The Ultimate List Of Commercial Real Estate Terms

Whether you are a small business owner, first-time investor or seasoned commercial mortgage broker – being familiar with the lexicon will help you better navigate the commercial real estate world.
We’re not only talking about terms such as Loan Amount, Owner Occupied or Non Recourse (although you’ll find them, too), but we’ve identified some nuanced, “learned in law school” terms, too. Knowledge is king. Below is the ultimate list of commercial real estate terms you should know.

1031 Exchange

This refers to the Internal Revenue Code (IRC), Section 1031. It paves the way to avoid paying capital gains tax on the sale of real estate property under certain conditions. If an investor sells a piece of property, then reinvests the proceeds from the sale into a new purchase within certain parameters, no capital gains tax would be owed on the original sale transaction.

Adjustable Rate Mortgage (ARM)

These are mortgage loans whereby the Interest Rate adjusts periodically during the Term of the loan. Adjustment dates can be monthly or annual, as set forth in the Promissory Note. The adjustable feature is tied to a published Index (e.g., Prime Rate) and represents a Spread over that Index.


Refers to a GSE, such as Fannie Mae or Freddie Mac

Agency Loans

Refers to loans provided by GSEs.


These are the features of a property (tangible and intangible) that adhere to the benefit of tenants. Examples range from onsite parking and health facilities, artwork and other interior upgrades, to geographic location within a community and proximity to transportation.


This term has two meanings. In the loan context, it refers to the payment schedule to pay off a debt. For example, a 30-year amortization means that the debt would be repaid with 360 equal monthly installments. In the accounting context, it is a financial metric that tracks the reduction of the value of an intangible asset (e.g.- copyright, patent, trademark, goodwill) to be accounted for over the years the asset generates revenues. An example would be a licensing agreement to use a celebrity’s name on a property for 10 years. The cost and related value would be incrementally amortized over the 10-year period of the licensing agreement for the purposes of accounting and taxes.


This is an estimate of a property’s value as of specific date. It is comprised of a combination of information, such as the asset’s condition, location, comparable assets and sales in the immediate vicinity, demand, scarcity, and utility of property, as well as, in the case of an income producing property, the potential cash flow from the property from rental income among other things. An appraisal report typically includes three methodologies for determining value: sales approach, income approach, and cost approach.


This is an account status stating that an obligation is unpaid. For example, your loan payment is past due and therefore, in arrears.

Bankruptcy Remote Entity (BRE)

A legal entity that is created to hold real estate and serve as a borrower and mortgagor under a loan. Also known as a Special Purpose Entity, these entities are required to be formed for CMBS Loans and Agency Loans. As CMBS and Agency loans are non-recourse, these “single-purpose” entities do not qualify for Chapter 11 bankruptcy protection.

Base Rent

The base rent is the minimum amount of rent due on a lease. Depending on the lease provisions, the base rent may change during the term of the lease. Base rent does not include expense reimbursements (i.e., CAM) or a percentage of sales.

Breakpoints / Natural Breakpoints

In a commercial lease where percentage rent is in place, natural or artificial breakpoints are used to determine rent thresholds. An artificial breakpoint would be a certain percentage of gross sales over a certain amount of sales. A natural breakpoint is achieved by dividing the base rent by a certain percentage.

Bridge Loans

In some contexts, Bridge Loans are often interchangeable with Hard Money Loans, and are typically used to provide a short term loan to provide time to line up traditional, permanent financing. Bridge loans are often used when repositioning or renovating a property, or in cases where permanent financing is impractical due to timing restrictions or unavailable due to insufficient income or property condition issues. Learn more about Bridge Loans here.

Business-Occupied Real Estate

See Owner-Occupied Real Estate.

Capital Stack

In the real estate context, the capital stack refers to the total capital invested in the project and is comprised of one or more of various channels, including common equity, preferred equity, mezzanine debt, and senior debt.

Capitalization Rate (“CAP Rate”)

This is the expected rate of return, measured as a percent, that a commercial real estate investment is likely to generate based on the projected income of the property. Also referred to as the “Cap Rate”, the metric measures the projected net operating income (NOI) against the property’s asset value. Example – If a building is purchased for $1,500,000 and the NOI is $150,000, the Cap Rate would be 10%: 150,000/1,500,000 = 10%.

