Glossary of CRE & Energy Finance Terms

Capital structure

Capital stack: The ranked order of claims on a property's cash flow and sale proceeds. Senior debt is repaid first and absorbs losses last, followed by mezzanine debt, then preferred equity, then common equity. Position in the stack determines the return each layer requires: earlier repayment and later loss absorption means cheaper capital.See also: Senior debt, Mezzanine debt, Preferred equityRead more
Clawback: A provision requiring the general partner to return promote already distributed if final results fall short of agreed thresholds. It protects investors where strong early distributions are followed by weaker later performance.See also: Promote, Distribution waterfall
Distribution waterfall: The contractual order in which distributions are allocated between partners — typically return of capital, then preferred return, then a profit split that shifts increasingly toward the sponsor as return hurdles are met. A European waterfall calculates promote once at exit across the whole investment; an American waterfall calculates it deal-by-deal or distribution-by-distribution.See also: Promote, Preferred return, Clawback
Mezzanine debt: Subordinate debt sitting behind senior debt and ahead of equity, typically secured by a pledge of the equity interests in the property-owning entity rather than by a mortgage on the property itself. On default, the mezzanine lender enforces the pledge and takes over the ownership entity, which is faster than foreclosing on real estate and leaves the senior loan undisturbed. Its relationship with the senior lender is governed by an intercreditor agreement.See also: Preferred equity, Intercreditor agreement, Capital stackRead more
Preferred equity: An equity investment in the ownership entity that receives a stated preferred return before common equity receives anything, usually with a defined redemption mechanism. Economically similar to mezzanine debt but structured as equity, which matters because most senior loan documents prohibit additional debt and liens while permitting an equity investment.See also: Mezzanine debt, Preferred return, Capital stackRead more
Preferred returnPref: A return that must be paid to one class of equity before another class participates in profits. A cumulative preferred return carries any shortfall forward until it is paid; a non-cumulative one does not. Whether it compounds materially changes outcomes over a multi-year hold.See also: Promote, Distribution waterfall, Preferred equity
Promote: The general partner's disproportionate share of profits above an agreed threshold, compensating the sponsor for sourcing, structuring, and executing a transaction beyond their pro-rata co-investment. Often structured in tiers that increase the GP's share as investor returns clear successive hurdles.See also: Distribution waterfall, Preferred return, Clawback
RecapitalisationRecap: Restructuring an asset's ownership and capital, typically by admitting new equity to retire or reduce existing debt. Commonly used where an asset is fundamentally sound but over-levered relative to current values, and where the sponsor would rather own less of a good asset than all of a problem.See also: Capital stack, Maturity wallRead more
Senior debt: First-position financing secured by a first mortgage or deed of trust on the property. It is repaid before every other layer, holds foreclosure rights against the real estate, and is normally the largest and cheapest tranche in a commercial real estate capital stack.See also: Capital stack, Loan-to-valueRead more

Underwriting

Capitalisation rateCap rate: Net operating income divided by property value. Higher cap rates imply lower value per dollar of income and generally reflect greater perceived risk or weaker growth expectations. Because value equals income divided by the rate, small movements in the rate produce large movements in value.See also: Net operating income, Internal rate of return
Debt service coverage ratioDSCR: Net operating income divided by annual debt service. A requirement of 1.25x means income must exceed the debt payment by 25%. Because the payment depends on rate and amortisation, DSCR responds to loan structure — longer amortisation or an interest-only period increases the loan a given income supports at the same coverage.See also: Debt yield, Loan-to-value, Net operating incomeRead more
Debt yield: Net operating income divided by the loan amount. It answers what unlevered return a lender would earn on their basis if they took the property back. Unlike DSCR and LTV, it contains no rate or valuation assumption, which is why it became a standard constraint — and why only higher income, not better loan terms, moves it.See also: Debt service coverage ratio, Loan-to-value, Net operating incomeRead more
Equity multiple: Total distributions divided by total equity invested, ignoring timing. A 2.0x multiple means an investor received twice what they put in. Read with IRR: a high IRR with a low multiple indicates capital returned quickly rather than a large absolute profit.See also: Internal rate of return, Distribution waterfall
Internal rate of returnIRR: The annualised discount rate at which the present value of all cash flows equals zero. It accounts for timing, which makes it the standard measure for a real estate hold — and also means it can be flattered by an early return of capital. Best read alongside equity multiple.See also: Equity multiple, Distribution waterfall
Loan-to-costLTC: The loan amount divided by total project cost, including acquisition, hard and soft costs, financing costs, and reserves. Used alongside loan-to-value on construction and heavy value-add transactions, where cost and completed value are different numbers.See also: Loan-to-value, Debt service coverage ratio
Loan-to-valueLTV: The loan amount divided by appraised value — or, on an acquisition, the lower of appraised value and purchase price. The value in the denominator is the appraiser's, not the sponsor's, which is where expectations most often diverge. On development deals a loan-to-cost test frequently binds alongside it.See also: Debt service coverage ratio, Debt yield, Loan-to-costRead more
Net operating incomeNOI: Property revenue less operating expenses, before debt service, capital expenditure, depreciation, and income taxes. Lenders underwrite their own NOI rather than the sponsor's, typically applying market vacancy, adding a management fee whether or not one is paid, and deducting a replacement reserve.See also: Debt service coverage ratio, Debt yield, Capitalisation rateRead more

