Commercial Real Estate Finance
Basic financial terms
Debt: Borrowed money. Usually paid back with interest. The
piece of paper that lays out the terms of borrowing the money is
usually called a ‘Note’. When a borrower wants to get money from
someplace else besides a single lender, they create “Bonds” which is
just another name for an agreement to pay back a loan. There are
some differences between the two, but suffice it to say they are both
the borrowing of money (the ‘Debt’ or ‘Principal’) with the promise to
pay it back with interest.
Interest: The cost of borrowing money (cost of debt). It is
usually paid as a percentage of the amount borrowed (the ‘’Principal’)
on an annual basis. (ooo! Think about why your savings account
pays interest!)
Equity: An ownership interest in something. Share the risk.
Share the reward. Share the profit. Share the loss.
It is important to understand the difference between debt and equity.
Debt is paid back with interest. If your property makes money or
loses money, doesn’t matter. You promise to pay back the debt with
interest. Equity, on the other hand, means ownership. You don’t pay
interest on the amount of equity you receive, instead you share in the
profits or losses with the other “equity partners” or owners. Think
about it and be sure you understand the difference. By the way,
those folks with equity are typically on the hook to pay back any debt!