Glossary of CRE Financing Terms
A comprehensive reference of terms you'll encounter when financing owner-occupied commercial real estate.
A
Amortization
The process of spreading a loan into a series of fixed payments over time. Each payment includes both principal and interest. For commercial real estate loans, amortization periods are typically 20 to 25 years, though the loan term (maturity) may be shorter.
B
Balloon Payment
A large, lump-sum payment due at the end of a loan term when the loan has not been fully amortized. Common in conventional commercial loans where the term is shorter than the amortization period (e.g., a 10-year term with 25-year amortization).
C
Cap Rate (Capitalization Rate)
A measure used to evaluate real estate investments, calculated by dividing the net operating income (NOI) by the property value. While primarily used for investment properties, lenders may reference cap rates when appraising owner-occupied commercial real estate.
CDC (Certified Development Company)
A nonprofit organization certified by the SBA to provide financing through the 504 Loan Program. CDCs work with banks and borrowers to structure the three-party 504 loan, providing the SBA-backed second mortgage.
Change of Ownership
A transaction in which ownership of a business is transferred from one party to another. SBA loans can finance partner buyouts and full business acquisitions, subject to specific eligibility and valuation requirements.
Collateral
Assets pledged as security for a loan. In commercial real estate lending, the property being financed serves as the primary collateral. Lenders may also require additional collateral such as business assets, equipment, or other real estate.
Commitment Fee
A fee charged by a lender to hold loan funds available for a borrower during the period between loan approval and closing. This compensates the lender for reserving capital.
D
Debt Service Coverage Ratio (DSCR)
A financial ratio that measures a business's ability to cover its debt payments. For SBA underwriting, DSCR is calculated by dividing adjusted cash flow (net income plus non-cash expenses like depreciation, amortization, and interest) by total annual debt service. The SBA requires a minimum DSCR of 1.15x for 7(a) loans; many lenders apply their own higher minimum of 1.20x to 1.25x.
Debenture
In SBA 504 lending, a debenture is a bond issued by the CDC and guaranteed by the SBA. The proceeds fund the second mortgage on the borrower's project. Debentures are sold to investors in monthly pools, and the interest rate is fixed at the time of sale.
Default
Failure to meet the terms of a loan agreement, most commonly by missing payments. Default can also be triggered by violating other loan covenants, such as failing to maintain insurance or allowing a lien to be placed on the collateral.
Deficiency
The remaining balance owed after collateral has been liquidated and the proceeds are insufficient to cover the outstanding loan balance. In recourse loans, the lender can pursue a deficiency judgment against the borrower or guarantors.
Disbursement
The release of loan funds to the borrower or to a third party on the borrower's behalf. For construction loans, disbursements typically occur in stages as work is completed.
E
Environmental Review (Phase I ESA)
A Phase I Environmental Site Assessment evaluates a property for potential environmental contamination. Required for virtually all commercial real estate loans, it examines historical records, site conditions, and surrounding properties to identify environmental risks.
Equity Injection
The borrower's cash contribution to a project, representing their "skin in the game." For SBA 7(a) loans, there is no SBA-mandated minimum for existing businesses, while startups and changes of ownership require 10%. SBA 504 loans require 10% to 20% depending on business type and property use.
Estoppel
A legal document signed by a tenant confirming the terms of their lease, including rent amount, lease term, and any modifications. Lenders may require estoppel certificates when the commercial property has tenants occupying a portion of the space.
F
Fair Market Value
The price at which a property would change hands between a willing buyer and willing seller, neither being under compulsion to buy or sell, and both having reasonable knowledge of the relevant facts. This is the standard of value used in most commercial real estate appraisals.
Franchise Fee
The upfront fee paid by a franchisee to a franchisor for the right to operate under the franchise brand. SBA loans can finance franchise fees as part of the total project cost. The franchise must be listed on the SBA Franchise Directory to be eligible.
