Loan Covenant
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.
Related Terms
DSCR (Debt Service Coverage Ratio)
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.
LTV (Loan-to-Value Ratio)
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).
Forbearance
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.
Term Sheet
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.
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