CRE
Glossary
Your comprehensive reference guide to commercial real estate terminology. Search terms or browse alphabetically.
76 terms defined
TIC
Tenants in Common. A co-ownership structure where multiple investors own undivided interests in a property. Popular for 1031 exchanges.
Amortization
The process of spreading loan payments over time. Most commercial loans are amortized over 25-30 years but have shorter loan terms (5-10 years), requiring balloon payments at maturity.
Anchor Tenant
A major tenant, typically a national retailer, that draws significant foot traffic to a retail property. Anchor tenants typically occupy 30-50% of a shopping center and negotiate favorable terms in exchange for their draw.
Balloon Payment
The remaining principal balance due at the end of a loan term. Commercial loans with 5-10 year terms are often amortized over 25-30 years, leaving a large balloon payment when the loan matures.
Basis Point
One-hundredth of one percent (0.01%). Used to describe interest rate changes or fee spreads. 25 basis points equals 0.25%.
Cap Rate
Capitalization rate. The ratio of Net Operating Income to property value. Used to compare unleveraged returns across properties. Formula: NOI ÷ Property Value = Cap Rate.
Capitalization (Cap) Rate
See Cap Rate.
Cash-on-Cash Return
The ratio of pre-tax cash flow to total cash invested. Measures return on actual out-of-pocket capital. Formula: Annual Cash Flow ÷ Total Cash Invested = CoC Return.
Class A Property
The highest quality commercial properties in a market. Class A buildings have premium finishes, excellent locations, strong credit tenants, and command the highest rents.
Class B Property
Properties that are functional but lack the premium features of Class A. May have deferred maintenance, less desirable locations, or aging finishes. Often targeted for value-add investments.
Class C Property
Properties with significant deferred maintenance, poor locations, or outdated improvements. Lower rents but offer the highest potential for value creation through renovations.
Closing Costs
Fees and expenses paid at property closing. Typically 2-5% of purchase price for CRE, including loan origination fees, title insurance, legal fees, and transfer taxes.
COGS
Cost of Goods Sold. Not typically used in CRE; operating expenses are the equivalent measurement for property costs.
Concessions
Incentives offered to tenants to sign leases. May include free rent periods, tenant improvement allowances, or reduced security deposits.
Core Property
Stabilized, high-quality properties in prime locations with credit tenants. Lower risk and lower returns than value-add or opportunistic investments.
Debt Service
The total principal and interest payments made on a loan over a specific period, typically annually or monthly.
Debt Service Coverage Ratio (DSCR)
The ratio of NOI to annual debt service. Lenders require minimum DSCR (typically 1.20x-1.25x) to ensure cash flow covers loan payments. Formula: NOI ÷ Debt Service = DSCR.
Delaware Statutory Trust (DST)
A legal trust structure that holds title to real property and allows multiple investors to own fractional interests. Popular for 1031 exchanges due to its passive investment structure.
Due Diligence
The investigation period before closing (typically 30-60 days) when buyers verify property condition, financials, leases, and legal matters.
Effective Gross Income (EGI)
Total potential gross income minus vacancy and credit loss, plus other income. The stabilized income used in CRE underwriting.
Equity Multiple
Total distributions divided by total capital invested. A 2.0x equity multiple means you received twice your original investment. Used to measure total return.
Equity REIT
A REIT that owns and operates income-producing real estate, as opposed to mortgage REITs that finance properties through loans.
Escrow
A neutral third party holds funds and documents during the closing process. Also refers to accounts held by lenders to collect property taxes and insurance.
Exit Strategy
The planned method for exiting an investment. Common strategies include sale to another buyer, refinancing, or 1031 exchange into another property.
Fair Market Value
The price a willing buyer and seller would agree to under normal market conditions, with neither under pressure to act.
FF&E
Furniture, Fixtures, and Equipment. Personal property included in some CRE sales. Typically excluded from real property value.
Force Majeure
A contract clause excusing performance due to events beyond a party's control, such as natural disasters or pandemics.
Full-Service Lease
A lease where the landlord pays all operating expenses. Rent includes taxes, insurance, and maintenance. Common for office properties. Also called Gross Lease.
GAAP
Generally Accepted Accounting Principles. The standard framework for financial reporting.
GNNN Lease
Gross NNN Lease. Tenant pays base rent; landlord pays all expenses. Combines gross lease simplicity with NNN terminology.
Going-In Cap Rate
The cap rate at which a property is purchased. Used to measure entry valuation and compare to exit expectations.
Gross Lease
See Full-Service Lease.
Gross Potential Income
Maximum possible rental income if the property were 100% occupied at market rents. Used as the starting point for income analysis.
Ground Lease
A lease of land only. The tenant owns or leases buildings and improvements. Ground leases typically have terms of 30-99 years.
Hold Period
The length of time an investor owns a property before selling. CRE holds typically range from 3-10 years depending on investment strategy.