Carpetable Area (aka “Assignable Area”)

This is the portion of functional area within a leased office or floor space (suite) that can actually be utilized by a tenant. It is also referred to as Assignable Area. Unlike Usable Area, unusable areas, such as entries/exits, columns and other obstructions, are not included in the Carpetable Area.

Cash Available to Service Debt

This is the Net Operating Income less Reserves. This figure is used to determine how much cash a property is generating as a means of determining the DSCR.

Cash Flow

This is a financial measure that monitors the net amount of cash that flows in and out of a business or investment/income property each month. Positive cash flow enables an owner or company to do important things, such as meet their obligations or reinvest in the business or property. Negative cash flow indicates a lack of liquidity from the asset or business, which can be a precursor to financial problems, including the ability to remain solvent.

Cash-On-Cash Return

This is a financial rate-of-return metric used to measure performance the annual cash income earned in relation to the amount of cash initially invested in a property, such as the cash down payment. It is calculated by dividing the annual cash flow of the property by the initial cash down payment amount. Example: $1 Million invested in a property and the annual net cash flow is $100,000 has a cash-on-cash return of 10%.

Caveat Emptor (“Buyer Beware”)

This term means buyer beware, which means the buyer takes the property as it stands, after reasonable inspection. In other words, the buyer has no recourse against the seller for any defect that is a Patent Defect, meaning it is readily discoverable with a reasonable inspection.

Cloud on Title

This refers to a lien or some kind of encumbrance that affects title to real property. For example, a mortgage or a judgment lien. It could also be in the form of a claim of a property right, such as an easement or a boundary dispute. These claims may impair the title to real property, making it uninsurable. Clouds on title are usually discovered during a title search.


An acronym for Commercial Mortgage Backed Securities.

CMBS Loans

These are commercial real estate secured loans that are securitized in the secondary market into a fixed income instrument (i.e., a bond). CMBS Loans have standardized underwriting criteria and are generally limited to certain asset classes, such as Multifamily, Office, Retail, Shopping Centers, and Hotels. Loan amounts are generally restricted to a minimum of $2 Million, a maximum of 75% LTV.

Common Area Maintenance (“CAM”)

This is a maintenance fee, in addition to monthly base rent, that is added to rent and is typically used to maintain the common areas of the property, such as stairwells, elevators, closets, corridors, ducts, bathrooms, lobbies and other amenities. In NNN leases, CAM includes other expenses such as taxes and insurance. CAM is defined by the lease and is usually charged on a proportional rate to each tenant.

Commercial Mortgage Originator

An individual or company that originates commercial mortgage loans.

Commercial Mortgage Banker

An individual or company that originates and services commercial mortgage loans, as well as serves as a direct lender.

Common Area

The common area of a property, sometimes referred to as communal areas, are areas that all tenants have access to, such as laundry rooms, elevators, lobbies, gyms, pool areas, etc.

Common Equity

The ownership interest in a project that is subordinate to all others in the capital stack. Typically, this is the sponsor’s equity.


Concessions are compromises that are made in order to move a deal forward. Generally, both parties will make concessions to even out the bargain.


The financial intermediary that functions as a link, or conduit, between the lender and the ultimate investors–i.e., the bond holders. The conduit makes loans or purchases loans from third party correspondents. These loans are then accumulated into a pool and ultimately securitized in the CMBS market.

Consumer Price Index (“CPI”)

Increases to Base Rent are often tied to the Consumer Price Index (“CPI”). CPI is one of the primary comparative financial measures used by the Federal Reserve and other agencies to monitor price movement and inflation/deflation on a month-over-month basis at the consumer level. Issued by the U.S. Bureau of Labor Statistic, the monthly “cost-of-living” report (known as the “CPI”) examines the weighted average of a predetermined basket of consumer goods and services. Categories monitored include: apparel, education and communication, food and beverage, housing, medical care, recreation, transportation, and other goods and services.

Contingency (aka Contingencies)

Contingencies come in many forms. In some cases, they are conditions, such as a Financing Contingency. In other cases, they are a form of potential future risk that can negatively impact investors and businesses. Examples include economic downturns, fraudulent activities, natural disasters, and labor issues, among others.

Correspondent Lender

A lender that is a correspondent for a Conduit or a GSE. Commercial Mortgage Originators and Mortgage Bankers may originated loans through a Correspondent Lender.


