Commercial Mortgage Cheat Sheet

Tim Milazzo
February 18, 2020
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We decided to put together a cheat-sheet of commercial mortgage and finance terms for the benefit of commercial property owners. Here you’ll find a layman’s explanation of most of the industry lingo you’ll encounter when financing a commercial property.

No judgment here — feel free to ctrl+F for that term you keep hearing but don’t fully understand yet. Save this page on your browser’s shortcuts if you need to, it’s not going anywhere.

The Glossary

Agency Debt

Loans secured by a government-sponsored entity like Fannie Mae, Freddie Mac, or HUD/FHA.


The amount of time it would take to pay down the full principal of the loan. The loan may come do earlier than that (see Loan Term), and you can also get a non-amortizing loan (see Interest Only).


An official, third-party assessment of the value of a property. An appraiser will typically be commissioned by a lender to determine the value of the property, which will usually help determine loan proceeds.

B-piece Buyer

In CMBS transactions, a bond buyer who takes the riskiest, highest-yielding tranche of bonds within a given pool. Named for the bond credit rating at the bottom of the spectrum.

Balloon Payment

You won’t find this on a loan term sheet, as it’s not an official term. This is a colloquial term defined as the amount of principal you still owe on a loan when the Loan Term expires. Example: If your Loan Term is 10 years and your Amortization is 30 years, you’ll owe 20 years of principal back after the 10 year Term expires.

Basis Points

1 Basis Point = 0.01%. The short-hand for Basis Points is bps. So 10 Basis Point would be written as “10 bps”. You can also just call them “bips” verbally.

Broad Treasury Financing Rate (BTFR)

This is a previous name for the financial index now known as the Secured Overnight Financing Rate (SOFR).

Cap Rate

Net Operating Income / Valuation. A measure of how expensive a property is in relation to the cash flow it produces. The lower the Cap Rate, the more expensive the property compared to income.

Capital Expenditures (CapEx)

CapEx is capital you spend to improve a property in some way. It can be structural, like a new deck, or as simple as new windows or paint. Any money you’re putting to a property to make it more physically valuable counts.

Cash Sweep

Automatic, daily withdrawals from an operating account to make payments toward your loan. This is something that you’ll typically only see triggered if your loan is in default or sinks below a stipulated metric (like DSCR).

Commercial Mortgage Backed Securities (CMBS)

Trade-able bonds resulting from the securitization of commercial real estate loans. Learn more »


The asset being lent against. Typically the property and either the land under it, or a leasehold on the land. The lender gets this if the loan defaults.

Debt Service Coverage Ratio (DSCR)

Net Operating Income / Debt Service. A measure of how well a property’s income allows the borrower to safely make loan payments without defaulting.


The process of paying off bond holders to satisfy a securitized mortgage before maturity. This term is specific to CMBS loans that have been sliced up into bonds. Defeasance is typically an expensive way to pay off a loan.

Due Diligence

The process of verifying the value and quality of an asset or deal. There are many steps included in Due Diligence, and lenders typically have a master checklist that they use to guide each transaction. Some of these steps are run through third parties, like an Appraisal or Environmental report, while others are internal steps analyzing information received.

Effective Rate

The actual interest rate charged over a calendar year after taking different calculation methods into account. This is something we automatically calculate for users of the StackSource platform.

Equity Multiple

The sum of all net cash flows plus exit proceeds divided by initial equity. This is a common measure of the real or expected amount of equity gained over the lifetime of a real estate investment. Equity multiples are expressed in ratio form. Ex. “2x” means equity is doubling.

Fannie Mae

Formal name “ The Federal National Mortgage Association”, Fannie Mae provides, guarantees, and securitizes mortgages for both residential and multifamily real estate. As it relates to commercial multifamily financing, Fannie Mae is a competitive non-recourse loan option. Learn more »

Federal Funds Rate

A centrally-controlled interest rate index set by the Federal Reserve Bank in the US based on their mandate to maximize employment and minimize inflation.

Federal Reserve Board - Open Market Operations

The Federal Reserve Board of Governors in Washington DC.

Freddie Mac

Formally “ Federal Home Loan Mortgage Corporation”, Freddie Mac is another government-sponsored entity (GSE) that provides mortgages for residential and commercial real estate. On the commercial side, Freddie’s programs are similar to Fannie’s at a high level: competitive non-recourse financing for multifamily. Learn more »

Furniture, Fixtures, & Equipment (FF&E)

A budget line for real estate that represents hard assets that are not built into the physical structure of a building. A couch or grill is a hard asset that can depreciate, and it’s a feature that adds value to the property, but it’s not a capital improvement to the actual building. Hotels and other furnished spaces usually set aside a percentage of their budget for FF&E.

Insurance Requirement

Bad things can happen to commercial properties. Fire. Earthquake. Flood. You don’t need Captain Planet, you need insurance. Your lender will require certain types and coverage amounts in your property insurance, which will certainly be outlined in your loan documents, and potentially up front on the Term Sheet.

Interest Rate

You must know this one already, right?

Interest Rate Floor

A minimum interest rate applied on a floating rate loan. It only affects a loan if the floating interest rate drops below the Floor.

Internal Rate of Return (IRR)

A common measurement of investment return that respects the time value of money. The formula for IRR is a bit complex, and if you’re not familiar with the concept of a Net Present Value or the Time Value of Money (financial topics covered by most business majors in college), you’ll want to start by reading up on those.


