Funding Sources: 113 Key Terms

By Devon Coombs, CPA, MBA · Teaching Professor of Finance, Santa Clara University · Reviewed August 2026

Financing determines who supplies the capital for a real estate deal and in what order those suppliers are repaid, an arrangement commonly described as the capital stack. The vocabulary of this area spans debt instruments such as the bridge loan, the balloon payment, and agency MBS, equity mechanics such as the capital call and the accredited investor standard, and structural protections such as bad boy carve-outs. These terms appear throughout Week 3 of the free Real Estate Finance course, which covers funding sources and the capital stack. Anyone comparing loan quotes or reviewing a fund's offering documents generally needs this language to evaluate the terms on offer.

These terms are taught in Week 3: How Are Real Estate Deals Financed? Funding Sources & the Capital Stack of the free Real Estate Finance course; the full course glossary collects every chapter in one place.

5/50 rule: A REIT ownership requirement: five or fewer individuals cannot own more than 50% of the value of the REIT’s shares during the last half of the taxable year.
accredited investor: An investor meeting specified financial or professional criteria under securities laws. Many private real estate syndications rely on Regulation D exemptions and are offered primarily or exclusively to accredited investors.
Adjusted Funds From Operations: AFFO: FFO adjusted toward recurring cash flow available for dividends by subtracting recurring capital expenditures, tenant improvements, leasing commissions, and straight-line rent. Less standardized than FFO.
AFFO: Adjusted Funds From Operations: FFO adjusted toward recurring cash flow available for dividends by subtracting recurring capital expenditures, tenant improvements, leasing commissions, and straight-line rent. Less standardized than FFO.
agency MBS: Mortgage-backed securities guaranteed by Fannie Mae, Freddie Mac, or Ginnie Mae. They carry very limited credit risk but significant interest rate, prepayment, and leverage risk.
B-piece: The most subordinate (first-loss) bonds in a CMBS, bought by specialized credit investors who conduct detailed loan-level due diligence and may have kick-out rights over the pool before securitization.
bad boy carve-outs: Provisions in a non-recourse loan that create personal liability for the sponsor or guarantor upon specified misconduct: fraud, misrepresentation, misappropriation of rents or deposits, waste, unauthorized transfers or debt, failure to insure, environmental violations, or improper bankruptcy actions.
balloon payment: The lump-sum loan balance still outstanding at maturity when a loan amortizes over a longer period than its term. The borrower must refinance, sell, or otherwise repay it.
binding constraint: The most restrictive of a lender’s sizing tests (LTV, DSCR, debt yield). The maximum loan equals the lowest amount the three tests allow; in higher-rate environments DSCR is often binding.
blind-pool risk: The risk that investors commit capital to a fund before knowing every specific asset it will acquire, underwriting the sponsor, strategy, and track record rather than a single property.
bridge loan: Short-term financing (often 12–36 months, usually floating-rate and interest-only) for an existing property in transition, such as renovation, lease-up, or repositioning, that is expected to qualify for permanent debt once stabilized.
capital call: A request for investors to contribute committed capital when the fund or deal needs it: for acquisitions, expenses, reserves, or follow-on investments.
capital commitment: The total amount an LP agrees to invest in a fund, funded over time through capital calls rather than all at once.
Cash Flow After Debt Service: Cash Flow Before Debt Service minus required debt service, leaving the property-level cash remaining for equity investors before income taxes and ownership-level distributions. (Distinct from the acronym CFADS, which some sources use for “Cash Flow Available for Debt Service,” measured before debt service.)
