CRE Glossary

A tax-deferral strategy under Section 1031 of the Internal Revenue Code that allows an investor to sell a commercial property and reinvest the proceeds into a like-kind replacement property while deferring capital gains taxes. The exchange must follow strict timelines: the replacement property must be identified within 45 days and the transaction must close within 180 days of the original sale. A qualified intermediary must hold the proceeds between transactions. 1031 exchanges are one of the most powerful wealth-building tools in commercial real estate, allowing investors to compound returns by deferring taxes across successive transactions.

A loan structure where a single mortgage is divided into two tranches: the A-Note (senior position with lower risk and lower yield) and the B-Note (subordinate position with higher risk and higher yield). The A-Note is typically sized at a lower LTV and sold to conservative investors, while the B-Note holder absorbs losses first and receives a higher return for that risk. A/B structures allow lenders to offer higher total leverage while distributing risk across different investor appetites. The B-Note holder often controls workout decisions in a default scenario.

Government-sponsored enterprises that provide liquidity to the multifamily housing market. Fannie Mae and Freddie Mac offer highly competitive rates with leverage up to 80% LTV for qualifying apartment properties. They provide interest-only options, streamlined underwriting, and are the primary source of permanent financing for stabilized multifamily assets nationwide.

The gradual repayment of loan principal through scheduled payments over time. Commercial real estate loans typically have 25-30 year amortization schedules, meaning the payment is calculated as if the loan would be fully repaid over that period. Most loans have shorter terms than their amortization, resulting in a balloon payment at maturity.

The remaining principal balance due at the end of a loan term that has not fully amortized. Most commercial real estate loans have 5-10 year terms with 25-30 year amortization schedules, resulting in a large balloon payment at maturity. Borrowers typically refinance or sell the property to pay off the balloon.

A unit of measurement equal to one-hundredth of a percentage point (0.01%). 100 basis points equals 1%. Commercial real estate loan pricing is typically quoted in basis points over an index rate. For example, a spread of 250 basis points over SOFR means the rate is 2.50% above the current SOFR rate. Basis points eliminate ambiguity when discussing rate changes — a rate moving from 5% to 6% is a 100 basis point increase, not a 1% increase.

Short-term financing (typically 1-3 years) used to "bridge" the gap between acquisition/repositioning and permanent financing. Bridge loans are ideal for value-add strategies, lease-up, renovation, or properties that don't qualify for traditional permanent financing. They feature higher rates and more flexible terms than permanent loans.

A financing mechanism that allows commercial property owners to fund energy efficiency, renewable energy, water conservation, and seismic improvements through a voluntary property tax assessment. C-PACE financing is repaid over 20-30 years through the property's tax bill, survives transfer of ownership, and is senior to the mortgage in the tax lien position. It requires consent from existing lenders and is available in states with enabling legislation. C-PACE can reduce the equity required in a capital stack by funding eligible building components that would otherwise come out of the construction or renovation budget.

A rate used to estimate the value of income-producing properties, calculated by dividing NOI by the property's market value or purchase price. A property with $500,000 NOI and a 5% cap rate would be valued at $10 million. Lower cap rates indicate higher values and are typical in primary markets; higher cap rates suggest higher risk or secondary/tertiary markets.

A formal request from a fund manager or general partner to investors (limited partners) requiring them to contribute a portion of their committed capital. Capital calls are made as investment opportunities arise or as project costs are incurred, rather than collecting all committed equity upfront. This structure allows investors to earn returns on their uninvested capital until it is called. Failure to meet a capital call typically triggers significant penalties, including dilution of the investor's ownership interest.

The layered structure of capital used to finance a real estate investment, arranged by priority of repayment. From lowest risk to highest: senior debt, mezzanine debt, preferred equity, and common equity. Each layer has different risk/return profiles. Understanding the capital stack is essential for structuring deals and evaluating investment opportunities.