LIBOR stands for the London Interbank Offered Rate. It’s a very common interest rate index used to set bridge financing rates, though it has a controversial history and is going away after 2021. As of early 2020, it’s still being used by many lenders, even if it won’t be around at the end of the loans they are quoting.

Leasing Commissions (LC)

A budgeted item on a pro forma to pay brokers for successfully bringing tenants in to a building. The commission will vary based on asset type, location, and deal structure. Speaking to a knowledgeable leasing broker for your particular asset type will be the fastest way to understand what should be budgeted for your project.

Loan Term

The amount of time that money is scheduled to be borrowed, before being owed back in full. The loan term in commercial real estate is typically shorter than the Amortization, meaning there is a “balloon” payment owed when the loan comes due.

Loan-to-Value (LTV)

The ratio of a loan’s principal and the property’s value. Example: If an investor is seeking a $3,000,000 loan collateralized by a $4,000,000 property, then the LTV is 75%.


A mechanism for a lender to collect property income directly. This is used under certain circumstances when the risk of loan default is higher.

Lockout Prepayment Penalty

This is a period during which you are not allowed to pay off your loan. A true lockout is rare — more common is a minimum interest stipulation.

Net Operating Income (NOI)

The sum of all revenues generated by an asset minus the sum of all operating expenses over the same period. Operating expenses do not include financing (loan payments) or capital expenditures. Learn more »


The borrower is not personally liable for the loan amount. The lender gets the Collateral and nothing else upon default, unless the borrower did something illegal.

Phase 1 Environmental Report

A standard, third-party review of a property’s environmental safety. This report will reveal if there are any issues with the soil that must be investigated in order for a loan to be put in place.

Phase 2 Environmental Report

A more detailed, rigorous review of the land and soil belonging to a subject property. A Phase 2 is only triggered if cause for concern is found on a Phase 1. The Phase 2 will define environmental issues that must be remediated to clear the way for lending, construction, or occupancy.

Prepayment Penalty

A fee assessed if a loan is paid back before maturity. Lenders often put these in place to assure they make a return on their capital, which they’ve budgeted to stay out and make that return. There are several types of prepayment penalties, including Yield Maintenance, Stepdown (also known as Declining), Defeasance, and Lockout.

Prime Rate

The prime rate is pegged to the Federal Funds Rate, and represents the interest rate that is charged to the most credit-worthy corporations for an unsecured loan.


The total amount borrowed and outstanding (owed back) on a loan.


The borrower is personally liable for the loan amount upon default, and after the value of the Collateral is taken. Learn more »

Reporting Requirement

As part of the loan servicing process, lenders need to check in on their investment. That means gathering financial statements on the properties, and potentially on the borrower as well, on an ongoing basis. Report requirements will be outlined in the loan documents. Expect lenders, especially regulated financial institutions like banks, to require audited financial statements at least annually.


An amount of capital that a lender will “hold back” for a specific purpose. The capital counts as part of the loan amount, but it cannot be withdrawn by the borrower. Common reasons for Reserves would be for Capital Expenditures (the borrower can withdraw the funds after completing them), Tenant Improvements, or Leasing Commissions. Lenders may even hold a reserve for their own interest payments. The lender holds the funds to make sure they’ll be available for the purpose intended, rather than in the borrower’s pocket (to the detriment of the collateral’s value).

Schedule of Real Estate Owned (SREO)

A structured list of all the properties that an investor owns. We wrote a full blog post about this here:

Schedule of Real Estate Owned

Why it’s important and how to build one

Secured Overnight Financing Rate (SOFR)

A likely replacement for LIBOR, which is dying an exceedingly slow but certain death as an interest rate index. SOFR technically measures overnight trading of Treasury bonds. Read more:

Secured Overnight Financing Rate - Federal Reserve Bank of New York

The Secured Overnight Financing Rate (SOFR) is a broad measure of the cost of borrowing cash overnight collateralized…


The process of taking a loan, or a pool of loans, and slicing them up into bonds that investors can buy. This takes place in CMBS and with most agency (Fannie/Freddie) loans.


A company that administrates existing loans. A “primary servicer” essentially interfaces with the borrower to make sure they are current on payments, abiding by the loan terms, and not in risk of default. Other servicer roles take over loan administration under different circumstances, like a Special Servicer guiding a loan through the default/work-out process.

In many cases, banks and other lenders service their own loans, meaning you can contact your original lender about any issues. But in other cases, like all CMBS loans, this is not the case — you’ll need to know who your Servicer is.

Stepdown Prepayment Penalty

Also known as a “declining” prepayment penalty, this penalty decreases with each subsequent year of the loan, making it less expensive to pay off your loan early over time.

Swap Rate

An initial index-based interest rate plus the corresponding Swap Spread. So “10-year UST Swaps” simply means the 10-year US Treasury Yield + 10 Year Swap Spread.

Swap Spread

The current cost to “swap” or trade a floating rate security with a fixed rate security at the same coupon, and the same maturity. Swap spreads are usually expressed as a number of Basis Points (hundredths of a percent).

Tenant Improvements (TI)

Budgeted item in a pro forma to improve the real estate for a lease to a new tenant. Landlords use these budgets to attract long-term tenants by covering their upfront cost of customizing a leased space for their operations.

Triple-Net Lease (NNN)

A lease in which the tenant is responsible for paying for the property’s maintenance, taxes, and insurance. This is usually done by reimbursing the landlord for these expenses. Read on »

Yield Maintenance

A prepayment penalty in which the borrower compensates the lender for their full expected profit on a loan, had it been held to maturity.

Want to see another term added to this list, or explained in further detail? Comment below or email

Deeper Dives

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