Cash Flow Before Debt Service: NOI minus capital expenditures, leasing costs, and reserves, leaving the cash available before paying the lender.
cash-flow coverage ratio: Cash Flow Before Debt Service divided by annual debt service. It differs from the standard classroom DSCR (NOI ÷ debt service) because it deducts capital costs and reserves first.
clawback: A provision requiring the GP to return excess promote if later results show it received more than it was ultimately entitled to under the final waterfall calculation.
closed-end fund: A fund with a defined investment period and finite life (often 7–10 years) that usually does not allow routine redemptions; capital is returned as assets are sold or refinanced. Common for value-add and opportunistic strategies.
co-investment: The GP’s own capital invested alongside the LPs. It creates alignment because LPs prefer the sponsor to have meaningful money at risk, not just fees and promote.
common equity: The bottom layer of the capital stack: the residual claim. Common equity is the first capital to absorb losses and the last to receive distributions, but it captures the upside after the senior claims are paid.
completion guarantee: A guarantee, common on construction loans, in which the sponsor agrees to complete the project, protecting the lender if the project is not finished or the budget fails.
conduit CMBS: A CMBS deal pooling many loans diversified across property types, borrowers, and geographies. The benefit is diversification; the drawback is underwriting an entire pool that mixes weaker and stronger assets.
conduit lender: A lender that originates commercial mortgage loans with the intent to securitize them in multi-borrower CMBS pools.
conforming loan: A conventional mortgage that meets Fannie Mae and Freddie Mac eligibility standards and falls within the FHFA conforming loan limit, allowing it to be sold into the agency secondary market.
construction draw: A funding advance on a construction loan released as milestones are completed and verified by the lender or a third-party inspector. Interest usually accrues only on amounts drawn.
construction loan: Financing for ground-up development or major redevelopment, advanced in draws as work is completed and verified. Among the highest-risk forms of senior CRE debt because the asset is not yet income-producing.
core-plus: A real estate strategy (illustrative net IRR ~8–12%, moderate leverage) holding mostly stable assets with modest value-add potential through light renovation, lease-up, or operational improvement.
debt fund: A private lender or private credit vehicle that originates bridge, construction, mezzanine, or preferred-equity capital. More flexible and faster than traditional lenders, but typically higher-priced.
defeasance: A collateral-substitution mechanism: instead of paying off the loan, the borrower buys permitted securities (often Treasuries) whose cash flows cover the remaining scheduled debt payments. The securities replace the real estate as collateral, releasing the property.
deferred developer fee: A portion of the developer’s fee left in the project as a source of capital rather than paid at closing, helping close a financing gap in affordable and policy-driven deals.
denominator effect: When public-market declines shrink the value of an investor’s overall portfolio, real estate becomes an outsized share of the total, prompting investors to seek liquidity from private and open-end real estate funds.
distribution waterfall: The contractual order in which cash is distributed among investors and the sponsor: typically return of capital, preferred return, GP catch-up, and the residual promote split. It determines how the deal’s profits are actually divided.
dividend yield: A REIT’s annual dividend divided by its share price; a common income metric, but not the same as NAV.
dry powder: Capital that has been committed to a fund but not yet invested. It gives the GP flexibility but can also create pressure to deploy before the investment period ends.
equity REIT: A REIT that primarily owns and operates income-producing real estate, earning rent and property-level income.
FFO: Funds From Operations: a REIT performance metric that adds real estate depreciation and amortization back to net income and adjusts for property-sale gains/losses. Analysts use Price / FFO much like a P/E ratio. Not the same as free cash flow.
FHA loan: A mortgage insured by the Federal Housing Administration to expand access to homeownership; it permits high loan-to-value financing (about 96.5%) and requires upfront and annual mortgage insurance premiums.
first-priority lien: A claim on the property that ranks ahead of all other liens. The senior lender’s first-priority lien gives it the first right to foreclose and be repaid from the collateral.
Funds From Operations: FFO: a REIT performance metric that starts with net income and adds back real estate depreciation and amortization and adjusts for gains or losses on property sales. It is not the same as free cash flow.
Ginnie Mae: GNMA: a government entity that does not originate or buy loans but guarantees the timely payment of principal and interest on MBS backed by federally insured or guaranteed loans (FHA, VA, USDA, certain HUD). Its securities carry the full faith and credit of the U.S. government.
GP catch-up: A waterfall tier that gives the GP a larger share (sometimes 100%) of distributions after the preferred return is paid, until the GP has “caught up” to its negotiated profit split. Optional and highly negotiated.
Historic Tax Credit: HTC (IRC Section 47): a federal credit generally equal to 20% of qualified rehabilitation expenditures for certified, income-producing historic structures, often used in adaptive reuse and layered with other capital.
