- Amortization
- The schedule over which a loan's principal is repaid through regular payments. A 10 year loan on a 30 year amortization has payments sized as if repaid over 30 years, with the remaining balance due at maturity.
- Asset-based lending
- Business financing secured by company assets, most often accounts receivable and inventory, with the available amount set by a borrowing base.
- Balloon payment
- The remaining loan balance due in one payment at maturity when a loan's term is shorter than its amortization.
- Bridge loan
- Short-term financing, usually 12 to 36 months, used to buy or reposition a property until it qualifies for permanent financing or is sold.
- Business-purpose loan
- A loan made for business or investment purposes rather than personal, family or household use. Commercial and investment property loans are business-purpose loans.
- Cap rate
- Capitalization rate: a property's net operating income divided by its value or price. A property with $100,000 of NOI valued at $1.5 million has a 6.67% cap rate.
- Cash-out refinance
- A refinance for more than the existing loan balance, with the borrower receiving the difference in cash.
- Construction draw
- A disbursement of construction loan funds released as work is completed, usually after a lender inspection confirms progress.
- Debt service
- The total principal and interest payments due on a loan over a period, usually measured annually.
- Debt service coverage ratio (DSCR)
- A property's net operating income divided by its annual debt service. A DSCR of 1.25x means income covers the loan payments 1.25 times. Many commercial lenders require 1.20x to 1.35x.
- DSCR loan
- An investment property loan that qualifies on the property's rental income relative to its payment rather than on the borrower's personal income.
- Debt yield
- Net operating income divided by the loan amount. Lenders use it as a leverage test that does not depend on interest rates or cap rates.
- Guarantor
- A person or entity that agrees to repay a loan if the borrower does not. On business-purpose loans, principals of the borrowing entity commonly guarantee the loan.
- Holdback
- Loan proceeds the lender holds back at closing and releases later, often to fund renovations or once a condition is met.
- Interest-only
- A payment structure where only interest is paid for a period and the principal balance does not decline.
- Loan-to-cost (LTC)
- The loan amount divided by the total project cost, including purchase price and construction or renovation costs.
- Loan-to-value (LTV)
- The loan amount divided by the property's appraised value. An $800,000 loan on a $1 million property is 80% LTV.
- Net operating income (NOI)
- A property's income after operating expenses such as taxes, insurance, management, repairs and utilities, but before debt service and capital expenditures.
- Non-recourse loan
- A loan where the lender's recovery on default is limited to the collateral, apart from standard carve-outs for fraud, misrepresentation and similar acts.
- Personal financial statement
- A summary of an individual's assets, liabilities and net worth, required from guarantors on most commercial loans.
- Prepayment penalty
- A fee charged when a loan is paid off before a set date. Common structures include step-downs, yield maintenance and defeasance.
- Recourse loan
- A loan where the lender can pursue the borrower or guarantors personally for any shortfall after the collateral is sold.
- Rent roll
- A list of a property's units or tenants showing rent, lease dates and occupancy, used by lenders to underwrite income.
- Sale-leaseback
- A transaction where an owner sells an asset such as real estate or equipment and leases it back, converting equity into cash while keeping use of the asset.
- Schedule of real estate owned (SREO)
- A list of all properties a sponsor owns, with values, debt and income, used by lenders to assess experience and financial strength.
- Sponsor
- The person or group that organizes and manages a real estate investment and typically guarantees the loan.
- Term sheet
- A lender's written outline of proposed loan terms, issued before full underwriting and closing. It is not a commitment to lend.
- T-12
- A trailing 12 month operating statement showing a property's actual income and expenses for the past year.
Lending glossary
Commercial lending terms, defined
Plain-English definitions of the terms you will see on a term sheet, in underwriting and at closing.