Commercial Mortgage Glossary

Below is our commercial mortgage glossary terms and definitions to help educate your commercial mortgage vocabulary and understanding.


Absorption Rate: The rate (speed) at which vacant space is either leased or sold to users in the market place. This rate is usually expressed in square feet per year or in units per year with regard to Multi-family.
Acquisition and Development Loan (A&D Loan): A loan for the purchase and preparation of raw land for development. Usually a construction loan or land sale is the source of payment.
Adjustable Rate Mortgage (ARM): A type of real estate loan where the interest rate, terms or both can change. This type of loan causes the borrower to absorb the uncertainty of changes in the market place during the life of the loan. Also called a variable rate mortgage.
Amortization : The repayment of a mortgage debt of a period of time in a series of periodic installments. Each payment consists of principle and interest payments. This is the payback of the principle portion of the loan owed to the lender.
Anchor Tenant : A well known commercial retail business such as a national chain store or regional department store, strategically placed in a shopping center so as to generate the most customers for all of the stores located in the shopping center.
Anchored Center : A shopping center with an anchor tenant.
Annual Loan Constant : The ratio of annual debt payment on a loan to the original amount borrowed. The loan constant is also referred to as the mortgage constant.
Arbitrage : The simultaneous buying and selling of any securities, including mortgages, mortgage backed securities, or future contracts in different market places, for the purpose of realizing profit from different prices.
Attornment : A tenants formal to be tenant of the new landlord.
Average Daily Rate : The average rate charged by a hotel for one room for one day; calculated by dividing the total room revenue by the actual rooms occupied.
Average Life : a way to look at the term of a  loan or bond that accounts for principle paydowns. If a loan is interest with a full balloon the average life would equal the maturity. If there is amortization, principle is being paid off over the life of the loan, decreasing the balloon payment and the average life. This number is then used to find the treasury that the closest remaining term, without going over.



Basis Points : One-one hundredth of 1 percent. Used to describe changes in yield or price on mortgages or mortgage securities.
Bridge Loan : A loan which enables a borrower to purchase property then allows time for the buyer to rehab or increase the NOI prior to placement of permanent long term financing. Also enables a buyer to get financing to make a down payment and pay closing costs before selling the present property. also called a gap loan.


Cap Expenditure : A major improvement that will have a life of more than one year. Capital expenditures are generally depreciated over their useful life, as distinguished from operational repairs, which are subtracted from income during the year in which they were expended.
Capitalization : The conversion of a future net income into a present value by using a specified desired rate of earnings as a desired discount rate. This capitalization rate is divided into the expended periodic income to derive a capital value for the expected income.
Capitalization Rate : The rate of return on net income considered acceptable for an investor. A rate of return used to derive the capital value of an income stream. The formula is Value= annual income divided by the capitalization rate also called cap rate.
Carve Outs : Specific items the lender will require the borrower to guarantee for the life of the loan. Typically include but not limited to environmental, fraud, misappropriation of funds, and theft.
Closing Costs : Various fees and expenses paid by the buyer and seller at the time of a real estate closing. Also termed transaction costs. Includes brokerage fees, lender fees, title insurance, recording fees, prepayment penalties, inspection, and appraisal fees, and attorneys fees.
Commercial Bank : A financial institution authorized to provide a variety of financial services, including consumer and business loans (generally short term with full recourse to the borrower.) Commercial banks may be members of the Federal Reserve System.
Commitment Fee : A charge required by the lender to lock in specific terms on a loan at the time of commitment.
Commitment Letter : An official notification from a lender to a Borrower indicating that the borrowers loan has been approved. It will state in detail the terms and conditions of the loans.
Common Area Maintenance : Operational expenses related to the maintenance of retail and office properties. Under a  triple net lease the tenant is required to reimburse the landlord for their proportionate amount of this expense. (Based on square footage)
Conduit : An entity which issues mortgaged-backed securities backed by mortgagees which were originated by other lenders.
Constant : Percentage of original loan paid in equal annual payments that provides principal reduction and interest payments over the life of the loan.
Construction Loan : A short term, interim loan for financing the cost of construction. The lender advances funds to the borrower at periodic intervals as work progresses. Typically a recourse loan to the borrower.
Consumer Price Index : The most widely know measures of price levels and inflation that are reported to the US government. It measures and compares on a monthly basis, the total cost of a statistically determined “typical market basket” of goods and services consumed by US households.
Correspondent : A specialized type of mortgage banker whose function is the origination of mortgage loans which are sold to other mortgage bankers or investment bankers under a specific commitment.
Cost Approach : A method of appraising property based on depreciated reproduction or replacement cost (new) of improvements, plus the market value of the site.
Credit Rating : An evaluation of a persons history of debt repayment. Generally available for individuals from a local retail credit association.
Cross-Collateralization : Net income short falls from one property are offset by the excess cash flow from other properties in a pool of crossed loans. Significantly enhances a transaction from the view point of investors and rating agencies.
Current Yield : A measurement of investment returns based on the percentage relationship of annual cash income to investment cost.


