Commercial Real
Estate Dictionary

Financing (Debt/Equity)



“Agency” Debt - Financing that is issued by one of the two government-sponsored enterprises, Fannie Mae or Freddie Mac.

Actual/360 or Actual/365 - The method in which interest accrues on a loan. Actual signifies the “actual” number of days that elapsed in the period and the denominator is either 360 or 365. Many lenders prefer to use a 360-day year because they technically earn more interest (a smaller denominator equals a larger quotient). For example, a month that has 30 days and an annual rate of 5.0% - the monthly interest rate would be 0.41667% for 30/360 and 0.41096% for 30/365.

Advance Rate - This is the ratio on a loan at which the lender will advance costs against the value or total cost of the collateral. For example, if an advance rate is 70%, then the lender will advance $0.70 for every $1.00 of approved collateral that is acquired. An advance rate is mainly seen in credit lines or revolving credit facilities, but can also be used in construction loans. The metric is similar in nature to LTC or LTV.

Amortization - The repayment of principal over a specified timeframe. Most amortizing loans have amortization schedules of 25 or 30 years. A loan can have a term of less than the amortization schedule, which results in the loan not fully amortizing over the term and a large payment being due at maturity. For example, a 10-year loan can have a 25-year amortization schedule.

B-Piece - The b-piece in a CMBS pool is the lowest rated (or non-rated) tranche of a CMBS securitization. This is also referred to as the “first loss” piece because any principal losses hit this tranche of the securitization first. It is possible for this tranche to be completely eliminated in a total loss, or “wiped out.” The b-piece buyer usually has some ability to kick out certain loans from a securitization that they deem problematic. The b-piece buyer also has the ability to appoint a special servicer for the entire securitization. It is typical of b-piece buyers to also engage in the business of special servicing to protect their interests.

Bridge Loan (Debt) - See Floater.


DY (Debt Yield) - A metric used by lenders to assess credit profile for their underwriting of an investment. The debt yield is calculated by dividing the NOI by the loan amount. A debt yield can be described as the “lender’s cap rate.” Generally, since a loan is a safer investment than equity, the debt yield should be greater than market cap rates. For example, if you are acquiring a multifamily property at a 5% cap rate, you might find a lender offering a loan that represents a debt yield of 6-7%. This offers the lender a “margin of safety” of approximately a 1-2% spread to foreclose and recoup their investment.

DSCR (Debt Service Coverage Ratio) - A ratio and metric used to determine the “affordability” or a potential loan for a given set of cash flows produced by an investment. The DSCR is calculated by dividing NOI by debt service. A positive number greater than 1 indicates that the NOI “covers” the debt service or that the property can sustain the cost of debt independently without an equity infusion. Inversely, a negative number indicates that the NOI from an investment is not sufficient to pay the interest and/or principal payments for a given loan.

Draw Schedule - The schedule/timing under which monthly construction costs will be paid or advanced from a construction loan. The draw schedule is related to “construction draws.”

Debt Fund - A fund or partnership that consists of many individual investors with pooled capital or equity; the pooled capital is used by the manager to originate mainly real estate debt products. These debt funds are not regulated banks and usually engage in riskier debt products, such as high leverage senior loans, bridge loans, construction loans, mezzanine debt, or preferred equity.

Debt Broker - The specific broker that has many relationships with lenders to help an owner/acquirer find appropriate debt for an acquisition or recapitalization.

Credit Profile - Credit profile generally speaking can mean any metrics, financial statements, or due diligence used to make an investment or lending decision. In personal finance, a credit profile might include job history, tax returns, income level, and FICO score. In real estate, however, credit profile deals with the underlying collateral of a real estate transaction (i.e. the actual building or asset that is being acquired or pledged). Example of credit profile could be lease terms, types of tenants, the credit profile of individual tenants, above/below market rents, vacancy, supply/demand in the market, etc.

Controlling Class Representative (CCR) - The class of bondholder in a specific securitization that has control rights for certain securitization decisions.

Construction Financing - A type of loan used to build a new project or significantly renovate an existing one. Construction loans are usually shorter in term (2-4 years) with some extension options. They usually carry a floating interest rate and have significant structure in place to protect the lender from construction completion risk and liens against the property. A construction lender will typically require that the owner contribute all of its required equity on day one and then the lender will fund “draws” from the total allocated loan amount as the actual construction dollars are billed from the contractor.

Conduit Financing - For all intents and purposes, this is the same as CMBS Financing.