HTC: Historic Tax Credit (IRC Section 47): a federal credit generally equal to 20% of qualified rehabilitation expenditures for certified, income-producing historic structures, often used in adaptive reuse.
hurdle rate: A minimum return (often an IRR or preferred return) that investors must achieve before the GP earns a higher share of profits; multi-tier waterfalls use several hurdles.; Own vs Lease
implied cap rate: A REIT valuation measure: property NOI divided by the REIT’s enterprise value or implied asset value, used to compare public-market pricing to private-market cap rates.
installment sale: A sale in which the seller receives payments over time and may defer recognition of some taxable gain under IRC Section 453, depending on the facts.
intercreditor agreement: An agreement between the senior lender and a junior lender (such as a mezzanine lender) that governs payment priority, foreclosure rights, cure periods, notices, and control if the borrower defaults.
interest reserve: Funds set aside in a construction or transitional loan budget to pay interest during the period when the property does not yet generate enough income to cover debt service.
joint venture: A JV: a negotiated structure, often pairing an operating partner (sourcing, execution, asset management) with a capital partner (most of the equity), with customized approval rights over major decisions.
jumbo loan: A mortgage that exceeds conforming loan limits and therefore cannot be sold to Fannie Mae or Freddie Mac as a standard conforming loan; it usually requires stronger credit, larger down payments, lower DTI, and more reserves.
kick-out right: A B-piece buyer’s right, in many conduit CMBS transactions, to review the loan pool and object to or remove certain loans before the securitization closes.
leasing commissions: Fees paid to brokers to attract and secure tenants. With tenant improvement allowances, they are among the largest leasing costs and are usually modeled below the NOI line.
LIHTC: Low-Income Housing Tax Credit (IRC Section 42): among the most important federal programs for affordable rental housing. Credits are allocated to developers and sold to tax-credit investors for equity, reducing the debt the project needs.
LLC: Limited liability company: a flexible entity widely used in real estate that can combine limited liability, pass-through taxation, and customized operating-agreement economics. Often used as a single-purpose entity to own one property.
loan assumption: A buyer’s assumption of the seller’s existing mortgage, usually with lender approval. It can be very valuable in a rising-rate environment when the existing loan carries a below-market rate.
loan-to-cost: LTC: a construction or value-add metric measuring the loan amount as a percentage of total project cost (rather than value). Often capped around 60% to 75% to ensure meaningful developer equity.
lockout period: A stretch early in a loan’s term during which voluntary prepayment is prohibited entirely.
Low-Income Housing Tax Credit: LIHTC (IRC Section 42): among the most important federal programs for producing and preserving affordable rental housing. A developer receives a credit allocation and sells it to a tax-credit investor for equity, reducing the debt the project needs.
LTC: Loan-to-Cost: a construction/value-add metric measuring the loan amount as a percentage of total project cost, often capped around 60% to 75% to ensure meaningful developer equity.
master servicer: The party that handles normal administration for performing loans in a CMBS pool: collecting payments and managing routine borrower requests.
mini-perm loan: An intermediate-term loan that bridges from construction financing to long-term permanent debt, often used while a newly built property stabilizes.
mortgage constant: The annual debt service on a loan expressed as a percentage of the loan amount, for a given interest rate and amortization period. Used to size a loan under the DSCR test (loan = NOI ÷ (DSCR × mortgage constant)).
mortgage REIT: An mREIT: a REIT that invests primarily in real estate debt (mortgages, MBS, and credit instruments) rather than owning property, earning a net interest spread and often using leverage such as repo financing.
mREIT: Mortgage REIT: a REIT that invests primarily in real estate debt (mortgages, MBS, and credit) rather than owning property, earning a net interest spread and often using leverage such as repo financing.
NAV: Net Asset Value: the estimated market value of a REIT’s underlying assets minus liabilities, usually per share. Trading at a premium or discount to NAV signals the market’s view of the platform, leverage, and outlook.