Exceptions to non-recourse loan provisions that make the borrower personally liable for specific acts, such as fraud, misrepresentation, environmental contamination, misappropriation of funds, or voluntary bankruptcy. Carve-outs are standard in non-recourse lending and are typically signed by the loan guarantor or sponsor.

A refinancing transaction where the new loan amount exceeds the existing debt, allowing the borrower to extract equity from the property. Cash-out is possible when property values have increased, debt has been paid down, or both. Most lenders allow cash-out refinancing within their standard leverage parameters.

Loans originated by conduit lenders that are pooled together and sold to investors as bonds. CMBS loans offer higher leverage (up to 75% LTV) with competitive rates across all property types. They feature standardized terms, non-recourse execution, and are assumable. However, they have significant prepayment restrictions (defeasance or yield maintenance) and less flexibility than portfolio loans.

A partnership structure where two or more entities share the general partner role in a real estate investment, combining their capital, expertise, or track record to execute a deal. Co-GP arrangements are common when a local operating partner with market knowledge joins forces with a more capitalized sponsor to meet equity requirements or satisfy institutional investor due diligence standards. The co-GP structure defines each partner's responsibilities, economics, and decision-making authority.

The origination of commercial real estate loans specifically intended for securitization into CMBS (Commercial Mortgage-Backed Securities). Conduit lenders underwrite and fund loans, then pool them with other loans and sell the pool to investors as rated bonds. Conduit loans offer competitive rates, higher leverage, non-recourse execution, and assumability. Because loans are sold to investors rather than held on balance sheet, conduit lenders can offer terms that portfolio lenders cannot. However, conduit loans come with significant prepayment restrictions and less servicing flexibility than portfolio loans.

Short-term financing used to fund the development of new commercial real estate projects. Construction loans are disbursed in draws as work is completed, with interest accruing only on funds advanced. They typically feature floating rates, 18-36 month terms, and require personal guarantees. Upon completion, the loan is paid off through permanent financing or sale.

A low-risk real estate investment strategy focused on high-quality, stabilized assets in primary markets with creditworthy tenants and long-term leases. Core investments are typically financed with low leverage and target returns of 6-9% IRR. They provide stable income with minimal operational risk.

A tax strategy that accelerates depreciation deductions by identifying and reclassifying building components into shorter depreciation categories. Standard commercial real estate depreciates over 39 years (27.5 for residential), but a cost segregation study can reclassify 15-40% of building costs into 5, 7, or 15-year categories. This front-loads tax deductions, improves after-tax cash flow, and increases investor returns. Cost segregation is particularly valuable for new construction, major renovations, and acquisitions.

Member-owned financial cooperatives that provide commercial real estate loans, often with competitive rates and flexible terms for local borrowers. CUSOs (Credit Union Service Organizations) allow credit unions to pool capital for larger transactions. Credit unions can offer relationship-based lending with more flexibility than traditional banks.

Private investment funds that originate commercial real estate loans, typically focusing on bridge, mezzanine, or higher-risk transactions that traditional lenders avoid. Debt funds offer flexible terms, quick execution, and higher leverage but at higher interest rates. They are valuable for transitional assets, value-add strategies, and complex capital structures.

A risk metric calculated by dividing Net Operating Income by the total loan amount, expressed as a percentage. For example, $1 million NOI on a $10 million loan equals a 10% debt yield. Unlike LTV and DSCR, debt yield is independent of interest rates and cap rates, making it a pure measure of loan risk. Most lenders require minimum debt yields of 8-10%.

A prepayment method where the borrower purchases a portfolio of government securities that generates cash flows matching the remaining loan payments. The securities are assigned to the lender, and the property is released from the mortgage. Defeasance is required for most CMBS loans and can be expensive, especially when interest rates rise.

A legal entity used in commercial real estate to hold investment property, commonly used as a replacement property vehicle in 1031 exchanges. DSTs allow individual investors to acquire fractional interests in institutional-quality properties while qualifying for tax-deferred exchange treatment. The trust structure provides passive ownership with no management responsibilities. DST investors receive their pro-rata share of income, appreciation, and depreciation benefits. Sponsors typically structure DSTs with non-recourse financing and long-term holds.

