Glossary
Capital terms in plain English.
Definitions of terms you will hear from lenders and capital partners.
- Amortization
- The schedule over which a loan's principal is repaid through regular payments. A 30 year amortization spreads repayment over 30 years even if the loan matures sooner.
- Balloon payment
- The remaining principal due at maturity when a loan's term is shorter than its amortization.
- Bridge loan
- Short term financing, usually one to three years, used until a property or business qualifies for permanent financing.
- Cap rate
- Net operating income divided by value or price. A higher cap rate means a lower value for the same income.
- Capital stack
- The layers of capital that fund a project, from senior debt with first priority to common equity with last priority.
- Cash out refinance
- A refinance for more than the existing balance, returning the difference to the owner.
- Co-GP
- A partner who invests alongside the sponsor in the general partner entity and shares in its economics and responsibilities.
- Covenant
- A condition in a loan agreement the borrower must meet, such as a minimum DSCR or liquidity requirement.
- Debt service
- The total principal and interest payments on a loan over a period, usually expressed annually.
- Debt yield
- Net operating income divided by the loan amount. Lenders use it as a sizing test that ignores rate and amortization.
- DSCR
- Debt service coverage ratio. Net operating income divided by annual debt service. A 1.25x DSCR means income covers payments 1.25 times.
- DSCR loan
- A rental property loan underwritten mainly on the property's income rather than the borrower's personal income.
- Equity multiple
- Total cash returned to an investor divided by the cash invested.
- Extension option
- A right to extend a loan's maturity, usually for a fee and subject to conditions.
- Guarantor
- A person or entity that promises to repay a loan if the borrower does not. Guarantees can be full, limited, or for specific events.
- Interest only
- A period during which payments cover interest but not principal.
- JV equity
- Capital from a joint venture partner who co-owns the project with the sponsor under negotiated terms.
- LP
- Limited partner. A passive investor whose liability is generally limited to the amount invested.
- LTC
- Loan to cost. The loan amount divided by total project cost, common in construction lending.
- LTV
- Loan to value. The loan amount divided by the appraised value or purchase price.
- Maturity
- The date a loan's remaining balance is due.
- Mezzanine debt
- Debt that sits behind senior debt, usually secured by a pledge of ownership interests rather than the property.
- Net operating income (NOI)
- Income from a property after operating expenses and before debt service, capital expenditures, and income taxes.
- Non recourse
- A loan where the lender's remedy is limited to the collateral, subject to carve outs for specific bad acts.
- Preferred equity
- Equity with priority over common equity for distributions and return of capital, usually at a fixed target return.
- Prepayment penalty
- A fee for paying off a loan before a set date. Forms include step downs, yield maintenance, and defeasance.
- Recapitalization
- A change to a company's or property's capital structure, such as bringing in new equity to return capital or buy out a partner.
- Recourse
- A loan where the lender may pursue the borrower or guarantors personally beyond the collateral.
- Rent roll
- A list of every unit or tenant with lease dates, rent, and deposits.
- Retained earnings
- Profits a business has kept rather than distributed to owners.
- SBA 7(a)
- A U.S. Small Business Administration guaranteed loan program for working capital, equipment, real estate, and business acquisitions.
- SBA 504
- An SBA program for long term, fixed rate financing of owner occupied real estate and major equipment.
- Sources and uses
- A table showing where a project's money comes from and how it is spent. The totals must match.
- Sponsor
- The person or firm that finds, organizes, and manages a real estate project or investment.
- T12
- A trailing 12 month operating statement showing actual income and expenses for the past year.
- Term sheet
- A summary of proposed loan or investment terms. It is not a commitment until final approval and documents.