Debenture Bond : A long term bond or note used by governments and corporations and not secured by a mortgage or lien a any specific property. Since there is no specific property the ability to repay the debt is based solely on the financial strength of the issuer.
Debt Service Coverage Ratio : (DSCR) The relationship between the annual net operating income of a property and the annual debt service of the mortgage loan or property. Both lenders and investors calculate this ratio to determine the likelihood of the property to generate enough income to repay the loan. From the lenders point of view the higher the ratio the better.
Debt Service : The periodic payment (monthly, quarterly, annually) of principle and interest payments on a loan which is being amortized over a long period of time usually 25-30 years.
Deed of Trust : The deed to real property which serves the same purpose as a mortgage, but instead of two parties being involved there are three. The third party holds the title for the lender. The lender is called the  beneficiary. The borrower is called the trustee. When a loan is made, the borrower conveys title a third party who holds the title for the benefit of the lender although the instrument may remain with the lender.
Defeasance : the lender replaces the cash flow of the original loan with actual treasury securities. The borrower repays the lender enough money to buy these securities and the lender buys a combination of bonds to replace the yield lost when a loan is paid off. Once these bonds are purchased the lender releases their collateral in the property.
Discount Rate : The rate of interest charged to banks who buy money from the Federal Reserve System. An increase in the rate not only discourages the banks from borrowing, but it also serves as a warning that rates may be going up. Also a compound interest rate used to convert expected future income into present value income.


Effective Gross Income : (EGI) Term used for an income producing property, derived from the potential gross income less a vacancy factor and a collection loss amount.
Equity Participation : The right of a lender to a share inn the gross profit, net profit, or net proceeds in the event of sale or refinance of a property the lender has made a loan on.
Estoppels Certificate : A document by which a tenant certifies to a lender that all rental amounts due and owing are current, and that the landlord is in compliance with all terms and conditions of the leases. Also a document by which the borrower certifies the mortgage is a lien for the amount stated. The debtor is thereafter prevented from claiming the balance due differs from the amount stated.
Expense Ratio : A comparison of the operating expenses to potential gross income. This ratio can be compared over time with that of other properties to determine the relative operating efficiency of the property considered.


Fair Market Value : (FMV) An economic concept designating the price a willing seller and buyer will agree on when both parties are acting prudently, knowledgably and under no compulsion to sell or buy.
First Mortgage : a lien on a property  which the lender claims is superior to any claims of any subsequent lenders.
Fixed Expenses : Expenses such as property taxes, insurance, and,  license fees that are not directly affected by the occupancy of the property. Fixed expenses along with operating expenses are subtracted from the gross income to determine the net operating income of the property.
Forward Commitment : An agreement between a permanent lender and an interim lender wherein the permanent lender issues a conditional commitment to replace the construction loan once a given set of terms has been met.
Fully Amortized Loan : A loan that is fully repaid at maturity by periodic (monthly) reductions of the principle.


Gross Lease : A lease of a commercial property where the landlord is responsible or paying all the expenses on the property taxes , utilities, insurance and repairs.


Hedging : The purchase or sale of mortgage future contracts by a mortgage bankers or lenders for the purpose of protecting cash transactions made at a later date.


Income Approach : A method of appraising property based on the properties anticipated future income. Once net income is established, it is then divided by the estimated capitalization rate to arrive at a fair market value.
Interim Financing : A loan , including construction, used when the property owner is unable or unwilling to arrange permanent financing. Generally arranged for less than three years, used to gain time for operations market conditions to improve.
Index : A published interest rate, such as prime rate, LIBOR, or the T-bill. Lenders use indexes to establish interest rates or compare investment returns.
Ingress and Egress : Applied to easements, meaning to right to go in and out over a piece of property, but not to park on it.
Internal Rate of Return : (IRR) The true rate of earnings on an investment. Equates the value of cash invested with cash returns. Considers the application of compound interest factors. Requires a trial and error method for solution.


Joint Venture : (JV) An agreement by two or more individuals or entities to engage in a single project or undertaking. Joint ventures are used in real estate development as a means of raising capital and spreading risk. Joint ventures are similar to partnerships, however once the purpose of the joint venture is accomplished the partnership ceases to exist.


