The A–Z of Commercial Real Estate Financing

A commercial loan term sheet is written in its own vocabulary. Words like “debt yield”, “cash sweep” and “bad-boy carve-out” decide how much you can borrow, what it costs to repay early and when you could become personally liable.

This glossary is for borrowers reading their first term sheet or commitment letter. Each entry gives a short, plain definition and, where we have one, a link to an article that goes further. Where Canadian and U.S. practice differ, the entry says so. It is general information; your loan documents and your lawyer have the final word.

The ratios, at a glance

The ratios lenders use to size a commercial loan

Ratio	Formula	What it tells the lender
Loan-to-value (LTV)	Loan ÷ appraised value	How much equity cushion there is if the property must be sold
Loan-to-cost (LTC)	Loan ÷ total project cost	The same idea for construction and renovation loans
Debt service coverage ratio (DSCR or DCR)	Net operating income ÷ annual loan payments	Whether the property’s income covers the payments, with room to spare
Debt yield	Net operating income ÷ loan amount	The lender’s return on the loan if it took the property, regardless of rate or amortization
Capitalization (cap) rate	Net operating income ÷ value or price	The property’s unlevered yield; used to convert income into value

A to D

• Amortization. The period over which payments would fully repay the loan. It is often longer than the term, which leaves a balance (a balloon) due at maturity. CMHC’s MLI Select allows amortizations of up to 50 years for qualifying rental projects.[1]
• Appraisal. An independent valuation of the property, ordered or approved by the lender. It sets the “V” in LTV.
• Balloon payment. The unpaid balance due at the end of the term. It is usually repaid by refinancing or selling.
• Bridge loan. Short-term financing used until permanent financing or a sale is possible. See bridge loans for commercial real estate.
• Capital stack. The layers of money in a property or project, ranked by who is repaid first: senior debt, mezzanine debt or preferred equity, then common equity.
• Carve-out (bad-boy carve-out). An exception to a non-recourse loan that makes the borrower or guarantor personally liable if specified events happen, such as fraud or a voluntary bankruptcy. Michigan’s Nonrecourse Mortgage Loan Act defines it as an exception that creates personal liability “if specified events occur.”[2] See recourse vs non-recourse loans.
• Cash management or cash sweep. A clause that diverts the property’s cash to the lender, or into a reserve, when a test such as DSCR is failed.
• CMBS. Commercial mortgage-backed securities: bonds backed by a pool of commercial mortgages. A “conduit” loan is one made to be pooled this way.
• CMHC mortgage loan insurance. In Canada, insurance from Canada Mortgage and Housing Corporation that lets approved lenders offer higher leverage and longer amortization on rental apartment buildings.[1]
• Commitment letter. The lender’s binding offer, with final terms and conditions. It follows a non-binding term sheet.
• Construction loan. A loan advanced in stages (draws) as a building goes up, usually interest-only. See funding an apartment building development.
• Covenant. A promise in the loan documents, such as keeping a minimum DSCR, insuring the property or not adding more debt.
• Defeasance. A way to release a loan, common in U.S. CMBS, by replacing the property as collateral with a portfolio of government securities that produces the remaining payments.
• Due diligence. The lender’s and buyer’s checks on the property, borrower and title. See the due diligence process.

E to M

• Environmental site assessment. A report on contamination risk. A Phase I is a desk and site review; a Phase II involves sampling. Fannie Mae requires a Phase I on its standard multifamily loans.[3]
• Equity. The owner’s money in the deal, which takes the first loss.
• Extension option. A right, usually with conditions and a fee, to extend the maturity date. Common on bridge and construction loans.
• Guarantee. A promise by a person or parent company to pay if the borrower does not. It may be full, limited, or only for carve-outs.
• Hard-money loan. A short-term loan from a private lender, based mainly on the property’s value.
• Interest-only period. Months or years during which only interest is paid.
• Interest rate benchmark. The base for a floating rate. In Canada this is often the Canadian Overnight Repo Rate Average (CORRA) or a bank’s prime rate; in the U.S., the Secured Overnight Financing Rate (SOFR).[4][5]
• Lender fee. A fee charged by the lender, often a percentage of the loan, paid at commitment or funding.
• Letter of interest or intent (LOI). An early, non-binding outline of terms.
• Maturity. The date the loan must be repaid in full.
• Mezzanine loan. A loan that sits behind the first mortgage, often secured by the shares of the borrowing company rather than the property.
• Mortgage investment corporation (MIC). In Canada, a lending corporation that meets the tests in section 130.1 of the Income Tax Act and can deduct the dividends it pays to shareholders.[6]

