Key Terminology

Senior Debt: A secured loan that has first repayment priority in case of default, making it lower risk for lenders and offering lower interest rates to borrowers.
Mezzanine Debt: A hybrid financing option between debt and equity, allowing higher leverage with subordinated repayment priority. Often includes warrants or equity participation.
Preferred Equity: A form of investment that provides priority distributions over common equity, offering a fixed return before profits are allocated to other investors.
Bridge Loan: Short-term financing used to bridge gaps before securing permanent financing, often utilized for property acquisitions or renovations.
Loan Commitment: A formal agreement by a lender to provide financing under specified terms, typically preceding the issuance of a commitment letter.
Loan Servicing: The administration of a loan post-closing, including payment collection, escrow management, and reporting.
Loan to Cost (LTC): A ratio measuring loan amount relative to total project cost, influencing the financial feasibility of developments.
Loan to Value (LTV): The ratio comparing loan amount to appraised property value, impacting financing terms and risk assessment.
Non-Recourse Loan: A financing structure where a lender can only seize collateral, without personal liability for the borrower.

Cap Rate (Capitalization Rate): A key metric for evaluating investment properties, calculated by dividing net operating income by purchase price.
Debt Yield: Measures risk for lenders by calculating net operating income relative to loan size, crucial in commercial mortgage underwriting.
Net Operating Income (NOI): Property revenue minus operating expenses, essential for evaluating profitability and debt coverage.
Net Cash Flow After Debt Service: Cash flow remaining after loan payments, indicating financial sustainability.
Cash on Cash Return: A measure of investment profitability based on cash flow relative to invested capital.
Yield Maintenance: A prepayment penalty ensuring lenders receive expected interest earnings if a loan is repaid early.
Risk-Adjusted Return: A profitability metric considering investment risks to determine true value.

Base Rent: The minimum rental amount paid by tenants before additional charges such as maintenance and taxes.
Common Area Maintenance (CAM): Shared costs paid by tenants for upkeep of communal spaces in commercial properties.
Triple Net (NNN) Lease: A lease structure where tenants cover taxes, insurance, and maintenance expenses in addition to rent.
Rent Roll: A document detailing current leases, tenant names, rental rates, and lease expirations, used in property valuation.
Economic Occupancy: Measures rental income generated versus total potential income, factoring in concessions and vacancies.
Physical Occupancy: The percentage of leased units occupied by tenants, separate from rental revenue.
Rent Abatement: A temporary rent reduction or waiver, often offered as an incentive for tenants in commercial leases.

Escrow: A financial arrangement where funds are held by a third party until contractual conditions are met.
Estoppel: A legal certification by tenants confirming lease terms, preventing later disputes.
Defeasance: A process replacing loan collateral with government securities, allowing borrowers to satisfy debt obligations while maintaining creditworthiness.
Recourse: Defines borrower liability—full recourse allows lenders to pursue personal assets, whereas non-recourse limits claims to collateral.
Phase 1 Environmental: An initial environmental assessment identifying potential contamination risks at a property site.
Phase 2 Environmental: A detailed investigation following Phase 1 if environmental hazards are suspected, involving sampling and lab analysis.
Ground Lease: A long-term lease where tenants lease land and develop improvements on it, common in commercial real estate.

Agency Lender: Financial institutions that originate loans backed by government-sponsored enterprises such as Fannie Mae or Freddie Mac.
CMBS (Commercial Mortgage-Backed Securities): Bonds backed by pools of commercial real estate loans, offering liquidity to lenders while providing capital to borrowers.
Hard Money Lender: A private lender providing short-term, asset-based loans with higher interest rates and flexible underwriting.

AM Best Rating: A financial strength rating system assessing the creditworthiness of insurance companies.
Securitization: The process of pooling real estate loans into investment-grade securities sold to institutional investors.
Step Down Prepayment: A structured penalty that decreases over time for early loan repayment.
Swap Rate: The fixed interest rate exchanged for a floating rate in financial agreements, commonly used in structured financings.
Tax Abatement: A temporary reduction or exemption from property taxes, often granted to encourage investment or development.