Land Acquisition Loan : A loan made for purchasing land only not improvements on or to land. Also called an acquisition loan.
Lease Abstract : A detailed recap of office and retail leases including tenant name, unit#, square footage, current rent rate including increases, start date, term.
Lessee : An individual who rents property to another under a lease. Landlord
Lessor : An individual who rents property from another person under a lease. Tenant
Letter of Credit : An arrangement with specified conditions, whereby a bank agrees to substitute its credit for a customers.
Leveraged Buy-out : The acquisition of a company with primarily borrowed money, using the acquired companies assets to collateralize the loan.
LIBOR : (London Interbank Offered Rate) The rate that international banks dealing in Eurodollars charge each other for large loans. Some domestic lenders use this rate as an index for adjustable rate mortgages.
Limited Partnership : Arrangement in which at least one partners liability extends beyond monetary investment and one partner is passive and limits liability to the amount invested.
Loan Application Fee : A charge required by a lender or loan originator to be paid by the borrower to cover the credit report, property appraisal, and other Third party expenses associated with the underwriting process. This fee is usually not refundable.
Lock-box : Rental income is delivered to a trustee (or servicer), who then pays expenses and the loan payment before excess cash is released to the borrower.
Locked-in Interest Rate : The rate promised by the lender at the time of application or commitment. On income property loans a rate lock usually requires a lock fee or commitment fee.


Member, Appraisal Institute : (MAI) appraisal report, demonstrative narrative report of a specific markets economic condition and an assessment of property value performed by a member of the American Institute of Real Estate Appraisers.
Management Fee : The amount charged by an independent company for the day to day management of a property. Typically based upon a percentage of the properties income.
Market Approach : A method of appraising property by analyzing sale prices of similar properties recently sold.
Market and Feasibility Study : A detailed analysis of activities in a market in regard to such influences as location, demand and competition which may or may not affect the value of the property. Includes an analysis of a real estate project to determine the best use and the likelihood of of the proposed use being a financial success.
Market Rent : The rental income a property is likely to command under the current market conditions. Also referred to as economic rent, may be higher or lower than what the property is actually leased for.
Mixed Use Commercial Project : a real estate development that contains two or more different uses all intended to be complimentary to each other.
Mortgage-Backed Securities : Securities purchased by investors secured by mortgages. Also know as pass through securities since the debt service paid by the borrower is passed through to to purchaser.
Mortgage Banker : A financial middleman who, in addition to bringing borrowers and lenders together, makes loans, packages them, and sells the packaged loans to both primary and secondary investors. Also may service the loan after it has been sold for a percentage of the balance paid to the investor.
Mortgage Broker : A person who brings the borrowers and lenders together and in return is paid a fee for doing so. Some lenders do not deal directly with borrowers, they only go through mortgage brokers.
Mortgage Constant : The relationship annual mortgage requirements and the initial mortgage loan principal, expressed as a decimal or percentage, for level payment mortgage loans. Used for converting debt service into mortgage loan value.
Mortgage Correspondent : A person authorized to represent a financial institution in a particular area for the purpose of placing loans.
Mortgage Securities Pool : A method by which securities backed by the value of specific real estate mortgages are issued in the financial market for investment purposes. Because they are mortgage backed they are more marketable and generally are issued with a lower rate of interest than if no such backing existed.


Net Leaseable Area : the area that may be rented to tenants or the amount of floor space that rents are based on.
Net Lease : A lease which states that in addition to the rent, the tenant pays such expenses as taxes, insurance, and maintenance. The landlord’s rent is therefore “net” of those expenses.
Net Operating Income : (NOI) Income from a property after all expenses and reserves have been deducted, except for income taxes, and financing expenses. (interest and principal payments)
Nonconforming use : A use that violates zoning regulations or codes, but is allowed to continue because it began before the zoning restrictions were enacted.
Non-recourse Loan : No personal liability to the borrower. Upon default, a lender may take the property pledged as collateral to satisfy the debt, but have no recourse to other assets of the borrower.


Occupancy Rate : The ratio of space rented to the total amount of rentable space.
Operating Expenses : Periodic expenses (usually monthly) of operating income producing property, other than debt service and income taxes. Operating expenses are directly related to the occupancy of the building. They include management fees, maintenance, utilities, supplies, and other such costs.
Operations and Maintenance Plan : (O&M) A written plan describing the removal of potentially dangerous environmentally sensitive materials.
Origination Fee : Amount charged by a lender to cover the time and expense of arranging a loan.