CMBS - Commercial Mortgage-Backed Securities. These types of securities are issued by investment banks that “pool” numerous individual mortgages for risk diversification. Assume an investment bank originates 100 individual loans on various properties across many locations. Generally speaking, the investment bank groups or “pools” these loans together horizontally for risk diversification and offers several vertical classes/tranches of bonds that offer investors different levels of risk. They are rated AAA (highest investment grade credit) to B (non-investment grade) and have commensurate levels of return. Interest payments are paid through the waterfall from highest rated to lowest rated; conversely, any principal losses are applied in reverse order from lowest rated to highest.

Cash-Out Refinance - A type of refinance where the new loan is greater than the existing loan, resulting in a cash payment to the borrower. Some lenders prefer not to participate in cash-out refinance transactions because there is a disincentive to the borrower to operate the property to its full standard since a portion of equity is being returned and “cash is being taken off the table.”

Carried Interest - See “promote.”

Capital Markets - The “capital markets” is a very amorphous term to describe any activity of capital raising or capital placement. The term is usually used to describe the availability and terms of real estate debt along with the availability and terms of real estate equity. A capital markets professional usually is not the person that is buying the actual real estate or crafting/executing the specific business plan but rather the person that helps to “capitalize” that same transaction.

Capital Account - The specific "paper" account within a partnership or similary entity that tracks the amount of capital invested and distributed to each partner.


Future Funding - A portion of the total loan amount that is funded at a point (or over time) in the future. The best example of future funding is a future cost for renovation, construction, or commissions that will add value to the asset and therefore will be advanced from the senior loan. Lenders are comfortable with future funding structure because the additional loan dollars are funded to cover costs that improve the value of their collateral.

Forbearance - A type of relief offered by a lender to a borrower that delays a lender from enforcing any legal rights for the repayment of debt.

Floater (Debt) - A shorter-term financing option (usually 2-3 years with several extension options) that has a floating rate (hence the term “floater”) consisting of a spread over LIBOR.

Financing Costs - The costs involved in procuring debt in a real estate transaction. These can include origination fees, lender legal, lender title insurance, etc.

Family Office - A privately held company or loosely organized collection of companies that represents the net worth of one or several wealthy families. Family offices usually have more flexible lending and investing guidelines because they are dictated by specific family mandates. In addition, there is usually not a “fund” structure so timing or investment horizon is less of a concern.

Equity Kicker - This is usually a “participation” right for the lender that is involved in a high leverage loan. For example, a lender might agree to increase their risk by lending 80 to 90% LTV or LTC. In exchange for this high leverage loan, the lender asks for an “equity kicker,” which is essentially a stipulated percentage of profits after the loan is repaid in full.

Equity Fund - A fund or partnership that consists of many individual investors with pooled capital or equity; the pooled capital is used by the manager to deploy common or preferred equity into real estate products. Equity funds can buy assets 100% on their own or they can enter into partnerships where they provide a portion (usually 5-95%) of the equity required to purchase an asset. The partnerships are known as joint ventures or JVs.

Equity Broker - An intermediary that acts as a market expert to find a match between a buyer/operator of real estate and an equity capital provider that has sufficient funds to deploy. The equity broker is usually hired by the operating partner to source JV equity from a larger family office or more institutional fund.

Earn Out - A type of structure in a loan or equity investment where the borrower or operator “earns out” an additional amount of investment based on pre-specified performance hurdles such as leasing activity, occupancy level, or NOI.


HNWI or High Net Worth Individual - A loose term used to describe an individual investor with significant assets to invest. The “floor” for HWNIs is usually $1 million dollars of net worth excluding their primary residence. HWNI is a similar but much more loosely defined term than an “Accredited Investor” which is utilized by the Securities & Exchange Commission (SEC).

Hard Money - A type of financing that is more expensive and more stringently structured and is often used in dire situations where traditional methods of financing have either failed or where the borrower was unable to qualify. Hard money is usually a last resort type financing as it is always very expensive (often 10%+ interest rate) and is short term. If the loan is not able to be repaid, the lender will take back the property.

General Partner (GP) - The day-to-day operator of an investment alongside a passive limited partner (LP).


JV Equity - A large (usually majority >50%) equity investment in a joint venture to acquire or recapitalize a property.

Interest Reserve - A type of account that is created and capitalized at closing that is used as extra security for a lender in a real estate transaction. An interest reserve required an owner to commit more equity up front so the lender has complete control over the interest reserve account. As interest payments are due, the lender will debit the reserve account so the owner does not need to pay twice. An interest reserve requirement is better for lenders but worse for borrowers because it requires more equity to be deployed at closing, thereby reducing the returns.

Interest Rate - The rate at which interest accrues on a loan. An interest rate can be “fixed” or “floating.” A fixed rate remains the same for the entire term of the loan (e.g. 5.0%). A floating rate is quoted as a spread over an index rate and the index is usually adjusted (updated) monthly (e.g. 300 basis points LIBOR).