These are legally binding obligations that are agreed to between parties to a contract. They may be positive (requiring action) or negative (requiring in inaction). Covenants typically appear in deeds, loan documents, and other contracts. In the deed context, they may be a covenant to maintain the property at a certain level (positive) or not to build above a certain height (negative). In the loan context, the loan documents may require the borrower to provide documents on an annual basis (positive) or not further encumber the property (negative).


This is the legal act of transferring property between parties in a real estate transaction. For example: The Seller conveyed title to the property to the Buyer.


These are items or allowances (“throw ins”) that are negotiated between a tenant (lessee) and owner (lessor) regarding a leased property and are often used to attract tenants, especially in weaker markets or with less desirable properties. They can include offers of free rent, moving allowances, tenant improvements, and lease buyouts. among others.

Credit Tenant

A “credit” tenant is a company that is of the size and financial strength worthy enough of being rated as investment grade by a credit agency such as Fitch, Moody’s, or Standard & Poor’s. For example, Starbucks or Walgreens, to name a few. An investment grade rating indicates that the tenant will be able to pay rent, even in economic downturns or specific market slumps. Credit tenants are typically required for institutional financing of single-tenant properties.

Debt Service

This is the amount of money required to satisfy the mortgage payments on a real estate property, which includes principal and interest repayment on the loan. It is generally calculated on an annual basis and equates to the monthly mortgage payment multiplied by 12. Example: The monthly mortgage payment is $5,000. The annual debt service is $60,000.


Defeasance is effectively a prepayment penalty that is often a provision in conduit loans, such as CMBS Loans. If a borrower elects to sell the property that is serving as collateral securing the loan prior to the loan’s maturity, the borrower must provide substitute collateral to provide income to service the debt.


This is an accounting metric that tracks the reduction of the value of a tangible asset over a specified period of time. It is a method that allows for a tangible asset (e.g., building, equipment, inventory, furniture) to be accounted for and expensed over the useful life of the asset. This expense is an offset against revenue, thereby reducing taxable income. An example would be a piece of equipment purchased for $100,000. As opposed to expensing the entire cost of the equipment in the year purchased, it could be incrementally depreciated over a number of years (determined by IRS rules) for the purposes of accounting and taxes.

Double Net Lease (“NN Lease”)

A form of real estate contract in which the tenant (lessee) is contractually obligated to pay the owner an agreed-upon monthly rent fee, as well as the property taxes and insurance incurred on the asset during the lease period.


Debt service coverage ratio. This is a measure of the borrower’s ability to service the monthly loan payments. A DSCR of 1.0 or lower means that the borrower’s income is insufficient to service the debt. Generally, lenders will require at least a 1.20 DSCR. To calculate, you divide the Cash Available To Service Debt by the Annual Debt Service. Example: If the property’s CASD is $40,000 and the Annual Debt Service is $32,000, then the DSCR is 1.25.

Investment Real Estate

This refers to income producing commercial real estate, such as Multifamily properties or Shopping Centers.


This is a third-party (non-owner) lien or other legal claim on real estate. An encumbrance may be voluntary, such as a mortgage, or involuntary, such as a judgment or tax lien. It is a Cloud On Titleand can impede the sale or transfer of a property, or restrict its use, until the Encumbrance is resolved and removed.


This is a legal arrangement allowing for a third-party to securely hold an asset, typically a deposit on behalf of the parties to a financial transaction. In many real estate transactions, the funds necessary to purchase the property are typically held in escrow until all conditions of the transaction (e.g. – building inspection) are satisfied.

Exit / Reversion Cap

This is the rate used to determine what the resale value of a property could be at “exit,” or when the holding period is up.


This is a person or organization that is legally and/or ethically obligated to maintain good faith and trust on behalf of a client. Among the key responsibilities of a financial fiduciary are that of holding assets in trust for another person and prudently managing the trust’s assets.

Financing Contingency

This refers to the a clause in a purchase and sale agreement that expresses that the purchaser’s offer is contingent upon being able to secure financing for the property. Typically a buyer uses this clause to establish a set period of time to apply for and secure a mortgage loan.

Force Majeure

This a legal clause in a financial contract that governs the actions and responsibilities of each party in the event of a “greater force” or act-of-God event, such as a natural catastrophe. It governs and removes or restricts/limits each party’s liability due to unforeseeable events that would preclude them from fulfilling their obligations, as detailed in the contact.

