CRE Financing Reference
Plain-English definitions for the 67 commercial real estate financing terms borrowers, brokers, and capital partners actually encounter. LTV, LTC, DSCR, bridge, mezz, cap rate, NOI, ARV, waterfall, recourse, and the rest.
The product menu. Knowing the difference between bridge, construction, and mini-perm decides which lenders are even relevant for your deal.
Short-term financing (typically 6–24 months) used to acquire, reposition, or stabilize a commercial property before refinancing into long-term debt or selling. Higher rate, faster close, lighter doc than permanent financing.
Bridge loans →Ground-up or heavy rehab loan released in draws as construction milestones are completed. Interest-only on drawn balance during the build. Typical term 12–24 months, often refinanced into a mini-perm or permanent loan at completion.
Construction financing →Bridge-to-permanent financing covering the lease-up or stabilization period, typically 3–5 years, between construction completion and permanent debt. Lets sponsor stabilize NOI before refinancing into long-term agency or CMBS debt.
Long-term, fully amortizing or partially amortizing debt (5/7/10/30-year terms) on stabilized income-producing property. Lower rate, longer duration, heavier doc requirements than bridge or construction.
Asset-based, short-term loan from private lenders prioritizing collateral over borrower credit. Higher rates (typically 10–14%), faster close. Used when traditional financing is unavailable due to time, credit, or property condition.
Subordinate financing between senior debt and equity in the capital stack. Secured by a pledge of equity interests in the property-owning entity rather than a mortgage. Higher rate than senior; lower than equity; gives sponsor more leverage without diluting ownership.
Hybrid capital sitting above common equity but below mezz/debt in the waterfall. Receives a fixed preferred return before common equity gets paid. Common in development and value-add deals to bridge the equity gap.
First-priority lien on the property. First to get paid in foreclosure. Lowest cost of capital in the stack. Includes most bridge, construction, and permanent loans.
Any debt junior to the senior loan, mezz, second mortgage, B-piece. Higher rate to compensate for higher loss risk in default.
Long-term rental property loan qualified on the property's cash flow (Debt Service Coverage Ratio) rather than the borrower's personal income. No W-2s or tax returns required. Available 30-year fixed.
DSCR loans →Short-term (6–12 months) acquisition + renovation loan for residential or small commercial properties intended for resale. Covers purchase plus rehab, interest-only, no prepayment penalty.
Fix & flip loans →Acquisition + renovation in a single loan for value-add commercial property. Up to 90% of purchase price and 100% of rehab costs. Interest-only with rehab draws released on inspection.
Renovation loans →Investment strategy: acquire a property with bridge/rehab financing, renovate it, rent it out, then refinance into a long-term DSCR loan and pull capital out tax-free to repeat the cycle.
Loan where the borrower (or guarantors) is personally liable for the debt beyond the collateral. If the property doesn't cover the loan in foreclosure, the lender can pursue the borrower's other assets.
Loan where the lender's only remedy in default is foreclosure on the property, borrower's personal assets are protected. Standard exclusions ('bad-boy carve-outs') still apply for fraud, waste, environmental issues, and unauthorized transfers.
Single loan secured by multiple properties under one mortgage. Common for SFR portfolios and small multifamily pools. Allows release of individual properties on partial paydown.
The numbers that decide whether your deal pencils. LTV, LTC, and DSCR are the three lenders quote first, knowing them cold accelerates every conversation.
Loan amount divided by appraised property value. Used for stabilized purchases and refinances. Typical bridge max: 75–80%. Lower LTV = more borrower equity = better terms.
Loan amount divided by total project cost (purchase price + renovation/construction budget). Used for value-add and construction deals. Typical construction max: 75–85%. Renovation max: up to 90% of purchase + 100% of rehab.
Property's NOI divided by annual debt service. A DSCR of 1.25x means the property earns 25% more than the loan payment. Most lenders want minimum 1.0x–1.25x. DSCR loans qualify on this metric alone, no personal income.
NOI divided by property value. Reflects unlevered yield. Lower cap rate = higher price relative to income. Used to compare properties across markets and to estimate value from income.
Gross rental income minus operating expenses (taxes, insurance, management, repairs, utilities), excluding debt service, capex, and depreciation. The income figure lenders care about most.