A measure of a property's ability to cover its debt obligations, calculated by dividing Net Operating Income (NOI) by annual debt service. Lenders typically require a minimum DSCR of 1.20x to 1.35x, meaning the property generates 20-35% more income than needed to pay the mortgage. Higher DSCRs indicate lower risk and may qualify for better loan terms.

A financing source derived from the U.S. Citizenship and Immigration Services EB-5 Immigrant Investor Program, which allows foreign nationals to obtain permanent residency by investing in job-creating commercial enterprises. EB-5 capital is typically structured as mezzanine debt or preferred equity at below-market rates, making it an attractive gap financing tool. Minimum investment thresholds are set by USCIS, with reduced amounts available for projects in Targeted Employment Areas. EB-5 capital is particularly common in large-scale hospitality, mixed-use, and multifamily developments where significant job creation can be demonstrated.

A measure of total return on invested equity, calculated by dividing total distributions received by total equity invested. An equity multiple of 2.0x means investors doubled their money. Unlike IRR, equity multiple does not account for the timing of returns but provides a simple measure of total profit.

A temporary agreement between a lender and borrower to modify or suspend certain loan terms, typically during financial distress. Forbearance may include temporary payment reductions, suspension of principal payments, waiver of covenant defaults, or extension of maturity dates. It is a workout tool that allows borrowers to stabilize operations without triggering foreclosure. Forbearance agreements are negotiated and typically require the borrower to demonstrate a credible path to resuming normal loan terms.

New construction of a commercial property from raw or improved land. Ground-up development involves significant execution risk, including entitlement, construction, and lease-up phases. It typically requires construction financing with recourse guarantees, followed by bridge or permanent financing upon stabilization.

Loans insured by the Federal Housing Administration through the U.S. Department of Housing and Urban Development. HUD-insured programs, including the 221(d)(4) for new construction and the 223(f) for acquisition and refinancing, offer the highest leverage and longest terms available for multifamily properties — up to 87% LTV with 35-40 year fully amortizing terms. HUD loans are non-recourse and fully assumable. The trade-off is a longer approval process and regulatory compliance requirements, including Davis-Bacon wage provisions for construction projects.

A legal agreement between two or more lenders that defines their respective rights, priorities, and remedies with respect to the same borrower or property. Intercreditor agreements are required when a capital stack includes both senior debt and subordinate financing such as mezzanine debt or a B-Note. Key provisions include standstill periods (restricting the junior lender from exercising remedies), cure rights (allowing the junior lender to cure senior defaults), and purchase options (allowing the junior lender to buy the senior position).

A loan payment structure where the borrower pays only interest for a specified period, with no principal amortization. Interest-only periods improve cash flow and increase leveraged returns. They are commonly available for 1-10 years depending on loan type and leverage. After the I/O period, the loan typically converts to amortizing payments.

A metric used to evaluate the profitability of an investment over its entire holding period, accounting for the time value of money. IRR represents the discount rate at which the net present value of all cash flows equals zero. Investors typically target IRRs of 15-25% depending on risk profile and investment strategy.

Equity capital provided by an institutional investor or partner to co-invest in a real estate project alongside an operating sponsor. JV equity structures typically feature a preferred return to the capital partner, followed by profit splits that reward the sponsor for achieving target returns. Common JV partners include pension funds, sovereign wealth funds, and private equity firms.

Insurance companies that invest policyholder premiums in commercial real estate loans. Life companies are known for offering the most competitive rates on high-quality, stabilized assets with conservative leverage (55-65% LTV). They focus on relationship lending with sophisticated borrowers and offer long-term fixed-rate loans up to 30 years with non-recourse execution.

