Commercial Loan Terms Explained: The Complete CRE Borrower’s Glossary

Loan Structure Terms

Amortization

The process of gradually paying down loan principal over time through regular payments. A 30-year amortization schedule on a 10-year loan means payments are calculated as if the loan would be paid off in 30 years, but at the 10-year maturity, a balloon payment covers the remaining balance.

Balloon Payment

A large lump-sum payment due at the end of a commercial loan term covering the remaining principal balance. Most commercial mortgages mature with a balloon, the loan doesn’t fully amortize during the term. Understanding the balloon amount is critical for exit planning.

Interest-Only (IO)

A loan structure where monthly payments cover only interest, no principal reduction occurs during the IO period. Common in bridge loans and the first 1–5 years of some permanent loans. IO periods improve cash flow but mean the principal balance doesn’t decrease.

LTV (Loan-to-Value)

The loan amount expressed as a percentage of the property’s appraised value. A $1.5M loan on a $2M property is 75% LTV. Most commercial lenders cap at 65–75% LTV for investment properties.

LTC (Loan-to-Cost)

Used primarily for construction and value-add loans. The loan amount expressed as a percentage of total project cost (purchase price + renovation/construction budget). A $1.6M loan on a $2M total project is 80% LTC.

ARV (After Repair Value / As-Stabilized Value)

The projected value of a property after renovation or lease-up is complete. Bridge and construction lenders often underwrite to ARV rather than current “as-is” value, which allows higher loan amounts on value-add projects.

Recourse vs. Non-Recourse

A recourse loan allows the lender to pursue the borrower personally (beyond just the collateral) in case of default. Non-recourse limits lender recovery to the property itself, with exceptions (carve-outs) for fraud, waste, and environmental issues. Most private loans are recourse; CMBS and agency are typically non-recourse.

Carve-Outs (Bad Boy Guaranty)

Provisions in non-recourse loans that trigger full personal liability for specific borrower actions: fraud, misrepresentation, environmental violations, willful waste, unauthorized transfers. Non-recourse is never truly “no personal liability”, carve-outs are universal.

Draw Schedule

The disbursement plan for a construction or renovation loan, where funds are released in stages as work is completed and inspected. Borrowers typically request draws tied to construction milestones, subject to lender inspection and approval.

Underwriting and Qualification Terms

DSCR (Debt Service Coverage Ratio)

NOI divided by annual debt service. A DSCR of 1.25x means the property generates 25% more income than needed to cover loan payments. Most lenders require 1.20–1.25x minimum. See our dedicated DSCR article for full detail.

NOI (Net Operating Income)

Gross rental income minus operating expenses (taxes, insurance, maintenance, management, reserves). Does NOT include mortgage payments, depreciation, or capital expenditures. NOI is the core metric for commercial property valuation and loan underwriting.

NCF (Net Cash Flow)

NOI minus capital reserves for replacement. Agency lenders (Fannie/Freddie) underwrite to NCF rather than NOI, which typically results in a slightly lower qualifying income figure and slightly more conservative underwriting.

Cap Rate (Capitalization Rate)

NOI divided by property value or purchase price. A $150,000 NOI property selling for $2,000,000 has a 7.5% cap rate. Cap rates are used to value commercial properties and compare investment returns. Lower cap rates indicate higher demand (lower yield); higher cap rates indicate lower demand (higher yield).

Debt Yield

NOI divided by the loan amount, expressed as a percentage. A $150,000 NOI property with a $1,500,000 loan has a 10% debt yield. Lenders use this as a sanity check on leverage, independent of interest rates. Most CMBS lenders require debt yields of 8–10%+.

Global Cash Flow

Analysis that combines personal income, business income, and investment property income to assess total borrower cash flow. Banks and SBA lenders often require global cash flow to ensure the borrower isn’t over-leveraged across all debt obligations.

T-12 Operating Statement

A trailing 12-month income and expense statement for a property. Lenders use T-12 to verify actual current NOI rather than projections. Essential documentation for stabilized property loans.

Pro Forma

Projected financial performance of a property based on assumptions about future income and expenses, typically used for value-add and development underwriting where current performance doesn’t reflect stabilized value. Bridge lenders underwrite to pro forma; permanent lenders prefer actual T-12.

Rates and Costs

Origination Fee / Points

An upfront fee charged by the lender at closing, expressed as a percentage of the loan amount. 1 point = 1% of the loan. A $2M loan with 2 points has a $40,000 origination fee. Points directly increase the effective cost of the loan.

Spread

The margin above a benchmark rate (SOFR, Prime, Treasury) that a lender charges. A loan priced at “SOFR + 400 bps” means the rate floats 4 percentage points above SOFR. When SOFR is 5.25%, the rate is 9.25%.

SOFR (Secured Overnight Financing Rate)

The primary benchmark index for floating-rate commercial loans, replacing LIBOR. Published daily by the Federal Reserve Bank of New York. Most private bridge and construction loans float off 30-day or 1-month term SOFR.

Rate Floor

A minimum interest rate regardless of index movement. A loan with a 5% floor and SOFR + 400 bps spread will not go below 5% even if SOFR drops to 0%. Always look for the floor rate on floating-rate loans.

Effective Rate (All-In Rate)

The true cost of a loan including origination fees, exit fees, and interest, expressed as an annualized rate. The effective rate is always higher than the stated note rate on short-term loans with significant points.

Exit Fee

A fee charged at loan payoff, typically 0.25%–1.0% of the original loan balance. Common on bridge loans. The exit fee is in addition to any prepayment premium and increases the all-in cost of the loan.

