Study Guide - Definitions & Examples

CMBS

Commercial Mortgage-Backed Security. A bond backed by a pool of commercial real estate loans, structured into tranches by risk level.

NOI

Net operating Income. A property’s income after operating expenses, before debt service and taxes.

DSCR

Debt Service Coverage Ratio. NOI / Annual Debt Service. Measures whether a property generates enough income to cover loan payments. Minimum 1.20x-1.25x for CMBS.

LTV

Loan-to-Value ratio. Loan Amount / Property Value. Measures the lender’s exposure relative to collateral value. Typically 65-75% at CMBS origination.

Debt Yield

NOI / Loan Amount. A rate-agnostic underwriting metric. Minimum ~8-9% for CMBS loans. Unaffected by interest rate change.

Cap Rate

NOI / Property Value. The yield an investor earns on an all-cash purchase. Used to value properties via direct capitalization.

Securitization

The process of pooling loans and issuing bonds backed by those loans. CMBS is the securitization of commercial real estate mortgages.

Tranche

A slice of a CMBS deal with a defined risk/return profile. AAA tranches are safest (paid first, takes losses last). B-piece tranches are riskiest (take losses first).

B-Piece

The most junior, unrated, or below-investment-grade trances of a CMBS deal (typically BB and below). First to absorb losses. Buyer often has controlling class rights.

Special Servicing

The management of defaulted or distressed CMBS loans. Special servicers (like LNR) handle modifications, foreclosures, and note sales for loans transferred from the master servicer.

Master Servicer

Administers performing CMBS loans: collects payments, distributes to bondholders, maintains escrows. Transfers troubled loans to the special servicer.

Watchlist

A list of CMBS loans with elevated risk factors (declining DSCR, high vacancy, near maturity, etc.) that require heightened monitoring by the servicer.

Whole Loan

A single mortgage held by one lender (not securitized). SMC originates whole loans that are then sold into CMBS trusts.

A-Note / B-Note

A single first mortgage split into senior (A-note) and junior (B-note) participations. Both are part of the same mortgage lien, unlike mezzanine debt.

Mezzanine Loan

A separate loan secured by a pledge of equity in the property-owning entity (not the property itself). Sits between first mortgage and equity in the capital stack.

Mortgage REIT

A REIT that primarily earns income from real estate loans and mortgage-backed securities rather than from owning physical properties.

DCF

Discounted Cash Flow. A valuation method that projects future NOI and a terminal sale, then discounts everything back to present value using a required rate of return.

Debt Service

The total annual loan payment obligation: principal payment + interest. DSCR measures NOI relative to this number.

Underwritten NOI

A lender’s normalized, stabilized view of a property’s NOI - adjusted for non-recurring items, below-market leases, and unrealistic management projections. Conservative by design.

REIS

Real Estate Investing & Servicing. Handles CMBS investing and special servicing.

SMC

Starwood Mortgage Capital. Originates commercial real estate loans.