A federal tax credit program administered by state housing agencies that incentivizes the development of affordable rental housing. Developers receive tax credits over a 10-year period in exchange for maintaining income and rent restrictions for 15-30 years. The credits are typically sold to investors (often through syndicators) to generate equity for the project, reducing the amount of debt required. LIHTC is the primary driver of affordable housing production in the United States and is frequently combined with tax-exempt bonds, C-PACE, and conventional debt in complex capital structures.

The transfer of an existing loan to a new borrower in connection with a property sale. CMBS and agency loans are typically assumable, allowing buyers to take over favorable loan terms. Assumption involves lender approval, fees (typically 1% of loan balance), and meeting underwriting requirements. It can provide significant value when existing rates are below market.

A condition or requirement written into a loan agreement that the borrower must maintain throughout the loan term. Financial covenants may require minimum DSCR, maximum LTV, or minimum net worth. Operational covenants may govern property maintenance, insurance requirements, or leasing activity. Violation of a covenant can trigger a default, accelerate the loan, or restrict distributions to equity. Borrowers negotiate covenant thresholds during loan origination to ensure adequate operating flexibility.

The ratio of a loan amount to the total project cost, commonly used for construction and development financing. For example, a $70 million loan on a $100 million project has a 70% LTC. Construction lenders typically limit LTC to 60-75% of total project costs, with the remainder funded by equity.

The ratio of a loan amount to the appraised value of a property, expressed as a percentage. For example, a $7 million loan on a $10 million property has a 70% LTV. Lower LTVs represent less risk to lenders and typically result in better rates. Maximum LTVs vary by lender type: life companies (55-65%), CMBS (up to 75%), and agencies (up to 80% for multifamily).

Subordinate financing that sits between senior debt and equity in the capital stack, secured by a pledge of ownership interests rather than a mortgage on the property. Mezzanine debt allows borrowers to achieve higher leverage (up to 85-90% of cost) while keeping the senior loan in compliance. Rates are higher than senior debt but lower than equity returns.

A property's annual income after deducting operating expenses but before debt service, capital expenditures, and income taxes. NOI is calculated as Effective Gross Income minus Operating Expenses. It is the fundamental metric used to value commercial real estate and determine borrowing capacity.

A loan structure where the lender's remedies in case of default are limited to the collateral property, and the borrower has no personal liability for any deficiency. Non-recourse loans are standard for CMBS, life company, and agency lending. They typically include "bad boy" carve-outs that make the loan recourse for fraud, misrepresentation, or environmental issues.

A high-risk, high-return investment strategy involving ground-up development, major repositioning, or distressed acquisitions. Opportunistic investments target returns of 18%+ IRR and often involve significant construction or lease-up risk. They require specialized expertise and typically use higher leverage with more expensive capital.

An upfront fee charged by a lender for underwriting, processing, and funding a commercial real estate loan, typically expressed as a percentage of the loan amount. Origination fees generally range from 0.25% to 2.0% depending on the lender type, loan complexity, and market conditions. Bridge loans and debt fund transactions tend to have higher origination fees than permanent financing. Origination fees are a component of the borrower's total cost of capital and are factored into investment return calculations.

A lending arrangement where two or more lenders share a single loan, with each holding a proportionate interest in the payments and risk. The lead lender (participant) typically originates, underwrites, and services the loan, while co-participants fund portions of the principal. Participation structures allow lenders to diversify risk, stay within regulatory lending limits, or fund larger transactions than their balance sheet would otherwise permit. Borrowers benefit from accessing a larger loan amount through a single point of contact.

Long-term debt (5-30 years) secured by stabilized commercial real estate, underwritten primarily on current cash flow. Permanent loans offer lower rates than transitional financing and are available from life companies, banks, agencies, and CMBS lenders. They are the typical "take-out" financing after construction or bridge loans.