Property value divided by gross annual rent (before expenses). Quick valuation screen, lower GRM is generally better. Less precise than cap rate but faster to compute.
Stabilized NOI divided by total project cost (purchase + improvements). Used by developers and value-add sponsors to assess whether the project generates enough income to justify the cost basis. Compare to market cap rate to estimate equity created.
Annualized return on equity factoring in timing of cash flows. The single number used to compare deals across hold periods and structures. Equity investors typically target 15–25%+ IRR depending on risk.
Annual cash flow after debt service divided by total equity invested. Measures actual cash yield per year. Doesn't factor in appreciation or principal paydown, just the cash you pocket.
Total cash distributed to equity divided by total cash invested. A 2.0x equity multiple means you got $2 back for every $1 invested. Pairs with IRR, high IRR + short hold can mean low multiple, vice versa.
Appraised value of a property after planned renovation or construction is complete. Lenders cap renovation and fix-and-flip loans at a percentage of ARV (typically 70–75%) to protect against renovation overruns and market shifts.
Current property value before any planned improvements. Used as the LTV base for bridge and acquisition loans on properties bought to flip or reposition.
Projected value once a property reaches market occupancy, market rents, and standard expense ratios. Drives mini-perm and permanent loan sizing on value-add deals.
How a deal is funded above the senior loan. Understanding the stack tells you who gets paid in what order, and whether your bridge loan will fund alongside other capital.
The full set of funding sources in a deal, ordered by priority. From bottom (lowest risk, lowest return) to top: senior debt, mezz, preferred equity, common equity. Each layer gets paid in order in distributions and in default.
The operator running the deal, sourcing, financing, executing, managing. Typically contributes 5–20% of equity (co-invest) and earns fees plus promote on top.
Passive equity investors. Contribute the bulk of equity, receive a preferred return, then share in upside after the preferred is paid. Limited liability and limited involvement in operations.
The order in which cash is distributed in a partnership. Typical 4-tier: (1) return of capital pro-rata, (2) preferred return (often 7–9%), (3) catch-up to GP, (4) split above hurdle (often 70/30 LP/GP). Carries get larger as hurdles are crossed.
The disproportionate share of profits the GP earns above the LP preferred return. The reward for performance, a typical promote might give the GP 30% of profits above an 8% IRR despite contributing only 10% of capital.
The GP's own equity contribution to the deal, usually 5–20%. Aligns sponsor with investors and is heavily scrutinized by LPs ('skin in the game').
The annual return LPs receive before the GP earns promote. Typically 7–9% for value-add, lower for stabilized, higher for ground-up. Can be cumulative or non-cumulative, compounded or simple.
Pledging multiple properties as collateral for a single loan, or using existing equity in one property to support a loan on another. Reduces cash equity needed but ties properties together, a default on one can affect all.
What you'll actually negotiate and sign. The fastest closings happen when borrowers know what these documents are before they hit the table.
Non-binding outline of proposed loan terms, amount, rate, fees, prepayment, recourse, covenants. Issued after preliminary review. Defines the deal before legal docs are drafted. Most negotiation happens here.
Binding commitment from the lender to fund the loan subject to remaining conditions (final appraisal, title clean, closing docs). Issued after term sheet acceptance and underwriting clearance.
Non-binding outline of deal terms used in property purchases or partnership negotiations. Establishes intent before drafting binding contracts. Speeds up the path to definitive docs.
The lender's verification phase, appraisal, environmental, title, survey, borrower financials, property financials. Typically 2–4 weeks. Where most deals slip or die.
Independent valuation of the property by a licensed appraiser, paid by the borrower but ordered by the lender. Drives final loan size on LTV-based products. Low appraisal = smaller loan or more equity.
Standard environmental review for commercial property, title history, historical use, current condition, regulatory database search. Required on most commercial deals. Issues trigger Phase II (sampling).
Insurance protecting the lender (and optionally the buyer) against defects in the property's title, undisclosed liens, claims, encroachments. One-time premium at closing. Required by virtually all lenders.
Neutral third party holding funds, documents, and instructions during closing. Distributes everything per the closing instructions once all conditions are met. Also used post-closing for tax/insurance reserves.