Interest Only (IO) - A loan payment that does not have any amortization or principal payments. Only interest is paid.

Insurance Lender - A lender that uses the capital of an insurance company for originate loans for commercial real estate. Insurance lenders generally have lower rates and longer terms to manage duration in their portfolio. They also generally choose safer assets to lend on rather than riskier business plans.


Loan-to-Value (LTV) - A ratio expressed in percentage terms that represents the loan amount in relation to the value of a property. For example, a property that is valued at $1 million with a $650,000 loan would have an LTV of 65%.

Loan-to-Cost (LTC) - A ratio expressed in percentage terms that represents the loan amount in relation to the total cost or total basis of a property. For example, consider a property that is purchased for $1 million and then renovated with an additional $1 million for a total basis of $2 million. The owner uses $1.5 million of debt to purchase and renovate the property, which represents an LTC of 75%.

Loan Sizing (to size) - A loan sizing is a process that evaluates the credit risks of the proposed loan and “sizes” (or determines) the appropriate loan amount based on various credit metrics such as debt yield and DSCR.

Loan Documents (Loan Docs) - A set of various documents that govern the rights and obligations of the lender and the borrower. These can include mortgages, promissory notes, title policies, loan agreements, escrow agreements, etc.

Loan Agreement - Loan agreements are the private agreement that define the “structure” and detailed covenants of the loan that is evidenced by a promissory note. For example, where extension terms, certain earnout provisions, or quarterly DSCR tests are defined.

Liquidity - The amount of unencumbered cash or cash equivalents readily available to pay expenses. This generally includes cash in the bank of immediately marketable securities.

Limited Partner (LP) - The passive majority capital partner/investor that turns over day-to-day control to a general partner to operate or develop the investment. The limited partner may require “control rights” or “major decisions” to ensure their investment is protected and to maintain a level of overarching control over the investment.

LIBOR - The London Interbank Offered Rate, which serves as a globally accepted benchmark rate that is indicative of borrowing costs between banks. The rate is calculated using a survey of participant banks.


Non-Recourse Debt - The only recourse the lender has for the repayment of the loan is the specific collateral pledged during the origination of the loan.

Net Worth - Assets minus liabilities. For example, suppose an individual owns a property that has an appraised value of $10 million with a $7 million loan outstanding. In this case, the individual’s net worth is $3 million.

Monetary Default - A payment default under a loan that involved the payment of interest or principal and could be during the term or at maturity. Maturity default is a type of monetary default where a borrower fails to take out (or repay) a loan in full at the balloon payment.

Mini-perm - A type of bridge loan that is traditionally used to replace construction financing.

Mezzanine Debt - Mezzanine debt is a type of subordinate financing (i.e. lower in lien priority or repaid after the senior loan) that is collateralized by the equity interest in the entity that owns the real estate and formalized with a UCC filing. It is generally more risky and therefore carries a higher rate of interest. The collateral in a mezzanine loan is the distinguishing factor from preferred equity.

Maturity Default - See monetary default.

Master Servicer - A master servicer is responsible for servicing the loan throughout its term so long as there is no default under the loan. Loan servicing involves collecting interest, principal, and escrow payments on behalf of lenders from borrowers.


Promote - The outsized return that is earned as compensation for a general partner exceeding the preferred return in a particular deal. The “promote” dilutes the limited partner’s return because the general partner earns a share of cash flow greater than their pro rata capital account after they achieve a preferred return or hurdle rate.

Promissory Note - A legal instrument where one party promises to pay another. Promissory notes are generally recorded instruments and can sometimes be public record.

Pro Rata - Proportional. For example, if one partner invests 90% and the other partner invests 10%, the cash flow could be distributed “pro rata” meaning 90%/10% for the entire deal. Some in the industry might refer to this as “straight up.”

Pricing - This is a widely used and flexible term in the real estate industry. Pricing can relate to the actual gross dollar price of an asset, the price per unit, or, most frequently, the expected return of an equity or debt investment. In terms of debt, pricing is used to refer to the interest rate and the cost of the loan.

Prepayment Penalty - The penalty associated with prepaying a loan prior to the stated maturity of the loan. Lenders require prepayment penalties because they need to manage their portfolio of capital and maintain certain level of duration or term outstanding on the money they invest.

Preferred Return or Hurdle Rate - This is the return that an investor earns on his/her invested capital before any promote (i.e. outsized return) accrues to the sponsor/developer. For example, a deal (or a fund) could have an 8% preferred return. Generally speaking, if someone invested $1 in the deal, they would have to receive their $1 invested capital back and an additional $0.08 per year for every year the $1 was outstanding before a profit sharing split is achieved.