A commercial real estate loan that the originating lender holds on its own balance sheet rather than selling into the secondary market. Portfolio loans offer more flexibility than securitized products in terms of underwriting, prepayment, and loan modifications because the lender retains the decision-making authority. Banks, credit unions, and some life insurance companies are the primary portfolio lenders. Borrowers benefit from direct relationships with decision-makers and the ability to negotiate customized terms.

An equity investment that receives priority distributions before common equity but after debt service. Preferred equity provides additional capital above senior debt limits with returns typically in the 10-15% range. Unlike mezzanine debt, preferred equity is not secured by a pledge of ownership and has different foreclosure remedies.

A priority return that must be paid to investors before the general partner or sponsor participates in profits. Typical preferred returns range from 6-10% annually. The pref may be cumulative (unpaid amounts accrue) or non-cumulative. Once the preferred return is satisfied, remaining profits are split according to the promote structure.

A fee charged to a borrower for paying off a loan before its scheduled maturity date. Prepayment penalties compensate the lender for lost interest income and come in several forms: yield maintenance (present value of lost interest), defeasance (substitution of securities), step-down (declining fixed percentage), and lockout (prohibition on early payment). The type and severity of prepayment penalty varies by lender and loan product, and significantly impacts a borrower's flexibility to sell, refinance, or recapitalize during the loan term.

Non-bank entities including family offices, high-net-worth individuals, and private credit funds that provide commercial real estate financing outside the traditional banking system. Private lenders offer speed, flexibility, and the ability to finance deals that don't fit conventional lending criteria, often at premium rates.

The disproportionate share of profits earned by a sponsor or general partner after achieving specified return hurdles for investors. A common structure is "80/20 over an 8% pref" meaning investors receive 80% of profits (sponsor 20%) after achieving an 8% preferred return, with the split becoming more favorable to the sponsor at higher return tiers.

A designated low-income census tract where investments in new development or substantial improvement of existing properties receive federal tax benefits under the Opportunity Zone program established by the 2017 Tax Cuts and Jobs Act. Investors can defer capital gains by investing in a Qualified Opportunity Fund within 180 days of a capital gains event. Investments held for 10 years or more may qualify for permanent exclusion of capital gains on the Opportunity Zone investment itself. The program is designed to stimulate economic development in underserved communities.

A derivative contract that protects floating-rate borrowers from interest rate increases above a specified level. Lenders typically require rate caps for floating-rate loans. The borrower pays an upfront premium based on the cap rate, term, and notional amount. Rate caps have become significantly more expensive in volatile rate environments.

A commitment from a lender to hold a specified interest rate for a defined period while the loan is processed. Rate locks protect borrowers from interest rate increases during underwriting. They typically cost 0.5-1.0% of the loan amount for 30-60 day locks, with longer locks costing more. Some lenders offer "float-down" provisions if rates decline.

A loan where the borrower is personally liable for repayment beyond the value of the collateral property. Recourse loans are common for construction loans, bank loans, and smaller transactions. Full recourse means the borrower guarantees the entire loan; partial recourse or "burn-down" provisions may reduce the guarantee over time as loan risk decreases.

Funds that a lender requires a borrower to set aside in escrow accounts for specific future expenses. Common reserves include tax and insurance escrows (monthly deposits for annual obligations), replacement reserves (capital expenditure funding, typically $250-$500 per unit for multifamily), tenant improvement and leasing commission reserves, and interest reserves (pre-funded interest payments during construction or lease-up). Reserve requirements reduce distributable cash flow but protect the lender's collateral by ensuring property maintenance and expense coverage.

A small business lending program administered by the U.S. Small Business Administration that provides long-term, fixed-rate financing for owner-occupied commercial real estate. The SBA 504 structure involves a conventional first mortgage (50% of project cost), an SBA-backed second mortgage through a Certified Development Company (up to 40%), and a borrower equity contribution (10%). The program offers below-market fixed rates on the SBA portion with 20-25 year terms. Eligible properties must be at least 51% owner-occupied.