IRR
Internal Rate of Return. The discount rate that makes the net present value of all cash flows equal to zero. The gold standard for measuring total return including time value of money.
J-Curve
A cash flow pattern where early returns are negative due to acquisition costs and limited income, followed by improving returns as the investment stabilizes.
LEED Certification
Leadership in Energy and Environmental Design. A green building certification program recognizing sustainable construction and operations.
Letter of Intent (LOI)
A preliminary agreement outlining basic deal terms before final contract negotiation. Also called Term Sheet.
Leverage
The use of borrowed money to finance an investment. Calculated as Loan-to-Value ratio. Moderate leverage can enhance returns; excessive leverage increases risk.
Loan-to-Value (LTV)
The ratio of loan amount to property value. Commercial lenders typically require 65-80% LTV. Formula: Loan Amount ÷ Property Value = LTV.
Lock Box
A mechanism where tenant rent payments are sent to a lender-controlled account to ensure debt service payments are made.
Mezzanine Financing
Financing that sits between senior debt and equity. Typically 10-20% of capital stack, offering higher returns than senior debt but lower than equity.
Net Operating Income (NOI)
The foundation of CRE valuation. Annual income minus operating expenses, before debt service and capital expenditures. Formula: Gross Income − Operating Expenses = NOI.
Net Present Value (NPV)
The value of all future cash flows discounted to today's dollars. Used to compare investments with different cash flow patterns.
NNN Lease
Triple Net Lease. Tenant pays base rent plus taxes, insurance, and maintenance. Landlord receives net income with minimal responsibilities.
Operating Expenses
Costs required to maintain and operate a property. Includes utilities, maintenance, management, insurance, and taxes. Excludes debt service and capital improvements.
Opportunistic
Investment strategy targeting high-risk properties with significant value-add potential or distressed situations. Target IRRs typically exceed 20%.
Pass-Through
Operating expenses that landlords pass through to tenants in addition to base rent. Common in NNN leases where tenants pay pro-rata shares of expenses.
PIP
Property Improvement Plan or Tenant Improvement Package. Budget for renovating or customizing a space, either paid by landlord or tenant.
Prepayment Penalty
Fee charged by lenders if loan is paid off early. Protects lenders from lost interest income.
Pro-Rata Share
A tenant's proportionate share of shared expenses, typically based on square footage relative to total building or property.
Quintuple Net Lease
See NNN Lease.
REIT
Real Estate Investment Trust. A company that owns and operates income-producing real estate. REITs trade on exchanges and offer liquid real estate exposure.
RENIV
Rent Net of Operating Expenses. Another term for NOI when discussing property income.
Replacement Reserve
Funds set aside for future capital expenditures like roof replacement or HVAC updates. Typically 1-5% of gross income annually.
Reversion
The value received when selling an investment. Includes sale proceeds plus any remaining cash flow after final year operations.
Sandwich Lease
A sublease situation where the tenant sublets to another tenant. The original tenant is 'sandwiched' between the landlord and subtenant.
SEC
Securities and Exchange Commission. Federal agency regulating securities offerings and markets. Private placements must comply with SEC regulations.
SF
Square Feet. The standard measurement for commercial properties. May be usable SF, rentable SF, or gross SF depending on context.
Soft Costs
Non-construction costs associated with development, including architectural fees, permits, legal fees, and financing costs.
Sourcing Fee
Compensation paid to finders or deal originators. Regulated by securities laws depending on investor accreditation and offering type.
Stabilized Occupancy
The occupancy level a property achieves under normal market conditions. Often used as the baseline for NOI projections.
Step-Down Rent
Lease structure where rent starts higher and decreases over the lease term. Common in retail with escalating expenses.
Step-Up Rent
Lease structure where rent increases over the lease term, typically 2-3% annually. The most common structure for commercial leases.
Survey
A property boundary survey shows the legal boundaries and any encroachments. Required by most lenders.
Swap Rate
The fixed interest rate in an interest rate swap agreement. Used to hedge against rising rates on variable-rate debt.
Tax Key
The assessor's identification number for a property. Used to research tax records and assessments.
Title Insurance
Insurance protecting against losses from title defects, liens, or encumbrances. Required by lenders; owners policies are optional.
Turnkey
A fully renovated property ready for immediate occupancy or leasing with minimal deferred maintenance.
Underwriting
The process of analyzing a property's financials, condition, and market position to determine investment merit and appropriate loan terms.
Usable Square Feet
The actual floor space a tenant can occupy. Excludes common areas like hallways and restrooms.
Value-Add
Investment strategy purchasing underperforming properties to increase income or reduce expenses through active management, renovations, or repositioning.
Vesting
The schedule by which an investor earns ownership in a deal. Common in fund structures where returns are split after preferred return is met.
Yield Maintenance
A prepayment penalty calculated to make the lender indifferent to early payoff. More borrower-friendly than defeasance.
Zoning
Local government regulations determining how property can be used. Zoning classifications include residential, commercial, industrial, and mixed-use.
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