Permanent Financing : A loan which takes effect after construction, or development, which replaces construction financing. Usually long term financing.
Phase I Environmental Report : A report required by most lenders which details the current environmental state of the property. Typically requires a review of the properties previous uses.
Physical Condition Report : A report required by most lenders describing the current physical condition of the property. Typically includes specific items which require maintenance or repair.
Potential Gross Income : The amount of income a property could possibly generate assuming there are no vacancies or collection losses.
Prime Rate : The lowest commercial interest rate charged by banks an short term loans to their most credit worthy borrowers.
Pro-Forma : A financial or accounting statement using estimates and assumptions to project income and the performance of a property over a period of time.
Principal and Interest Payments : A periodic payment, usually monthly, that includes the interest amount charged as well as the amount applied to amortization of the principal balance.


Quitclaim Deed : A form which conveys only the present interest a person has in a property with out making representations or warranties of title. Such a deed is useful in clearing up doubtful claims or possible disputes.


Real Estate : Land and everything more or lees attached to it
Real Estate Investment Trust : (REIT) A real estate mutual fund, established by income tax laws to avoid the corporate income tax. It sells shares of ownership and must invest in real estate or mortgages.
Real Estate Market : The potential buyers and sellers of real property at the current time. It includes markets for various property types, such as office market, housing markets, land market, and condo market.
Recourse : The ability of a lender to foreclose on a property and seek other assest of the borrower to satisfy the debt.
Rehabilitation Tax Credit : The Tax Reform Act of 1986 provides a 20% tax credit for rehabilitating certified historical structures, and a 10% credit for other structures placed in service after 1936.
Replacement Reserve : Various account maintained by the lender to provide funds for anticipated expenditures required to maintain a building. A reserve account is usually required to escrow for taxes and insurance. A replacement reserve may be required to provide funds for short lived components.
REVPAR : Revenue per Room: Calculation used in hotels where the gross income is divided by the total number of rooms rented or not rented.


Sales Comparison Approach : A method of estimating value of real property by comparing recent sales of comparable properties to the subject property after making adjustments for differences. The comparable properties should be substantially similar to the subject and should be arms length transactions.
Secondary Mortgage Market : The means by which existing first mortgages are bought and sold. The secondary market allows the lender to sell a loan before its maturity date, thereby providing more funds to loan.
Self Amortizing Loan : A mortgage that requires level payment to meet the interest and principal requirements to fully repay the debt over the full term.
Servicing Fee : The payment made by the borrower to the lender who originally made the loan for servicing the loan. Usually one-eighth to one-half percent of the outstanding loan balance.
Spread : The difference between the rate at which money can be borrowed and the rate at which it is loaned. Typically the percentage the lender adds to the Treasury bill when quoting a rate to a borrower.
Stabilized : A term used to describe a property here the income and expenses have remained consistent. Typically for a minimum of 90 days.
Subordinated Ground Lease : A land lease where the rent payment is subordinated to the debt service.
Survey : The process by which the precise boundaries of a parcel are measured. When land is sold a survey conveys a visual representation of the legal description.


Take out Commitment : A written agreement by a lender to provide permanent long term financing following construction of a planned project. Typically provides specific conditions for occupancy and income.
Tax and Insurance Escrow : An account required by some lenders to hold funds for property taxes and insurance. Paid in monthly increments by the borrower.
Tenant Improvement Escrow : An account set up by the lender for estimated funds need to  improvement of retail or office space.
Third Party Reports : Reports required by a lender prior to closing which normally include MAI appraisal, Phase I environmental, Physical condition reports.
Title Insurance : An  insurance policy the protects the holder form loss due to defects in the title.
Triple Net Lease : A commercial lease in which the tenant is required to pay all the expenses of the property and the landlord receives a net rent amount each month.
Trust Deed : A conveyance of real estate to a third party to be held for another.


Underwriter : An employee of a mortgage lender who reviews a loan package, and verifies all the information is accurate and makes a recommendation to a loan committee regarding the risk and desirability of the loan.
Underwriting Criteria : The analysis of the risk involved with in making a mortgage loan to determine whether the risk is acceptable to the lender. Underwriting involves the evaluation of the appraisal, and the borrowers ability and willingness to repay the loan.
U.S. Treasuries : Only treasuries with original terms of 30 years are bonds.2-10 year treasuries are notes, and anything less are bills.


Vacancy Rate : The percentage of units or space that is unoccupied, or from which there is no rental income generated.


Warehousing : The process by which a lender assembles mortgages the have made and prepares them to be sold.
Wraparound Mortgage : A method of acquiring additional financing on real estate by placing additional funds in a junior or subordinate position to the existing debt.


Yield Maintenance : The prepayment premium which will equal the present day value of any costs the to the lender resulting from the difference in interest rates between the date of the note and the date on which the prepayment was made. In layman’s terms, the borrower must pay the lender enough cash to replace the loans future cash flows using  Treasury Securities.


Zoning Ordinance : The act of city, county or other authorities specifying the type of use property may be put to in specific areas.