G
Goodwill
An intangible asset representing the value of a business beyond its tangible assets, including brand reputation, customer relationships, and operational systems. In business acquisitions financed with SBA loans, goodwill is a common component of the purchase price.
Guarantee Fee
A fee charged by the SBA for providing its loan guarantee. The fee is 2% for loans up to 150,000, 3% for 150,001-700,000, and a split tier of 3.5% on the first 1 million of the guaranteed portion plus 3.75% above 1 million for loans over 700,000. The fee is typically financed into the loan amount.
Guarantor
An individual who personally guarantees repayment of a loan. SBA policy requires that all owners of 20% or more of the borrowing entity provide an unlimited personal guarantee. Lenders may also require guarantees from owners with less than 20% ownership.
I
Impound Account (Escrow)
An account held by the lender into which the borrower makes monthly deposits to cover property taxes, insurance, and other recurring expenses. This ensures these costs are paid on time and protects the lender's collateral interest.
Interest Rate Spread
The margin added to a base rate (such as the Prime Rate) to determine the borrower's interest rate. For SBA 7(a) loans, the maximum allowable spread varies by loan amount: 3.0% for loans over 350,000, 4.5% for 250,001-350,000, 6.0% for 50,001-250,000, and 6.5% for loans of 50,000 or less.
L
Lien Position
The priority ranking of a lender's claim on the collateral property. The first lien holder gets paid first in a liquidation, followed by second lien holders, and so on. In SBA 504 loans, the bank holds the first lien and the CDC holds the second lien.
Loan-to-Value Ratio (LTV)
The ratio of the loan amount to the appraised value of the property. For example, a loan of 800,000 on a property valued at 1,000,000 is 80% LTV. SBA 7(a) loans for existing businesses can finance up to 100% of the project with no SBA-mandated equity minimum, while startups and acquisitions allow up to 90% LTV. Conventional loans typically require 65-80% LTV.
N
NAICS Code
North American Industry Classification System code. A six-digit code assigned to every business based on its primary industry. The SBA uses NAICS codes to determine size standards for loan eligibility.
Net Operating Income (NOI)
The income a property generates after deducting operating expenses but before debt service and income taxes. NOI is a key metric in the income approach to property valuation and is used in DSCR calculations.
Note Rate
The interest rate stated on the promissory note, which determines the borrower's actual payment. This may differ from the annual percentage rate (APR), which includes fees and other costs of borrowing.
O
Occupancy Requirement
For SBA loans, the borrower must occupy at least 51% of the total usable space of the property (existing buildings) or 60% for new construction. This requirement ensures the property qualifies as "owner-occupied" rather than an investment property.
Origination Fee
A fee charged by the lender for processing and underwriting the loan. Typically expressed as a percentage of the loan amount (e.g., 0.5% to 1%). For SBA loans, origination fees are subject to SBA fee limitations.
P
Participation
An arrangement where one lender sells a portion of its loan to another lender. In SBA lending, the SBA's "guarantee" effectively functions as a participation agreement, where the SBA agrees to purchase a percentage of the loan if it defaults.
Permanent Working Capital
A fixed amount of working capital included as part of an SBA loan to support ongoing business operations. Unlike a revolving line of credit, permanent working capital is disbursed once and repaid over the life of the loan as part of the term financing.
Personal Guarantee
A legal commitment by an individual to repay a business loan if the business cannot. SBA policy requires unlimited personal guarantees from all owners of 20% or more. A personal guarantee puts the guarantor's personal assets at risk.
Phase I ESA (Environmental Site Assessment)
An investigation of a property's environmental condition, including a review of historical records, site inspection, and regulatory database search. Required for all commercial real estate transactions to identify potential contamination.
Prepayment Penalty
A fee charged if a borrower pays off a loan before its scheduled maturity. SBA 7(a) loans have a subsidy recoupment fee of 5%, 3%, and 1% of the prepayment amount during the first three years for loans with maturities of 15 years or more, triggered only when more than 25% of the loan is prepaid in a single year. SBA 504 loans have a declining prepayment penalty over the first 10 years.
