Reference
Commercial Real Estate Glossary
Clear, plain-English definitions for 72 key commercial real estate terms — investment metrics, lease structures, transaction processes, financing concepts, and tax strategies. Click any term for a full explanation.
Investment Metrics
12 terms
Cap Rate (Capitalization Rate)
The ratio of a property's Net Operating Income to its purchase price, expressed as a percentage. The primary metric for comparing commercial real estate investments.
NOI (Net Operating Income)
Annual income from a property after deducting operating expenses — before debt service, taxes, and capital expenditures.
Cash-on-Cash Return
Annual pre-tax cash flow divided by total cash invested. The levered return on your actual equity.
IRR (Internal Rate of Return)
The annualized rate of return over an investment's hold period, accounting for timing of all cash flows including sale proceeds.
Equity Multiple
Total cash distributions divided by total cash invested. A simple multiplier showing how many times you got your money back.
Yield on Cost
For development deals: stabilized NOI divided by total development cost. The development spread vs. market cap rate.
Pro Forma
A projected financial statement for a property showing expected income, expenses, and cash flow over time.
Underwriting
The process of evaluating a property's financial performance, risks, and potential returns before committing to invest.
Operating Expenses (OpEx)
Recurring costs required to operate a property — taxes, insurance, maintenance, utilities, management.
CapEx (Capital Expenditures)
One-time investments to improve, replace, or extend the useful life of a property — roof replacement, HVAC, parking lot.
Market Rent
The rent a property would command if leased today in an arms-length transaction. Used to evaluate mark-to-market upside.
Rent Roll
Schedule of all tenants in a property showing unit, square footage, lease terms, and rent amounts. Core due diligence document.
Lease Terms
11 terms
NNN Lease (Triple Net Lease)
A commercial lease where the tenant pays property taxes, insurance, and maintenance on top of base rent — making the landlord's income almost entirely passive.
Absolute NNN Lease
The purest form of NNN lease — tenant is responsible for everything including roof and structure.
Double Net Lease (NN)
Lease where tenant pays taxes and insurance but landlord remains responsible for structural items like roof and HVAC replacement.
Ground Lease
Long-term lease of land only — tenant owns building improvements on land owned by the lessor.
Full-Service Lease (Gross Lease)
Lease where the landlord pays all operating expenses (taxes, insurance, maintenance, utilities). Common in office buildings.
Modified Gross Lease
Hybrid lease structure where landlord and tenant split operating expenses in various ways.
Estoppel Certificate
A signed tenant statement confirming lease terms, rent, and any claims against the landlord — required during commercial property sales.
SNDA (Subordination, Non-Disturbance & Attornment Agreement)
Three-party agreement between tenant, landlord, and lender protecting tenant's lease rights in case of foreclosure.
CAM (Common Area Maintenance)
Tenant's proportionate share of expenses for maintaining common areas of a multi-tenant property.
TI Allowance (Tenant Improvement Allowance)
Dollar amount landlord contributes toward tenant's buildout of leased space, typically quoted per square foot.
Free Rent / Rent Abatement
Period at lease start when tenant doesn't pay rent, used to offset buildout costs or attract tenants.
Transaction Terms
12 terms
LOI (Letter of Intent)
Non-binding document outlining key deal terms between buyer and seller before drafting the formal purchase agreement.
PSA (Purchase and Sale Agreement)
The binding contract that governs a commercial real estate transaction. Drafted after LOI acceptance.
Earnest Money
Deposit paid by buyer to seller at contract signing, typically 1-5% of purchase price. Refundable during due diligence, non-refundable after.
Going Hard
The moment earnest money becomes non-refundable, typically at end of due diligence period.
Due Diligence
The investigation period after contract signing, typically 30-90 days, when buyer inspects everything about the property.
Phase I Environmental Site Assessment
Records-based investigation to identify potential environmental contamination. Required by virtually every commercial lender.
Phase II ESA
Physical environmental testing with soil borings and groundwater sampling, triggered when a Phase I identifies contamination risks.
PCA (Property Condition Assessment)
Commercial building inspection far more comprehensive than residential — evaluates structure, systems, and projects capital expenditures over 10-12 years.
ALTA Survey
The gold-standard land survey for commercial properties — maps boundaries, easements, improvements, and flood zones.
Title Commitment
The title company's preliminary report showing what it will insure — exceptions, liens, easements, and encumbrances.
Title Insurance
Insurance protecting buyer and lender against title defects discovered after closing. Both owner's and lender's policies are standard.
Fee Simple
The most complete form of real estate ownership — full ownership of both land and improvements, with no time limit.