Preferred Equity - Similar to a mezzanine loan in relation to the economics of the investment (i.e. a higher rate and leverage amount), however the legal structure of preferred equity is actually an equity investment rather than a loan. In this case though, preferred equity is “senior” to the subordinate (or “common”) equity in the real estate transaction.

Personal Guarantee - A guarantee where the borrower pledges his or her personal assets as well as real property collateral as security to entice a lender to make a loan. If a loan with a personal guarantee is not repaid, the lender can seek repayment by looking to the borrower’s personal assets in a court of law.

Personal Financial Statement (PFS) - A personal balance sheet stating the assets and liabilities of an individual. This is usually provided by a borrower for a lender during credit analysis and for personal guarantees.

Permanent Loan or Permanent Financing - A longer-term financing solution that usually has a term greater than five years and most commonly a term of 10 years (for multifamily assets specifically). Permanent financing usually has a fixed rate that is quoted as a whole interest rate or a spread over U.S. treasuries.

Pari Passu - Latin for “on equal footing.” This refers to how cash flow is distributed and implies that there is no subordination amongst the equity. For example, if one partner negotiates to receive their investment back before another partner receives any distributions, this situation would not be pari passu.

PACE Financing - A new form of creative financing that stands for Property Assessed Clean Energy. It is generally able to be used for up to 20% of the project costs and the costs that qualify are directly correlated to energy efficiency (HVAC, LED Lighting, plumbing, insulation, etc). The financing is paid back in the form of an annual tax assessment on your property tax bill, which creates an issue with lenders as this is a superior lien to the first mortgage, so it is often a creative way to get things done, but just requires lenders to be familiar with the product.

Opportunity Zone Equity/Fund - A fund or equity investor that requires opportunity zone treatment in a designated qualified opportunity zone (QOZ) based on the 2017 Tax Cuts and Jobs Act.


Recourse Debt - A loan or obligation where a lender can seek personal recourse to the individual if the loan is not repaid in full. For example, imagine a new acquisition of a $10 million property with an $8 million loan. The property falls in value, the lender forecloses and sells the property for $7 million. The lender can seek a personal judgement to collect the remaining $1 million against the individual borrower’s assets. This is the opposite of non-recourse debt which is more favorable to any individual; however, sometimes recourse is necessary to secure more advantageous terms (such as interest rate or loan amount).

Recapitalization - This type of transaction is the opposite of an acquisition wherein an owner seeks to “take out” or pay off an existing loan with a new loan or “buy out” an existing equity partner with a new partner or new debt.

Rating Agency - A rating agency is a private, third-party company that assigns credit ratings, which rate a debtor's ability to pay back debt by making timely principal and interest payments and the likelihood of default. The “big three” rating agencies are Moody’s, S&P, and Fitch.


Tranche - Defined as “a portion” of something, especially money. Tranche is a useful term in finance and especially real estate finance as cap stacks are often complex with many parts. For example, a senior loan could be split (or “tranched” for industry vernacular) between a senior A note and a subordinate B note - this loan would have two “tranches.”

Technical Default - A default under the loan documents for a technical clause such as a DSCR test or quarterly occupancy threshold.

Swaps - Generally used as the index rate to price CMBS loans. This rate is based on derivative contracts that indicate how interest rate risk is priced in the overall market. These interest rate “swap” contracts are sometimes less volatile than U.S. Treasuries depending on market conditions.

Structure - When you hear someone talking about “structure” in an investment or a loan, this usually means the finer points of the negotiation such as operational controls, ongoing NOI hurdles, buy/sell arrangements, reserve account requirements, etc.

Spread - The additional risk premium added to an index rate. Usually quoted in basis points or points.

Special Servicer - In the event of default, there are certain protocols in place to “transfer” the loan from master servicing to special servicing for loan modification, foreclosure, or workout. The special servicer has more latitude to make decisions on behalf of the securitization trust to protect principal. Special services may be required to make advances of interest or principal payments in the event of a continuing monetary default.

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Waterfall - This is the official mechanism of how deal (or fund cash) flow is split between partners. The waterfall could be simple or complicated and is usually bespoke for every situation. An example waterfall might read as follows: a) First, pro rata pari passu, 90% to the Limited Partner and 10% to the General Partner until the Limited Partner receives an 8% IRR on invested capital; b) Next, pari passu 80% to Limited Partner and 20% to General Partner until Limited Partner achieves a 10% IRR on invested capital; c) Thereafter, pari passu 70% to Limited Partner and 30% to General Partner.

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