Commercial Real Estate Finance Glossary
Clear definitions of the metrics, structures, and terms used in commercial real estate capital markets — written the way Kismet Kapital explains them to sponsors.
Loan-to-ValueLTV
Loan-to-value (LTV) is the ratio of a loan amount to the appraised value of the property securing it, expressed as a percentage.
Loan-to-CostLTC
Loan-to-cost (LTC) is the ratio of a loan amount to the total project cost, including acquisition, hard costs, soft costs, and carry.
Debt Service Coverage RatioDSCR
Debt service coverage ratio (DSCR) is net operating income divided by annual debt service, showing how many times income covers the loan payment.
Net Operating IncomeNOI
Net operating income (NOI) is a property's effective gross income less operating expenses, before debt service, capital expenditures, and taxes on income.
Capitalization RateCap Rate
A capitalization rate is net operating income divided by property value, expressing the unlevered yield a property produces at its purchase price.
Debt Yield
Debt yield is net operating income divided by the loan amount, measuring a lender's return if it had to take back the asset.
Mezzanine Debt
Mezzanine debt is subordinate financing secured by a pledge of equity interests in the borrowing entity rather than by a mortgage on the property.
Preferred Equity
Preferred equity is capital that ranks junior to all debt but senior to common equity, earning a fixed return before the sponsor participates in profits.
Bridge Loan
A bridge loan is short-term, usually floating-rate senior debt used to fund a transitional business plan until the asset reaches a stabilized exit.
Recourse
Recourse determines whether a lender can pursue the borrower's or guarantor's assets beyond the property itself if the loan defaults.
Capital Stack
The capital stack is the full set of capital funding a transaction, ordered by repayment priority from senior debt at the bottom to common equity at the top.
Interest Reserve
An interest reserve is loan proceeds set aside at closing to pay interest during a period when the property does not generate enough income to cover debt service.
Guaranteed Maximum Price ContractGMP
A guaranteed maximum price (GMP) contract caps what a general contractor can charge for a project, shifting cost-overrun risk to the contractor.
Promote
A promote is the share of profits a sponsor earns above its pro-rata equity contribution once investors have received their preferred return.
Internal Rate of ReturnIRR
Internal rate of return (IRR) is the annualized discount rate at which a project's cash flows have a net present value of zero.
Equity Multiple
Equity multiple is total distributions to an investor divided by total capital contributed, expressed as a multiple of invested equity.
Defeasance
Defeasance is a prepayment method in which a borrower substitutes government securities for the property as loan collateral instead of paying the loan off in cash.
Property Improvement PlanPIP
A property improvement plan (PIP) is a brand-mandated renovation scope a hotel owner must complete to obtain or retain a franchise flag.
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