Loan Glossary

A large lump-sum payment due at the end of a loan term. Common in commercial loans, the borrower makes small payments during the term then pays the remaining balance in one large final payment.

The ratio of net operating income to property value, used to evaluate commercial real estate investments. Formula: Cap Rate = NOI ÷ Property Value.

Property used for business purposes, including office buildings, retail centers, industrial warehouses, multifamily apartment complexes (5+ units), hotels, and mixed-use properties.

NOI divided by annual debt service (loan payments). A DSCR of 1.25 means the property generates 25% more income than needed to cover the mortgage. Most commercial lenders require DSCR ≥ 1.20–1.25.

The process of thoroughly investigating a property, business, or loan before committing to a transaction. For commercial loans, this includes reviewing financials, environmental reports, leases, and physical inspections.

A short-term, asset-based loan from private investors rather than banks. Hard money loans close quickly but carry high interest rates (8%–15%) and are commonly used by real estate investors for fix-and-flip projects.

A non-binding agreement outlining the basic terms of a commercial real estate purchase or lease before formal contracts are drafted. Sets the framework for negotiation.

A condition placed on a commercial loan requiring the borrower to maintain certain financial ratios or operational standards. Violating a covenant can trigger a default even without missed payments.

A hybrid of debt and equity financing, often used in commercial real estate to fill the gap between senior debt and equity. Carries higher interest rates (10%–20%) and may convert to equity on default.

Annual income generated by an income-producing property after operating expenses but before debt service (mortgage payments) and income taxes. Key metric for commercial real estate valuation.

Property acquired by a lender through foreclosure after failing to sell at a foreclosure auction. REO properties are sold by the lender's REO department.

A recourse loan allows the lender to pursue a borrower's personal assets if the collateral is insufficient. A non-recourse loan limits the lender's recovery to the collateral only — personal assets are protected.

A commercial property that has reached its expected occupancy level (typically 90%–95%) and generates consistent, predictable income. Stabilized properties qualify for permanent financing.

A commercial property with below-market rents or high vacancy that can be improved through renovation, better management, or lease-up to increase its value and NOI.