N to R

• Net operating income (NOI). Rental and other income, minus vacancy and operating expenses, before debt payments and income tax.
• Non-recourse loan. A loan where the lender’s recovery is limited to the property and other collateral, apart from carve-outs. Fannie Mae offers non-recourse execution on most loans over $750,000.[3]
• Open and closed mortgages. An open mortgage can be repaid at any time without penalty; a closed one cannot, or only with a penalty.
• Prepayment penalty. The cost of repaying early. In Canada, section 10 of the Interest Act limits the penalty after five years on mortgages longer than five years to three months’ interest, but it does not apply to mortgages given by corporations.[7]
• Recourse. The lender’s right to pursue the borrower or guarantor personally for any shortfall.
• Refinancing. Replacing an existing loan with a new one. See refinancing a commercial property.
• Rent roll. A list of units or tenants, with rents, lease dates and deposits. The starting point for underwriting.
• Replacement reserve. Money set aside, often monthly, for future capital repairs such as roofs and boilers.

S to Z

• Seller financing (vendor take-back). A loan from the seller to the buyer for part of the price. See seller financing.
• Single-purpose entity (SPE). A company that owns only the financed property, so its finances are not mixed with other businesses. Many permanent lenders require one.
• Stabilized. A property at normal, sustainable occupancy and income. Fannie Mae, for example, typically requires 90% occupancy for 90 days before funding.[3]
• Supervisory LTV limits. In the U.S., the maximum LTVs regulators expect banks to follow: 65% for raw land, 75% for land development, 80% for commercial and multifamily construction and 85% for improved property.[8]
• Syndicated loan. One loan funded by several lenders and run by an agent. See commercial mortgage options.
• Term. The length of the loan agreement, after which the balance is due.
• Term sheet. A summary of proposed terms. Usually not binding, except for clauses on deposits, costs and confidentiality.
• Underwriting. The lender’s analysis of the property, borrower and loan before committing.
• Yield maintenance. A prepayment charge that compensates the lender for the interest it loses when a fixed-rate loan is repaid early, usually by comparing the loan rate with current government bond yields. Fannie Mae fixed-rate loans can be prepaid on payment of yield maintenance.[3]

Sources

1. MLI Select — Canada Mortgage and Housing Corporation. Checked 2026-10-12.
2. Nonrecourse Mortgage Loan Act (Excerpt), Act 67 of 2012, MCL 445.1592: Definitions — Michigan Legislature. Checked 2026-10-12.
3. Multifamily Term Sheet: Conventional Properties — Fannie Mae, 2026. Checked 2026-10-12.
4. Canadian Overnight Repo Rate Average — Bank of Canada. Checked 2026-10-12.
5. Secured Overnight Financing Rate Data — Federal Reserve Bank of New York. Checked 2026-10-12.
6. Income Tax Act, section 130.1 (mortgage investment corporations) — Justice Laws Website, Government of Canada. Checked 2026-10-12.
7. Interest Act (R.S.C., 1985, c. I-15), section 10 — Justice Laws Website, Government of Canada. Checked 2026-10-12.
8. Interagency Guidelines for Real Estate Lending Policies (12 CFR Appendix C to Subpart K of Part 208) — Legal Information Institute, Cornell Law School (text of the U.S. regulation). Checked 2026-10-12.