Gross Lease – Full Service

A lease in which the tenant (lessee) is contractually obligated to pay the owner Base Rent and no CAM (i.e., an agreed-upon, all-inclusive monthly rent fee during the lease period). Unless otherwise agreed to by both parties to the contract, the owner will be responsible for all costs associated with the property, including taxes, insurance, maintenance and repairs, utilities, janitorial, and more.

Gross Lease – Modified

A form of lease in which the tenant (lessee) is contractually obligated to pay the owner an agreed-upon, mostly-inclusive monthly rent fee during the lease period. Unlike a full-service gross lease, both parties agree to specific costs being borne by the tenant, in addition to the base rent fee. Examples can include maintenance or utilities costs. All other asset-related expenses are the obligation of the owner, including, including taxes, insurance, maintenance and repairs, utilities, janitorial, and more.

GSE – Government Sponsored Entity

An acronym for Government Sponsored Entity, referring to Fannie Mae or Freddie Mac, for example.

Guaranty Agreement

This is the document that memorializes the Personal Guarantee provided by an individual or the Corporate Guarantee provided by an entity.

Hard Money Loans

These are loans offered by private lenders that typically carry higher interest rates as compared to institutional lenders like banks and offer short term durations, typically one to two years. Hard money loans are utilized by real estate investors when lower cost options are unavailable or impractical, such as due to timing restrictions or when the applicant will not qualify due to poor credit. Hard money lenders generally require less documentation than as required by institutional lenders.

Hybrid ARM

This is a mortgage loan product by which the Interest Rate is fixed for a portion of the loan term, and then after the fixed period is reached, the Interest Rate adjusts periodically thereafter. For example, a 5/1 Hybrid ARM means that the Interest Rate is fixed for 5-years and then adjusts annually thereafter for the remainder of the Loan Term.


An index is a published index, such as the Prime Rate, LIBOR, or U.S. Treasury Bills, among others, and is used to calculate Interest Rates.


Loans that do not have an Amortization schedule. The borrower is only required to repay the interest accrued under the loan and does not have an obligation to repay the Principal until Maturity.

Interest Rate (aka Rate)

The Interest Rate is the amount charged on a loan and it is expressed as a percentage.

Internal Rate of Return (IRR)

The internal rate of return is the rate at which the net present value of the cash flows from a property investment grows or shrinks. IRRs are helpful in determining whether a potential investment will result in an attractive cash flow.


See Interest Only

Latent Defect

These are “hidden”, pre-existing defects or faults present within a property that cannot reasonably be detected through a standard inspection. Sellers are almost always required to reveal known, latent defects.

Leasehold Improvements

These are alterations contained within a rental agreement that are made by a property owner to customize the space to the needs of the tenant. Also referred to as Tenant Improvements, common improvements include changes to walls, floors, ceilings, lighting, and more.

Leasing Commissions

Leasing commissions are paid to real estate agents when leases are executed on rental properties. Terms vary, but often the commission is equal to one month’s rent.

Letter of Intent

A non-binding agreement in which one party memorializes its intent to enter into an agreement with another party upon certain terms or a framework of terms. Letters of Intent are often used in the context of leasing, purchasing, or lending.

LifeCompany Loans

These are loans provided by life insurance companies. They generally provide very competitive rates, often lower than banks, and long fixed terms. However, underwriting tends to be very conservative and LTV ratios tend to be lower versus other alternatives, such as CMBS Loans. Generally, borrowers must obtain loans through Correspondent Lenders.


This is often referred to as the Sponsor’s liquid assets, such as cash and marketable securities.

Load Factor (a.k.a. “Add On Factor”)

This is the proportional factor, measured as a percentage, of the difference between Usable Area sq. ft. and Rentable Area sq. ft.. Also referred to as the “Add-On Factor”, it accounts for the portion of building space that is in excess of the Usable Area of the structure, e.g.- common or shared space, which includes areas such as stairwells, elevators, closets, corridors, ducts, bathrooms, lobbies and other amenities.

Example – A 100,000 sq. ft. office building with 15,000 sq. ft. of common area would have 85,000 sq. ft. of Usable Area. The Load Factor would be 15 percent – 15,000/100,000 = 15 percent or .15. The tenant would combine their Usable Area (3,000 sq. ft.) with the Load Factor (15 percent or .15) to determine their Rentable Area sq. ft. (3,450 sq. ft.). They would then multiply that amount by their monthly square footage lease rate ($3.00 sq. ft.) to determine their monthly lease cost – (3,000 + 15%)*$3.00 = $10,350 monthly lease cost.