The primary mortgage loan that has first priority claim on a property's cash flows and collateral. Senior debt sits at the top of the capital stack with the lowest risk and lowest cost of capital. Senior lenders are repaid before any subordinate financing or equity in case of default or sale.

The benchmark interest rate that has replaced LIBOR for floating-rate commercial real estate loans. SOFR is based on overnight repurchase agreement transactions and is considered more reliable than LIBOR. Floating-rate loans are typically priced as SOFR plus a spread, with rate caps often required to limit interest rate exposure.

The margin added to a base index rate (such as SOFR or Treasury) to determine a loan's interest rate. For example, a loan priced at "SOFR + 250" has a 2.5% spread over the SOFR index. Spreads reflect credit risk, property type, leverage, and market conditions. Lower spreads indicate more favorable pricing.

A property that has achieved a consistent level of occupancy (typically 90%+) and is generating predictable cash flow from operations. Stabilized properties qualify for permanent financing with the most favorable terms. The transition from lease-up to stabilization is a key milestone in the investment lifecycle.

The contractual arrangement establishing the priority of claims between different creditors or capital providers in a real estate transaction. A subordinate lender agrees that their claim on the property's cash flows and collateral ranks below the senior lender's claim. Subordination is a fundamental concept in structuring the capital stack and directly impacts the risk and return profile of each position. The terms of subordination are documented in intercreditor or subordination agreements.

Debt instruments issued by state or local government entities where the interest income is exempt from federal (and sometimes state) income taxes. Tax-exempt bonds allow borrowers to access lower interest rates because investors accept reduced yields in exchange for the tax advantage. In commercial real estate, tax-exempt bonds are commonly used for affordable housing (often paired with LIHTC), healthcare facilities, and other projects with a public benefit component. Bond-financed projects must comply with specific regulatory requirements throughout the bond term.

A non-binding document outlining the key terms and conditions under which a lender is prepared to make a commercial real estate loan. Term sheets typically include proposed loan amount, interest rate or pricing, term, amortization, LTV and DSCR requirements, recourse provisions, prepayment terms, reserve requirements, and closing conditions. Borrowers often solicit multiple term sheets to compare options. A signed term sheet typically triggers a good-faith deposit, exclusivity period, and formal underwriting.

The yield on U.S. government debt securities, used as the benchmark index for fixed-rate commercial real estate loans. The 5-year, 7-year, and 10-year Treasury rates are the most commonly referenced benchmarks, corresponding to typical loan terms. Fixed-rate commercial loans are priced as the relevant Treasury yield plus a spread. Because Treasury rates fluctuate daily with market conditions, borrowers use rate locks to secure pricing during the underwriting and closing process.

The process by which a lender evaluates the risk and determines the terms of a proposed commercial real estate loan. Underwriting involves analyzing the property's income and expenses, market conditions, borrower financial strength, and collateral value. Lenders stress-test assumptions including vacancy, rental growth, and interest rate scenarios. The underwritten NOI, which may differ significantly from the borrower's pro forma, determines the maximum loan amount through LTV, DSCR, and debt yield constraints.

An investment strategy focused on acquiring underperforming properties and increasing their value through renovation, re-tenanting, operational improvements, or repositioning. Value-add deals typically require bridge financing and target returns of 13-18% IRR. The strategy involves more risk than core investments but offers higher potential returns.

The contractual framework governing how cash distributions and profits are allocated among partners in a real estate investment. A typical waterfall has multiple tiers: first, return of invested capital; second, a preferred return (typically 6-10%); third, a catch-up provision allowing the sponsor to receive a larger share until a specified split is reached; and fourth, a promote split above certain IRR thresholds. Waterfall structures align incentives by rewarding the sponsor for outperformance while protecting investor capital with priority returns.

A prepayment penalty calculated to compensate the lender for lost interest income, typically the present value of the difference between the note rate and current Treasury yields for the remaining loan term. Yield maintenance can be very expensive in rising rate environments. Some loans offer "declining" yield maintenance that reduces over time.