Energy finance

Battery energy storage systemBESS: An installed battery system that stores electricity for later discharge. On commercial property, value comes from reducing demand charges, arbitraging time-of-use tariffs, providing resiliency, and in some markets participating in grid programmes — with the applicable utility tariff, rather than the equipment, determining whether a project works.See also: Demand charge, Behind-the-meterRead more
Begin construction: A defined regulatory concept determining eligibility and timing for federal energy credits, generally satisfied either by starting physical work of a significant nature or by incurring a specified percentage of total project cost, in each case with a continuity requirement afterwards. The documentation standard is substantive, and the date now materially affects a project's credit window.See also: Investment tax credit, Placed in serviceRead more
Behind-the-meterBTM: Generation sited on the customer's side of the utility meter, serving a facility's load directly rather than delivering into the grid. It is being deployed at scale for data centres because it can be built on a timeline compatible with the facility, bypassing interconnection queues that run far longer.See also: Power purchase agreement, Demand chargeRead more
Commercial Property Assessed Clean EnergyC-PACE: Long-dated, fixed-rate, fully amortising financing for energy efficiency, renewable generation, water conservation, and in many states resiliency improvements, repaid through a voluntary special assessment on the property tax bill. Because repayment attaches to the property rather than the borrower, terms commonly run twenty to thirty years and the obligation transfers to a buyer at sale. It requires the senior lender's consent, as the assessment ranks with property taxes.See also: Investment tax credit, Power purchase agreementRead more
Demand charge: A component of a commercial electricity bill based on the highest rate of consumption during a billing period, measured over a short interval, rather than on total energy used. On many commercial tariffs it is a substantial share of the bill, which is why reducing the measured peak is usually the largest reliable source of value in a battery storage project.See also: Behind-the-meter, Battery energy storage systemRead more
Interconnection queue: The sequence in which requests to connect new generation or large loads to the electricity grid are studied and processed. Queue times of roughly three to seven years in many territories, against data centre build cycles of one to two years, are the central constraint driving behind-the-meter generation.See also: Behind-the-meterRead more
Investment tax creditITC: A federal tax credit calculated as a percentage of eligible project cost for qualifying energy property. The current technology-neutral version sits in Section 48E. The 2025 tax legislation tightened timing for wind and solar: facilities beginning construction after 4 July 2026 must be placed in service by 31 December 2027, while those beginning construction on or before that date retain the ordinary multi-year runway.See also: Tax credit transfer, Begin construction, Tax equityRead more
Placed in service: The point at which a facility is ready and available for its intended use, which determines when an investment tax credit is earned. Statutory placed-in-service deadlines now constrain the timeline for wind and solar projects that began construction after 4 July 2026.See also: Begin construction, Investment tax creditRead more
Power purchase agreementPPA: A long-term contract to buy electricity from a generating asset at an agreed price. In commercial real estate it typically describes third-party ownership: a developer finances, owns, and operates a system on the property and the owner buys the output, contributing no capital and taking no tax attributes.See also: Commercial Property Assessed Clean Energy, Behind-the-meterRead more
Tax credit transferSection 6418: The sale of an eligible clean energy tax credit to an unrelated taxpayer for cash, permitted under Section 6418. It lets a project owner who cannot use a credit convert it into capital, at a discount to face value and subject to diligence, indemnity, and often tax insurance. Far simpler than a tax equity partnership, which is why it opened credit monetisation to smaller projects.See also: Investment tax credit, Tax equityRead more
Tax equity: A partnership structure in which an investor with tax capacity is admitted to a project and allocations are engineered to deliver tax credits and accelerated depreciation to them. It captures more total value than a simple credit sale because it also monetises depreciation, but the fixed transaction cost makes it uneconomic below a substantial project size.See also: Tax credit transfer, Investment tax credit

Process & documents

Commercial mortgage-backed securitiesCMBS: Loans originated for pooling and securitisation, sold to bond investors. CMBS execution typically offers fixed-rate non-recourse financing, but post-closing flexibility is limited: the borrower deals with a servicer bound by a servicing agreement rather than a lender exercising discretion, and modifications may require transfer to special servicing.See also: Defeasance, Senior debt
Defeasance: A prepayment mechanism common in securitised loans requiring the borrower to substitute a portfolio of securities for the property as collateral rather than paying a penalty. The cost depends on prevailing rates and can be large enough to change a refinancing decision, so it should be established early.See also: Maturity wall, Commercial mortgage-backed securitiesRead more
Intercreditor agreement: The contract between a senior lender and a subordinate lender setting out relative rights — cure rights, standstill periods, notice requirements, enforcement mechanics, and purchase options. Negotiating one is a substantial part of why mezzanine debt takes longer to close than preferred equity.See also: Mezzanine debt, Preferred equityRead more
Maturity wall: A concentration of loan maturities falling due in a compressed period. A large volume of US commercial real estate debt originated in the 2010s and early 2020s is maturing across 2026 and 2027, into a different rate environment and, in some property types, different valuations.See also: Recapitalisation, DefeasanceRead more
Sizing constraint: Any of the tests that cap loan proceeds — debt service coverage, debt yield, loan-to-value, or loan-to-cost. Lenders run all applicable tests and lend the lowest result. Identifying which one binds tells a sponsor what will actually move the number: structure for coverage, income for debt yield, equity or basis for value.See also: Debt service coverage ratio, Debt yield, Loan-to-value, Loan-to-costRead more
Sources and uses: A table showing every source of capital in a transaction against every application of it, with the two sides equal. Lenders check it first and check it arithmetically — a table that does not balance, or where equity is a plug figure, prompts verification of everything else in the file.See also: Capital stackRead more

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