Financing
10 terms
DSCR (Debt Service Coverage Ratio)
Ratio of NOI to annual debt service. Lenders require 1.20x-1.30x+ typical for commercial loans.
Debt Yield
NOI divided by total loan amount. A lender metric measuring loan safety independent of interest rate.
LTV (Loan-to-Value)
Loan amount as a percentage of property value. Typical commercial LTV ranges 65-80%.
LTC (Loan-to-Cost)
Construction loan amount as a percentage of total project cost. Typical LTC ranges 65-80%.
Bridge Loan
Short-term (1-3 year) commercial loan used to acquire, stabilize, or reposition a property before permanent financing.
CMBS (Commercial Mortgage-Backed Securities)
Securitized commercial real estate loans pooled and sold as bonds to investors. Competitive rates but rigid terms.
Construction Loan
Short-term financing for ground-up development, disbursed in draws as construction progresses.
Sponsor / Syndicator / General Partner
The principal who organizes a real estate deal, raises capital, and manages the investment on behalf of passive investors.
Promote / Carried Interest
The sponsor's share of profits above a preferred return threshold. Aligns sponsor incentives with investor returns.
Limited Partner (LP)
Passive equity investor in a syndicated deal who provides capital but has no operational role. Liability limited to investment amount.
Development & Construction
7 terms
Development Spread
The difference between a development project's yield on cost and the market cap rate. The profit margin of ground-up CRE development.
Build-to-Suit (BTS)
Development model where a developer builds a property specifically designed for a committed tenant under a pre-negotiated lease.
Zoning
Municipal regulations dictating how land can be used — commercial, residential, industrial, mixed-use.
Entitlements
The governmental approvals required before development can proceed — site plan, variance, conditional use, plat approval.
Variance
Municipal approval allowing a specific property to deviate from zoning requirements due to unique hardship.
Site Plan
Engineering drawings showing how a site will be developed — building, parking, drainage, landscaping, utilities.
Civil Engineer
Licensed engineer who designs site-level infrastructure — grading, drainage, utilities, site plans.
Valuation & Appraisal
6 terms
Income Approach (to Valuation)
Valuation method based on applying a cap rate to NOI. The primary approach for income-producing commercial real estate.
Sales Comparison Approach
Valuation method based on recent sales of comparable properties. Used alongside the income approach.
Cost Approach
Valuation method based on replacement cost minus depreciation. Useful for special-purpose properties without direct comparables.
Reversion Value
The estimated sale value of a property at the end of an investor's hold period or at the end of a ground lease term.
DCF (Discounted Cash Flow)
Valuation method that discounts projected future cash flows (including sale proceeds) back to present value using a target rate of return.
Exit Cap Rate (Terminal Cap Rate)
The cap rate used to value a property at the end of an investment hold period — typically 25-50 bps higher than entry cap.
Property Types
3 terms
Single-Tenant Net Lease
Commercial property leased to one tenant, typically under an NNN structure. The core asset class for 1031 exchange buyers.
Multi-Tenant Property
Commercial property with multiple tenants. Includes retail shopping centers, office buildings, and industrial parks.
Value-Add Real Estate
Investment strategy of buying underperforming commercial properties and increasing value through renovation, rent growth, and repositioning.
Tax & Legal
11 terms
1031 Exchange (Like-Kind Exchange)
IRS-approved strategy allowing investors to defer capital gains taxes by reinvesting proceeds from sold investment property into like-kind property.
Qualified Intermediary (QI)
IRS-required neutral third party that holds 1031 exchange proceeds and facilitates the transaction.
Boot
Non-like-kind property or cash received in a 1031 exchange. Boot is taxable.
Opportunity Zone
Federally-designated economically distressed area where investments via Qualified Opportunity Funds receive tax incentives including deferred and tax-free gains.
Capital Gains Tax
Federal tax on the profit from selling an investment asset. Long-term rate is 0-20% plus 3.8% NIIT for most real estate investors.
Depreciation Recapture
Tax levied on the gain from depreciation previously claimed on an investment property, at a maximum 25% federal rate.
Depreciation
Tax deduction allowing investors to write off the cost of an income-producing building over its useful life — 39 years for commercial, 27.5 for residential.
Cost Segregation
IRS-approved tax strategy that reclassifies portions of a building into accelerated depreciation schedules (5 or 15 years) instead of 39 years.
Bonus Depreciation
IRS provision allowing investors to deduct a percentage of qualifying property costs in the first year. Phasing out from 100% (2022) to 0% (2027).
Constructive Receipt
The IRS doctrine that treats money as received when it becomes available to you — critical concept in 1031 exchanges.
Environmental Contamination Liability
Under federal CERCLA law, property owners can be held liable for contamination regardless of who caused it — even if it occurred before they owned the property.
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