Key Definitions in Debt Terms – A Practical Guide for Investors and Borrowers

Understanding debt terminology is essential for anyone involved in property investment, development or finance.

This guide breaks down the key definitions in debt terms, focusing on the language you will encounter in loan agreements, investment memoranda, and credit committee papers.

What Are Debt Terms?

In simple terms, debt terms describe how a loan works.

They set out:

• how much can be borrowed,

• what it costs,

• what performance is expected, and

• what happens if things don’t go to plan.

For real estate investors and borrowers, these terms often matter more than the headline interest rate. They shape risk, flexibility, and control – particularly in stressed or refinancing scenarios.

Types of Debt

Senior Debt

Senior debt ranks first in the capital structure and benefits from priority repayment and security.

Lower risk – but capped returns.

Mezzanine Debt

Mezzanine debt sits between senior debt and equity, often carrying higher pricing and equity-like features.

Higher return potential – but materially higher risk.

Core Debt Metrics and Definitions

Loan to Value (LTV)

Loan to value (LTV) measures the loan amount as a percentage of the asset’s value.

LTV = Loan Amount ÷ Asset Value

Lower LTVs typically provide greater lender protection, while higher LTVs increase equity risk and amplify returns.

Loan to Cost (LTC)

Loan to cost (LTC) compares total debt to the total project cost, including acquisition, construction, and fees.

LTC = Loan Amount ÷ Total Project Cost

LTC is particularly relevant in development finance, where valuation may lag capital deployment.

Debt Yield

Debt yield measures a property’s income relative to the loan amount.

Debt Yield = Net Operating Income (NOI) ÷ Loan Amount

Unlike LTV, debt yield is value-agnostic and focuses purely on income sustainability – a reason it has gained prominence post-GFC.

Interest Cover Ratio (ICR)

Interest cover ratio (ICR) assesses how comfortably income covers interest payments.

ICR = NOI ÷ Interest Payable

A lower ICR increases refinancing and default risk, especially in rising rate environments.

Margin

The margin is the lender’s spread over a base rate (e.g. SONIA or EURIBOR).

All-in rate = Reference Rate + Margin

Margins reflect risk, structure, asset quality, and liquidity conditions.

Fixed vs Floating Rate

• Fixed rate debt provides certainty of cost meaning the base rate is fixed for some or all of the loan term.

• Floating rate debt fluctuates with the base rate and may be hedged via caps or swaps.

Each carries different risk depending on interest rate volatility and hold period. There is often an upfront cost to putting hedging in place, which reflects the gap between the cap/swap and the forward curve.

Arrangement Fee

An arrangement fee is paid to the lender for originating and structuring the loan.
It is usually expressed as a percentage of the loan amount and paid upfront or capitalised.

Even modest arrangement fees can materially increase the effective annual cost of short-dated debt.

Commitment Fee

A commitment fee is charged on undrawn loan amounts that the lender has committed but not yet advanced.

This is common in:

• development finance

• capex facilities

• revolving credit structures

It compensates the lender for allocating capital that is not yet deployed.

Exit Fee

An exit fee is payable on repayment or refinancing of the loan, typically expressed as a percentage of the outstanding balance.

Exit fees are more common in:

• higher-leverage structures

• short-term or bridge facilities

They can reduce flexibility if an early refinance or asset sale is required.

Extension Fee

An extension fee is payable if the borrower exercises an option to extend the loan maturity.

While often framed as optional, extension fees effectively price refinancing risk and market uncertainty.

Covenants

Covenants are contractual performance thresholds, often linked to:

• LTV

• ICR

• Debt yield

Breaching covenants can trigger cash traps, default interest, or enforcement rights.

Why These Definitions Matter

Debt terms are not just technical detail. They shape how risk is shared between lender and borrower, how much flexibility exists through the life of the loan, and how outcomes are managed if performance drifts.

They influence:

• downside protection

• control in stressed scenarios

• refinancing optionality

• the true risk-adjusted cost of capital

Two loans with the same headline rate can look broadly comparable – yet behave very differently once covenants, fees, security, and development mechanics are fully understood.

Closing Thoughts

With interest rates higher and capital more selective, debt structures are under greater scrutiny than at any point in the last decade. Terms that were once seen as standard are now actively negotiated, tested, and enforced.

The opportunity may sit in the asset – but the risk often sits in the documentation.

The key question is not simply what the debt costs today, but how it performs across the cycle.

Want to Go Deeper?

Understanding definitions is the first step. Applying them in practice is where value is really created.

Within the EiP Academy, we break down:

• how to model debt terms across investment and development scenarios,

• how to read and interrogate term sheets, and

• how to navigate loan agreements with a commercial, investor-led lens.

For anyone looking to move beyond headline pricing and properly assess debt risk, the focus should be on structure, not just yield.