Net Asset Value: NAV: an estimate of the market value of a REIT’s underlying real estate assets minus liabilities, usually expressed per share. A premium or discount to NAV signals the market’s view of the platform, leverage, and outlook.
net interest margin: The difference between the yield a mortgage REIT earns on its assets and its cost of financing those assets; the source of its spread income.
non-recourse: A loan in which the lender’s recovery is generally limited to the property, the borrower entity, and pledged collateral: the lender usually cannot pursue the sponsor’s personal assets merely because the property underperforms, absent a carve-out.
open-end fund: An evergreen fund with no fixed termination date that may accept new capital and allow periodic redemptions, subject to fund rules and liquidity limits. Common for core and core-plus strategies.
operating agreement: The governing document of an LLC (analogous to a limited partnership agreement) controlling voting, distributions, transfer restrictions, reporting, sponsor authority, removal rights, and the distribution waterfall.
opportunistic: The highest-risk real estate strategy (illustrative net IRR 18%+, high leverage), including development, distressed acquisitions, major redevelopment, complex recapitalizations, or emerging markets; returns driven heavily by appreciation and execution.
pension fund: An institutional investor that manages retirement assets and may invest in real estate directly, through separate accounts, or through commingled funds; a common limited partner in private real estate.
permanent loan: Longer-term, stabilized financing for a property with predictable income and occupancy, the typical takeout for a bridge or construction loan.
PPM: Private Placement Memorandum: the offering document describing a private real estate investment’s opportunity, business plan, risks, fees, conflicts, sponsor background, structure, and investor terms.
prepayment protection: Loan provisions (yield maintenance, defeasance, lockouts, step-down penalties) that compensate the lender or bond investor if the borrower repays before maturity, especially after rates decline.
private credit: Non-bank lending provided by debt funds and similar investors, often used for transitional assets, complex capital stacks, and borrowers needing customized or fast execution.
Private Placement Memorandum: A PPM: the offering document describing the investment opportunity, business plan, risk factors, fees, conflicts, sponsor background, structure, and investor terms in a private real estate offering.
QOF: Qualified Opportunity Fund: the investment vehicle through which investors access Opportunity Zone tax benefits; it must hold qualifying Opportunity Zone property or businesses.
qualified basis: The portion of a LIHTC project’s eligible development cost on which tax credits are calculated; 9% credits are designed to subsidize roughly 70%, and 4% credits roughly 30%, of qualified basis over the credit period.
Qualified Opportunity Fund: A QOF: the investment vehicle through which investors access Opportunity Zone tax benefits; it must hold qualifying Opportunity Zone property or businesses.
qualified rehabilitation expenditures: The rehabilitation costs of a certified historic structure that qualify for the Historic Tax Credit, subject to the Secretary of the Interior’s Standards for Rehabilitation.
recapture: The loss or reclaiming of tax credits (such as LIHTC) if a project fails to meet ongoing income, rent, tenant-eligibility, or affordability requirements during the compliance period.
recourse: A loan feature allowing the lender to pursue the borrower’s or guarantor’s assets beyond the property collateral if the loan defaults. Bank, bridge, and construction loans are more likely to carry full or partial recourse.
redemption queue: A waiting line imposed by an open-end fund when redemption requests exceed available liquidity, delaying or limiting withdrawals until the fund can raise cash.
Regulation D: SEC rules providing exemptions from securities registration commonly used for private real estate offerings, including Rule 506(b) and Rule 506(c).
repurchase agreement: A repo: short-term borrowing against owned securities, commonly used by mortgage REITs for leverage. It can create a maturity mismatch between longer-duration assets and short-term funding.
return of capital: The waterfall tier (and the REIT distribution component) that returns an investor’s original contributed capital before profit-sharing begins; as a REIT distribution it is not immediately taxed but reduces the shareholder’s basis.
Rule 506(b): A Regulation D exemption that prohibits general solicitation but allows an unlimited number of accredited investors and a limited number of sophisticated non-accredited investors.
Rule 506(c): A Regulation D exemption that permits general solicitation but requires all purchasers to be accredited investors, with the issuer taking reasonable steps to verify accredited status.
same-store NOI growth: NOI growth measured only on properties owned in both comparison periods, isolating operating performance from the effect of acquisitions and dispositions.