Prime Rate
The interest rate that commercial banks charge their most creditworthy customers. The Prime Rate is commonly used as the base rate for SBA 7(a) variable-rate loans. It is influenced by the federal funds rate set by the Federal Reserve.
Pro Forma
A set of projected financial statements showing anticipated future performance. Lenders often require pro forma projections to evaluate whether a business can support the proposed debt service, especially for startups, expansions, or acquisitions.
R
Real Estate Appraisal
A professional assessment of a property's market value conducted by a licensed appraiser. Commercial appraisals typically use three approaches: income capitalization, sales comparison, and cost approach. Required for all commercial real estate loans.
Recourse
The lender's legal right to pursue the borrower's personal assets beyond the collateral if the loan goes into default. Most SBA loans are full recourse to the guarantors, meaning personal assets can be pursued to satisfy the debt.
Refinancing
Replacing an existing loan with a new one, typically to secure better terms, lower interest rates, or access equity. SBA refinancing has specific requirements, including a "substantial benefit" test showing the borrower gains meaningful improvement.
S
SBA Express
An expedited SBA 7(a) loan program with a maximum loan amount of 500,000 and a 50% SBA guarantee. Lenders use their own credit analysis and documentation, allowing faster turnaround times compared to standard 7(a) processing.
SBA Guarantee
The SBA's commitment to purchase a percentage of an SBA-backed loan from the lender if the borrower defaults. For 7(a) loans, the guarantee is 85% for loans up to 150,000 and 75% for loans over 150,000, up to a maximum guarantee of 3,750,000.
Seller Standby Note
A promissory note held by the seller of a business or property in which the seller agrees to defer a portion of the purchase price. The note must be on "full standby" (no payments of principal or interest) for the full term of the SBA loan. Standby seller debt may be counted as equity, but cannot exceed half of the SBA-required equity injection.
Size Standard
The SBA's criteria for defining whether a business qualifies as "small." Size standards are based on either annual revenue or number of employees and vary by NAICS code. A business must meet the applicable size standard to be eligible for an SBA loan.
Subordination
An agreement by a creditor to accept a lower priority position relative to another creditor. For example, if a borrower has an existing loan on a property, the existing lender may need to subordinate to allow a new first lien to be recorded.
T
Term Sheet
A preliminary document outlining the proposed terms and conditions of a loan, including loan amount, interest rate, term, amortization, fees, and collateral requirements. Term sheets are non-binding and precede formal loan documentation.
Title Insurance
Insurance that protects the lender (and optionally the buyer) against defects in the title to real property. Lender's title insurance is required for all commercial real estate loans and covers issues such as unknown liens, encumbrances, or ownership disputes.
U
UCC Filing (Uniform Commercial Code)
A legal filing that establishes a lender's security interest in business assets (such as equipment, inventory, and accounts receivable). A UCC-1 financing statement is filed with the state to provide public notice of the lien.
Underwriting
The process by which a lender evaluates the creditworthiness of a borrower and the feasibility of a loan. Underwriting includes analysis of financial statements, credit history, collateral, business plan, and compliance with lending program requirements.
Use of Proceeds
A detailed breakdown of how loan funds will be spent. SBA loans have specific eligible uses of proceeds, including real estate acquisition, construction, renovation, equipment purchase, working capital, and business acquisition. Each use must be documented and approved.
V
Variable Rate
An interest rate that fluctuates over the life of the loan based on changes in a reference rate (such as Prime Rate or SOFR). Most SBA 7(a) loans carry variable rates that adjust with Prime. The borrower's rate changes as the base rate moves up or down.
W
Working Capital
Funds used to cover day-to-day operating expenses of a business, such as payroll, rent, inventory, and supplies. SBA loans can include permanent working capital as part of the financing package, which is particularly important for business acquisitions and expansions.