Fee charged if the borrower pays off the loan before a defined date. Protects lender's expected yield. Common structures: declining percentage, yield maintenance, defeasance. Bridge loans often have no penalty; permanent loans usually do.
Prepayment penalty that makes the lender whole as if the loan ran to term, the borrower pays the difference between the loan rate and current Treasury yield on the remaining balance and remaining term. Common in CMBS and permanent debt.
Loan payoff method where the borrower substitutes Treasury securities that generate cash flow matching the remaining loan payments. Removes the lien but keeps the loan on the lender's books. Standard on CMBS.
Borrower obligations written into the loan docs, minimum DSCR, occupancy thresholds, reporting requirements, reserve maintenance, restrictions on additional debt. Violating a covenant can trigger default even if payments are current.
Exceptions to non-recourse, situations where the borrower or guarantor becomes personally liable. Standard carve-outs: fraud, misrepresentation, waste, environmental violation, unauthorized transfer of the property, bankruptcy filing.
Portion of loan proceeds held back at closing to fund interest payments during construction or lease-up, when the property doesn't yet generate cash flow. Standard on most construction loans.
Construction loan funding plan, proceeds released in stages tied to completion milestones, verified by inspection or third-party engineer. Standard 5–8 draws on a typical project.
Funds the lender retains from closing or future draws to cover specific conditions, completion holdback, leasing reserve, capex reserve. Released as conditions are met.
Lender programs are organized by property type and class. Multifamily and SFR financing live in different worlds, and a Class B office is priced very differently from Class A.
Residential property with 5+ rental units. Largest, most liquid CRE asset class. Eligible for agency financing (Fannie/Freddie), banks, debt funds, and bridge lenders.
Property combining commercial (typically ground-floor retail or office) with residential above. Underwriting blends MF and commercial. Most lenders want commercial under 30–40% of total income.
Pool of single-family or 1–4 unit rental properties financed together. Typically DSCR or blanket loans, 5+ properties minimum. Allows portfolio investors to scale without 30+ individual loans.
Ground-up construction of single-family rental homes intended as a rental portfolio from day one rather than for sale. Hybrid SFR/multifamily underwriting. Fastest-growing US residential asset class.
Property at market occupancy (typically 90%+), market rents, and stabilized expenses. Eligible for permanent debt at lowest rates. The exit goal for most value-add deals.
Property requiring renovation, repositioning, lease-up, or expense reduction to reach stabilized value. Higher risk, higher return. Funded by bridge or renovation loans, exited via refinance or sale at stabilization.
Property quality grading. Class A = newest, best location, highest rents, lowest cap rates. Class B = older but well-maintained, secondary locations. Class C = older, value-add candidates, highest cap rates. Lenders price risk accordingly.
Property facing financial or physical distress, foreclosure, deferred maintenance, vacancy, expired lease. Often acquired below market by bridge-financed sponsors who reposition then refinance or sell.
The rules that decide who can lend, who needs a license, and what a loan can legally do. Business-purpose CRE financing is a different regulatory world than consumer mortgage lending.
Loan made for commercial or investment property rather than the borrower's primary residence. Falls outside consumer mortgage regulations (TILA, RESPA, ATR/QM) and has lighter disclosure but stricter underwriting on the asset.
Loans made to an LLC, LP, or corporation rather than an individual. Standard structure for CRE financing, separates property liability from sponsor's personal assets. Personal guarantees may still apply via the loan docs.
Federal-state registry for mortgage loan originators. Required for most consumer mortgage activity. Business-purpose CRE lending is largely outside the NMLS regime, though some states require licensing for broker activities on residential investment property.
Public filing under the Uniform Commercial Code securing a lender's interest in non-real-estate collateral, equipment, fixtures, rents, entity interests. Common on mezz loans (UCC on equity pledge) and construction loans (UCC on materials and equipment).
Limited personal guarantee on an otherwise non-recourse loan triggered only by specific bad acts (the bad-boy carve-outs). Industry standard on non-recourse CRE debt above $1M.
LLC governance document, defines ownership %, capital contributions, distribution waterfall, decision rights, transfer restrictions. Required by lenders before closing entity-level loans. Often amended at closing to add lender protections.
We structure CRE debt, bridge, construction, renovation, DSCR — for sponsors and brokers. $1M–$50M+ across all 50 states.