Lock-Out Period

A period of time after the loan origination during which a borrower cannot prepay the mortgage loan.

Loss Factor

This is the proportional factor, measured as a percentage, that a tenant rents but cannot use – Rentable Area versus Usable Area. Example – If the Rentable Area of a lease is 5,000 square feet and the Usable Area of the space is 4,000 feet, the Loss Factor would be 20 percent: (5,000 – 4,000)/5,000 = 20 percent.

Loss to Lease

The difference between the market rental rate for a property and the rent being paid for a similar property. For example, if a property were leased for a one year term at $10,000 per month, and the current market rate were $12,000 per month on similar properties, the loss to lease would be $2,000 per month.


Loan to Value ratio. It is expressed as a percentage and represents the percentage of the loan as against the value of the underlying collateral–i.e., the real estate. It is calculated as follows: Loan Amount / Value. Example, if a property is worth $4 Million and there is a $3 Million loan, the LTV is 75%.


The Maturity Date of a loan is the date that it matures. Maturity refers to the date by which the loan must be repaid in full.

Mortgage or Deed of Trust

This is the document given by the property owner to the lender to secure the repayment of the Promissory Note or other obligation and sets forth certain Covenants governing the use of the property and the consequences for default under the Mortgage or the Note.

Net Absorption

This is the net change in the amount of occupied space or units within a given market or submarket over a specified measurement period, such as 1 year. The metric depicts net increases or decreases in demand, taking into account inventory changes, such as construction of new space and removal of existing space from that particular market. Net absorption is considered positive if demand increases versus supply within the market when measured against the previous specified period. Net absorption is considered negative if demand decreases versus supply within the market when measured against the previous specified period.

Net Operating Income (“NOI”)

The is the measurement of income, also known as NOI, generated from a commercial real estate investment. It is calculated by deducting Operating Expenses owed by the owner such as utilities, insurance, management fees, property taxes, repairs and maintenance /janitorial fees, from the rental revenue. The NOI of a property is measured on a pre-tax basis and excludes loan payments (both principal and interest), capital expenditures, amortization and depreciation.

Net Worth

This is simply assets minus liabilities. It is essentially a measure of the financial worth of an individual or entity.

No Income Verification Loans

See Stated Income Loans

Owner-Occupied Real Estate

These are properties where the owner is occupying the property for its own use. For example, a law firm that owns a small 3 story office building and occupies the entire building is owner-occupied. If, on the other hand, the law firm only occupied one floor and the remaining 2 floors were rented to other tenants, then the property would be Investment Real Estate.

Patent Defects

Patent defects are those that can be discovered by inspection and ordinary vigilance on the part of the purchaser.

Percentage Lease

A form of real estate contract in which the tenant (lessee) is contractually obligated to pay the owner a monthly Base Rent payment based on the tenant’s monthly sales volume that is directly attributable to the leased-property location.

Personal Guarantee

This is a contractual agreement by a person to be responsible for the financial obligations of a another in the event that the debtor or borrower fails to pay an amount owing under the loan agreement. A guarantee may be provided by an individual or a business entity, such as a corporation, and may be limited based on the language of the guaranty agreement.

Phase I Environmental Report

An assessment and report prepared by a professional environmental consultant that reviews the property, both land and improvements, to ascertain the presence or potential presence of environmental hazards at the property. This Phase I Environmental Site Assessment (ESA) provides a review and makes a recommendation as to whether further investigation is warranted (a Phase II Environmental Site Assessment). The latter report would confirm or disavow the presence of an environmental hazard and, should one be found, will recommend additional review and/or mitigation efforts that should be undertaken.

Prepayment Penalty (PPP)

A prepayment penalty is a clause in a mortgage contract stating that a penalty will be assessed if the mortgage is prepaid within a certain time period. There are several forms of prepayment penalties, including Declining Balance, Yield Maintenance, and Defeasance.


The Principal of a loan is the amount borrowed and it is stated on the Promissory Note.

Promissory Note

A Promissory Note is a document that memorializes the obligation between a lender and borrower and it includes the terms of the loan, including repayment terms.