Repayment and Exit Terms

Prepayment Penalty

A fee charged for paying off a loan before maturity. Protects the lender’s expected yield. Commercial prepayment structures include step-down schedules, defeasance, and yield maintenance.

Step-Down Prepayment

The most common commercial prepayment structure. The penalty decreases over time, for example, 5/4/3/2/1 means a 5% penalty in year 1, 4% in year 2, and so on until year 5 when no penalty applies. Common on bank and CMBS loans.

Defeasance

A prepayment structure used on CMBS loans where the borrower substitutes the original collateral (the property) with government securities that generate the same cash flows as the remaining loan payments. Defeasance doesn’t involve a cash penalty, it requires purchasing a portfolio of securities, which can be expensive when rates have fallen.

Yield Maintenance

A prepayment calculation designed to compensate the lender for lost interest income. The borrower pays the present value of remaining loan payments discounted at a Treasury rate. Can be very expensive when interest rates are low. Common on life insurance company loans.

Lock-Out Period

A period during which prepayment is not permitted at any price. Many CMBS loans have 2–5 year lock-out periods before defeasance or step-down penalties kick in.

Extension Option

A provision allowing a borrower to extend a bridge or construction loan for an additional period (typically 3–12 months) by paying an extension fee. Extensions are subject to conditions: the project must be on track, the borrower must not be in default, and performance tests may apply.

Maturity Date

The date by which the loan must be repaid in full. On most commercial loans, this triggers a balloon payment. Missing a maturity date without an approved extension puts the loan in default.

Lender and Loan Type Terms

CMBS (Commercial Mortgage-Backed Securities)

Commercial mortgages pooled and sold as securities to investors. CMBS lenders originate loans with the intent to securitize rather than hold them. This provides pricing efficiency but limits post-close flexibility, loan modifications become extremely difficult once in a CMBS pool.

Bridge Loan

Short-term (12–36 month) financing designed to “bridge” a property through a transition period, acquisition, renovation, lease-up, until it qualifies for permanent financing. Interest-only, higher-rate, flexible underwriting.

Hard Money Loan

Asset-based lending where qualification is primarily based on property value rather than borrower income or creditworthiness. Typically provided by private individuals or small funds. Highest rates, fastest closing, minimal documentation.

DUS Lender (Delegated Underwriting and Servicing)

Lenders approved by Fannie Mae to underwrite and close agency multifamily loans without prior approval. Includes major firms like Walker & Dunlop, Berkadia, CBRE Capital Markets. DUS lenders share in loan losses, aligning incentives with underwriting quality.

Mezzanine Debt

Junior debt sitting between senior mortgage debt and equity in the capital stack. Mezz lenders hold pledges of ownership interests rather than first lien positions. Typically carries higher rates (12–18%) and provides leverage beyond what senior lenders will provide.

Preferred Equity

An equity investment with debt-like return characteristics, fixed preferred return, priority distribution over common equity. Economically similar to mezzanine debt but structured as an ownership interest. Often used interchangeably with mezz in practice.

Property and Collateral Terms

NNN (Triple Net Lease)

A lease structure where the tenant pays base rent plus property taxes, insurance, and maintenance. NNN properties are highly desirable for lenders because expense risk is tenant-borne. NNN retail is one of the most financeable commercial asset classes.

Stabilized

A property that has reached its expected long-term occupancy and income levels, typically 85–95% occupancy with market-rate leases in place. Stabilized properties qualify for permanent financing; transitional (unstabilized) properties are bridge candidates.

Appraisal (MAI)

An independent property valuation performed by a certified appraiser (MAI designation from the Appraisal Institute is the gold standard for commercial). Lenders order appraisals at the borrower’s expense; the appraiser is selected and managed by the lender, not the borrower.

Phase I Environmental Assessment

An environmental review of a property’s history and condition to identify potential contamination. Required by most lenders. A Phase II is required when Phase I identifies recognized environmental conditions (RECs), it involves actual soil/groundwater testing.

Survey (ALTA/NSPS)

A boundary and improvement survey of a commercial property meeting ALTA/NSPS standards. Required by title insurance companies and most lenders to confirm property boundaries, easements, and encroachments.

Legal and Structural Terms

Personal Guarantee

An agreement by which a principal of the borrowing entity accepts personal liability for a loan. A full recourse guarantee means unlimited personal liability. A limited guarantee caps exposure at a specific dollar amount or percentage. Required by most lenders for recourse loans to LLC or corporate borrowers.

Cross-Collateralization

A loan structure where multiple properties secure a single loan or where one property secures multiple loans. Provides additional security for the lender but creates risk for the borrower, default on one property can trigger action against all cross-collateralized assets.

Cross-Default

A provision where default on one loan automatically triggers a default on other loans from the same lender or across a borrower’s portfolio. Read cross-default language carefully in any loan document.

Assignment of Rents

A lender’s right to collect rental income from a property directly in the event of borrower default. Included in virtually every commercial mortgage. A borrower in default typically cannot collect rents without lender consent.

UCC Financing Statement

A public notice filed by a lender to perfect a security interest in personal property (fixtures, equipment, lease assignments) associated with a commercial property. Part of the standard closing package for most commercial loans.

Intercreditor Agreement

An agreement between a senior lender and a junior lender (mezzanine or preferred equity) governing their relative rights in the event of default, foreclosure, or bankruptcy. Required whenever multiple layers of debt exist on a property.

Frequently Asked Questions