SASB CMBS: A single-asset, single-borrower CMBS securitizing one large loan or related loans to one borrower. It allows direct underwriting of a specific asset but concentrates risk; SASB has become a large share of issuance.
SBA 504: A Small Business Administration program for small businesses acquiring or improving owner-occupied commercial real estate, typically structured as a senior bank loan, an SBA-backed CDC loan, and at least 10% borrower equity. The business must generally occupy 51% (existing) or 60% (new) of the building.
secondary mortgage market: The market where originated loans are sold, pooled, and converted into mortgage-backed securities, connecting local borrowers and lenders to global fixed-income investors.
Section 199A: A federal provision under which many individual investors may deduct a portion of qualified business income, including certain ordinary REIT dividends, subject to limitations and current tax law.
Section 223(f): A HUD/FHA program providing FHA-insured financing for purchasing or refinancing existing multifamily properties, offering long-term (up to 35-year), fully amortizing, fixed-rate, non-recourse debt, with a detailed and lengthy approval process.
securitization: The process of pooling loans and converting them into tradeable securities (such as MBS or CMBS) sold to investors, which gives originating lenders liquidity to make new loans.
seller financing: Also called a purchase-money mortgage or seller carryback: the seller lends the buyer part of the purchase price and collects payments over time, common when institutional debt is expensive or unavailable.
senior debt: The first mortgage loan secured by the property. It has the highest payment priority and the strongest collateral position (a first-priority lien), and therefore usually carries the lowest required return in the capital stack.
SOFR: The Secured Overnight Financing Rate: a benchmark interest rate. Floating-rate commercial loans are commonly priced as SOFR plus a credit spread.
soft debt: Subordinate, often below-market or deferred-payment financing (frequently from public or mission-driven sources) used to fill gaps in affordable housing and community-development capital stacks.
special servicer: The party that manages a CMBS loan that is delinquent, in default, or needs a major workout: negotiating modifications, extensions, foreclosures, discounted payoffs, or asset sales.
spread investing: A mortgage REIT’s core model: earning a yield on mortgage assets while paying a lower cost to finance them, capturing the difference (the net interest spread or net interest margin).
step-down prepayment penalty: A prepayment fee that declines over the loan term, for example 5%, 4%, 3%, 2%, then 1% in successive years.
subscription agreement: The document an investor signs to formally commit capital to a deal, usually including investor representations such as accredited-investor status.
syndication: A structure in which one sponsor raises capital from multiple passive investors under standardized terms; the sponsor controls the investment and LPs receive the rights described in the PPM and operating agreement.
tax credit: A dollar-for-dollar reduction of tax liability, which makes it more valuable than a deduction (which only reduces taxable income). Programs like LIHTC and HTC convert tax credits into upfront project equity.
tax-exempt bonds: Bonds whose interest is exempt from federal income tax, often used (with 4% LIHTC credits) to finance affordable housing at a lower cost of capital.
tranche: A class of bonds in a CMBS (or other securitization) with a distinct payment priority, credit rating, yield, and loss exposure. Senior tranches are paid first; junior tranches absorb losses first.
unit turn costs: In multifamily, the make-ready costs to prepare an apartment for the next resident: paint, cleaning, minor repairs, flooring, and appliances. Routine turns may be operating expenses; larger replacements may be capital.
USDA loan: A government-guaranteed mortgage supporting homeownership in eligible rural areas for qualifying low- and moderate-income borrowers, sometimes with no-money-down financing.
VA loan: A mortgage guaranteed by the Department of Veterans Affairs for eligible veterans, service members, and certain surviving spouses; it can allow zero down payment and no monthly private mortgage insurance, though a VA funding fee may apply.
vintage year: The year a fund begins investing. It matters because fund performance is heavily influenced by the market cycle in which capital is deployed.
yield maintenance: A prepayment premium designed to preserve the lender’s expected yield. On early repayment the borrower pays principal, accrued interest, and a premium generally based on the present value of the lender’s lost interest income relative to a benchmark rate.

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