An investment security vehicle for real estate (Real Estate Investment Trust) that invests directly in mortgages or properties. REITs are often exchange-listed (e.g.- NYSE, NASDAQ) and trade like shares of common stock. Compared to direct investment in real estate assets, REITs afford an investor liquidity and typically offer high relative yields and special tax considerations. Investors gain the benefit of real estate exposure within their portfolio, with REIT assets ranging from shopping malls and multi-family housing units to hospitals, office buildings and warehouses.

Rent Abatement

A rent abatement clause in a property lease gives the tenant a legal right to withhold or reduce rent payments until relevant property repairs are completed. Rent abatement rights can also be granted by state regulations.

Rentable Area

This is the portion of office or floor space (suite), measured in square feet, for which a tenant is financially responsible. It includes the Usable Area (including unusable areas, such as entries/exits, columns or other obstructions), as well as common or shared areas, such as stairwells, elevators, closets, corridors, ducts, bathrooms, lobbies and other amenities. Tenants are generally charged a proportionate share (Load Factor or Add-On Factor) for the common areas within the building, in addition to their base rent.


An expense applied in underwriting to account for future repairs or future property maintenance costs. If not accounted for in the Net OPerating Income, lenders will apply a Reserve (aka Replacement Reserve) as an expense item. The resulting figure is the Cash Available To Service Debt.

Return On Investment (“ROI”)

The ROI is a primary efficiency metric used to measure the net performance of an asset, such as a commercial real estate property. Also referred to as ROI, it can also be used to calculate and compare an asset’s net performance against alternative investments. ROI is a ratio measurement and is calculated by dividing an investment’s return by the cost of the investment. Example – A property with a total cost of $1,000,000 and a return of $1,300,000 would provide an ROI of 30%: (1,300,000 – 1,000,000)/1,000,000 = 30%.


Right of First Offer (ROFO) and Right of First Refusal (ROFR) can be granted via contract to extend first rights to a lessee or purchaser before the sale or lease is offered to outside parties.

Single Net Lease

A form of real estate contract in which the tenant (lessee) is contractually obligated to pay the owner an agreed-upon Base Rent fee, as well as the net properly taxes incurred on the asset during the lease period.

Stated Income Loans

These are loans typically offered by private lenders that do not require the applicant to provide tax returns or other income verification documents. Generally, the lender will rely on a credit report and the information stated in the application by the applicant and not reconcile against tax returns.


This is the Guarantor and often is the principal owner of the Special Purpose Entity that is to serve as the borrower.


References to the “spread” represent the margin over the Index as used in calculating the Interest Rate. Example, 2% spread over the 10-year, means 2% is added to the 10-year Treasury Bill rate to determine the Interest Rate.

Subscription Line

A subscription line is a kind of revolving line of credit where the borrower has the pre-approved right to receive additional capital contributions as required to fund the project. Subscription lines offer nearly instantaneous funding.

Tenant Improvements

These are alterations contained within a rental agreement that are made by a property owner to customize the space to the needs of the tenant. Also referred to as Leasehold Improvements, common improvements include changes to walls, floors, ceilings, lighting, and more.


The Term of the Loan is the period of time from the funding of the loan to Maturity Date.

Triple Net Lease (“NNN Lease”)

A lease agreement in which the tenant (lessee) is contractually obligated to pay the owner an agreed-upon Base Rent fee, as well as costs associated with the leased asset, including taxes, insurance, and maintenance and repairs incurred during the lease period. These types of lease agreements are often used with Credit Tenants.

Usable Area

This is the portion of office or floor space (suite), measured in square feet, that is utilized exclusively by a tenant. It is considered the total floor space within the boundaries of the leased area, with no exception made for unusable areas, such as entries/exits, columns or other obstructions.

Work Letter

This is a written statement defining the agreement between a tenant (lessee) and owner (lessor) regarding all issues to be addressed, as well as work to be completed, in the build-out of the interior of a space.

Yield Maintenance

This is a form of a Prepayment Penalty that requires the borrower to effectively guarantee to the lender the same yield as if the loan was not prepaid prior to maturity. It only comes into play if Interest Rates are lower than the current Interest Rate on the loan. For example, suppose a loan is originated at 5% fixed for 10-years. If the borrower elected to refinance several years later, and the rates had risen to 6%, then there is no “yield maintenance” because the lender can reinvest the loan proceeds at the now higher 6% rates. If however, rates had gone down to 4%, then the 1% difference would represent income –i.e., the “yield”–that the lender would not receive. Hence, the borrower would have to pay to the lender this yield difference to maintain the yield for the lender.

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