value (LTV) Ratio: The ratio of a loan amount to the appraised value of a property.

London Interbank Offered Rate (LIBOR): A benchmark interest rate at which banks lend to one another, historically used for adjustable-rate loans.

Maturity Date: The date when the full principal balance of a loan is due.

Mezzanine Financing: A secondary financing layer between debt and equity, often secured by ownership interests.

Metropolitan Statistical Area (MSA): A region defined by the U.S. OMB consisting of a city and surrounding communities.

Net Operating Income (NOI): A property’s income after operating expenses are subtracted, excluding debt service and capital expenditures.

Non-Recourse Loan: A loan secured only by the property, limiting lender recovery to the collateral.

Operating Expenses: Costs required to operate and maintain a property, including taxes, insurance, utilities, and management fees.

Origination Date: The date a loan officially begins.

Permanent Loan / Permanent Financing: Long-term financing that replaces short-term loans once a property is stabilized.

Preferred Equity: A hybrid investment offering fixed returns and priority over common equity in distributions.

Recourse Loan: A loan allowing the lender to pursue the borrower’s personal assets in case of default.

Rent Roll: A report detailing tenants, rents, lease terms, and payment status, used to assess property income and occupancy.

SOFR (Secured Overnight Financing Rate): A benchmark rate used in modern lending, replacing LIBOR, and forming the base for variable loan pricing.

Soft Costs: Indirect construction-related expenses such as design, legal, financing, and management fees.

Stabilization: The stage when a property achieves consistent occupancy and income.

T-12 (Trailing Twelve Months): A 12-month historical operating performance snapshot used in underwriting and property evaluation.

Treasury Spread: The pricing spread over U.S. Treasury yields used to determine commercial mortgage interest rates in capital markets execution.

Underwriting: The process of evaluating borrower and property risk to determine loan eligibility.

Yield Maintenance: A prepayment penalty ensuring the lender receives expected returns if a loan is paid off early.