Glossary
Commercial mortgage glossary
The 16 terms that come up on almost every commercial file, explained in plain language.
- DSCR
- Debt service coverage ratio. Net operating income divided by the annual mortgage payments. Lenders generally want 1.20 to 1.25 on conventional commercial deals, and the ratio usually sets the loan amount.
- LTV
- Loan to value. The loan expressed as a percentage of the property's appraised value. Conventional commercial financing typically caps out at 65 to 75 percent depending on asset type.
- NOI
- Net operating income. Gross rental revenue less vacancy allowance and operating expenses, before mortgage payments and income tax. It is the number every commercial valuation and loan size starts from.
- Cap rate
- Capitalisation rate. Net operating income divided by the property value, expressed as a percentage. Lower cap rates mean higher prices for the same income.
- Amortization
- The period over which the loan would fully repay if payments continued unchanged. Commercial amortizations run from 15 to 30 years, and up to 50 years on some insured multifamily programs.
- Term
- The length of the current mortgage contract, commonly 1 to 10 years. At the end of the term the balance is renewed, refinanced or repaid, which is the moment renewal risk shows up.
- Recourse
- Whether the lender can pursue the borrowers personally beyond the property itself. Most commercial mortgages are full recourse with personal guarantees, while limited recourse is earned on strong files.
- IRD
- Interest rate differential. A prepayment penalty that charges the lender's lost interest when you break a fixed rate mortgage early. On commercial fixed debt it can be large, so read the prepayment clause before signing.
- Bridge loan
- Short term financing, usually interest only and often from a private lender, that funds a property while it is being purchased, repositioned or waiting on a permanent loan. It is priced for speed and repaid from a defined exit.
- Takeout financing
- The permanent loan that repays a construction or bridge facility once the project is complete or stabilised. Lenders want the takeout mapped out before they fund the short term money.
- MLI Select
- A CMHC multi unit insurance program that awards points for affordability, energy efficiency and accessibility commitments, and rewards them with higher leverage, longer amortization and premium discounts.
- Rent roll
- A schedule of every unit in a property showing tenant, rent, lease start and expiry, and vacancy. It is the first document a commercial underwriter reads.
- Environmental Phase 1
- A review of a site's history and current use to identify potential contamination, with no sampling involved. It is a standard condition on industrial and older commercial properties, and a Phase 2 with testing follows only if concerns are found.
- Appraisal
- An independent valuation of the property prepared for the lender, typically using the income, direct comparison and cost approaches. The lender lends against the appraised value, not the purchase price.
- Covenant
- The strength of the party standing behind the payments, whether a tenant or a borrower, and also the ongoing obligations written into the loan agreement. A strong covenant improves both leverage and pricing.
- Construction draw
- A staged advance of construction financing released as work is completed and verified by a quantity surveyor or cost consultant. Holdbacks required by builders lien legislation are retained from each draw.
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