Commercial Real Estate Glossary

Defined the way they are used in underwriting rather than the way a dictionary would put it, because the distinctions that cause arguments — amortization against term, gross against effective income, going-in against exit — are exactly the ones a short definition tends to flatten.

Amortization: The schedule on which a loan is repaid, and the basis on which its payment is calculated. Distinct from the term: a ten-year term on a twenty-five year amortization is ordinary in commercial lending, and means the payment is sized as though the loan ran twenty-five years while the balance falls due after ten.
Balloon payment: The balance outstanding when a loan term ends before its amortization does. It is not a penalty or a surprise — it is the arithmetic consequence of paying a twenty-five year payment for ten years — but it is frequently large, and refinancing it is the single biggest risk in a short-term commercial loan.
Basis point also: bp, bps: One hundredth of a percentage point. A quarter-point move in a cap rate or an interest rate is twenty-five basis points, and that is the increment markets actually trade in. Worth knowing because a "25 bp" move sounds negligible and, on a low cap rate, is not.
Break-even occupancy: The occupancy at which a property exactly covers its operating expenses, reserves and debt service, with nothing left over. Take those three, divide by gross scheduled income, and that is the point where cash flow reaches zero. A break-even in the low seventies can absorb a lost tenant; one in the low nineties cannot.
Capitalization rate also: cap rate: Net operating income divided by price, as a percentage — the yield a property would return if bought outright with no mortgage. It is a price, not a forecast: a lower cap rate means the asset is more expensive per dollar of income. Because value is income divided by the cap rate, small movements matter more the lower the rate already is.
Cash-on-cash return: Annual before-tax cash flow divided by the cash actually invested — down payment plus closing costs. It counts only spendable cash, which is why it is usually lower than total return: principal paydown is real return but is equity, not income, and cannot be spent without refinancing or selling.
Debt service coverage ratio also: DSCR: Net operating income divided by annual debt service. At 1.25x the property earns $1.25 for every dollar of mortgage payment. Most commercial lenders require between 1.20x and 1.35x depending on asset class and tenancy. Below 1.00x the property does not cover its own debt.
Debt yield: NOI divided by the loan amount — the return a lender would earn if it foreclosed and owned the asset outright. Unlike loan-to-value it does not depend on an appraisal, and unlike coverage it does not depend on the rate or amortization, so no financing structure can flatter it. Floors around 9 to 10% are common, and it became standard after 2008 for exactly that reason.
Effective gross income also: EGI: Gross scheduled income less vacancy and credit loss. The step between what a fully let building would bill and what it realistically collects. Underwriting to gross rent assumes every unit is let every day, which no asset achieves and no lender accepts.
Going-in cap rate: The capitalization rate implied by the price you are paying and the income at acquisition. Distinguished from the exit cap rate used to estimate a sale price, which is conventionally 25 to 50 basis points higher because the asset is older at sale. A model using the same rate at both ends is quietly assuming the market stays still.
Gross rent multiplier also: GRM: Price divided by gross scheduled income. Quick and comparable across listings, but blind to how expensive a building is to run — two assets with the same GRM can have very different net income. Screen on it; do not underwrite on it.
Interest-only: A payment covering interest and no principal. Debt service is lower, so the same income supports a larger loan at the same coverage ratio — which is precisely why it is offered. The trade is that no equity is built and the full original balance falls due at maturity.
Loan constant also: mortgage constant: Annual debt service divided by the loan amount. It converts a rate and an amortization into a single number you can compare directly against a cap rate: when the cap rate exceeds the loan constant the leverage is positive, and when it does not, borrowing reduces your return.
Loan-to-value also: LTV: The loan as a percentage of value, where lenders use the lesser of purchase price and appraisal. Its complement is the down payment. A term sheet quoting 70% LTV is quoting a maximum, not a promise — the coverage test runs alongside it and the lender advances the lesser result.
Negative amortization: What happens when a payment is smaller than the interest accruing on the balance: the shortfall is added to principal and the loan grows. It is why a payment below one period’s interest has no amortization period at all — there is no number of payments that retires the debt.
Net income multiplier: Price divided by NOI — the exact reciprocal of the cap rate. A 7.00% cap rate is a 14.29x multiplier. The same fact stated two ways; cap rates read as a yield and compare against borrowing costs, multiples read more naturally as what buyers are paying for income.
Net operating income also: NOI: Effective gross income less operating expenses and replacement reserves, before debt service and before tax. The figure every commercial valuation and every loan sizing rests on, and the figure most disagreements are actually about — two parties quoting different cap rates on the same building usually differ on NOI, not on the rate.
Operating expenses: Everything the property costs to run before debt service: taxes, insurance, utilities, management, repairs, maintenance and administration. Debt service is not an operating expense, and neither are capital improvements — those are separate lines below NOI.
PITI: Principal, interest, taxes and insurance — the full monthly housing payment where taxes and insurance are escrowed with the lender. Only principal and interest amortize the loan; the escrow portion changes independently of the rate and term, which is why loan mathematics is done on P&I alone.
Replacement reserves also: capital reserves: An annual set-aside for roof, parking, HVAC and other capital items. A real annual cost even in years nothing is spent, and deducted before NOI by any lender. Omitting it overstates NOI and therefore overstates borrowing capacity by roughly the omission divided by the loan constant.
Stub period: A first interest period shorter or longer than a full month, arising when a loan funds mid-month. Interest accrues for the actual days between funding and the first payment date, which is why a first payment often differs from every payment after it.
Vacancy and credit loss: The allowance deducted from gross scheduled income for units that sit empty and rent that is never collected. Five percent is a common starting assumption; the right figure depends on the market and the asset. It comes off before operating expenses, not after.
30/360 and actual/360: Day-count conventions. 30/360 treats every month as thirty days and every year as three hundred and sixty, which is what payment quotes assume. Actual/360 charges a full year’s rate over the actual 365 or 366 days, so it accrues more interest on the same balance and rate — a difference that is small per month and material over a term.