CRE Glossary: 50+ Commercial Real Estate Terms
Commercial real estate has its own language. Whether you're evaluating your first deal or closing your hundredth, having a quick reference for CRE terminology is invaluable. This glossary covers 50+ essential terms used in underwriting, valuation, and investment decision-making.
Updated April 2026 | Use Ctrl+F to search
Absorption Rate
The percentage of available commercial space leased in a market during a specific period (usually quarterly or annually). A 10% absorption rate means 10% of vacant space was leased. High absorption suggests a tight market and upward rent pressure.
Amortization
The scheduled repayment of a loan through regular installments of principal and interest. A 25-year amortization means the loan will be fully repaid in 25 years. Longer amortization = lower monthly payments but higher total interest paid.
Base Rent
The minimum annual rent a tenant pays, excluding any tenant reimbursements for taxes, insurance, or common area maintenance (CAM). In a $100/sq ft rent quote, base rent is typically $80/sq ft with $20/sq ft in reimbursements.
Breakeven Occupancy
The occupancy level at which operating revenue equals operating expenses (NOI = 0). A property might have breakeven occupancy at 75%, meaning occupancy above 75% generates positive NOI. Below 75%, the property operates at a loss.
Broker Opinion of Value (BOV)
An informal, non-binding estimate of property value provided by a commercial real estate broker. Less rigorous than an appraisal and useful for initial pricing guidance. Often included in the Offering Memorandum.
CAM Charges
Common Area Maintenance charges passed to tenants. Includes costs for parking lots, hallways, lobbies, landscaping, security. In NNN leases, tenants pay CAM. Typically estimated at $4–$15/sq ft annually depending on property type and location.
Cap Rate (Capitalization Rate)
Year 1 NOI divided by property value. Used as a quick valuation metric. A property with $500k NOI valued at $10M has a 5% cap rate. Inverse of P/E ratio in stocks. See cap rate guide.
Capital Expenditure (CapEx)
Major improvements to a property that extend its useful life or improve operations. Examples: roof replacement, parking lot resurfacing, HVAC upgrade, building facade renovation. CapEx is excluded from NOI but included in cash flow analysis.
Cash-on-Cash Return
Year 1 equity cash flow divided by initial equity investment. A property generating $100k in cash flow on a $1M equity investment has a 10% cash-on-cash return. Typically 6–10% for stabilized properties, lower for value-add deals under renovation.
Class A/B/C Property
Property classification by age, condition, and location. Class A = newest, best-maintained, prime location (trades at lowest cap rates ~3–4%). Class B = mid-vintage, good condition, secondary markets (5–6% cap rates). Class C = older, deferred maintenance, tertiary markets (6–8%+ cap rates).
CMBS (Commercial Mortgage-Backed Securities)
Loans sold and securitized in capital markets. The originating lender sells the mortgage to investors as tradable securities. CMBS loans tend to have stricter underwriting and more loan-level servicing than traditional bank loans.
Concessions
Landlord incentives to attract tenants, typically in soft markets. Examples: free rent for first 6 months, tenant improvement (TI) allowances, moving assistance. Concessions reduce effective rent and should be factored into underwriting.
Cost Segregation
An advanced tax strategy that allocates building costs to personal property and land improvements, enabling accelerated depreciation. A $10M acquisition might be cost-segregated to create $2M in depreciable personal property (5–15 year life) vs. 27.5–39 year building depreciation.
Debt Service Coverage Ratio (DSCR)
NOI divided by annual debt service (principal + interest). A property with $1M NOI and $800k annual debt service has 1.25x DSCR. Lenders typically require 1.20–1.35x DSCR. See NOI guide.
Debt Yield
NOI divided by the total loan amount (not property value). A $1M NOI on a $10M loan = 10% debt yield. Used by bridge lenders and distressed buyers as a quick underwriting metric for cash-flow based lending.
Defeasance
Method of refinancing or paying off a CMBS loan early by substituting a collateral pool (Treasury bonds or other safe securities) for the property. An alternative to prepayment penalties. Defeasance involves legal, appraisal, and treasury costs (typically $100k–$500k).
Discount Rate (WACC)
The interest rate used to discount future cash flows back to present value in DCF models. Typically 8–12% for CRE, reflecting cost of capital and risk. Higher discount rate = lower present value. Also called Weighted Average Cost of Capital (WACC).
Effective Gross Income (EGI)
Gross rental income minus vacancy loss and bad debt allowance. If a property has $1M in potential rent but 5% vacancy, EGI = $950k. The starting point for NOI calculations after vacancy adjustments.
Equity Multiple
Total cash distributions divided by initial equity investment. A 2.0x equity multiple means you got back twice your investment. Most deals target 1.8–2.5x over a 5–10 year hold. Also called "money multiple" or "MOIC" (Multiple on Invested Capital).
Escalation Clause
Lease provision that increases rent over time. Common escalations: fixed (3% annually), indexed to inflation (CPI), or step (rent jumps on renewal). Escalations protect landlords from rent stagnation and are critical for NOI growth projections.
Estoppel Certificate
A legal document signed by a tenant confirming lease terms, rent payment status, and outstanding defaults. Provided during due diligence to verify the lease matches the rent roll and that no payment issues exist.
Expense Stop
A rent escalation mechanism where the tenant pays reimbursement for operating expenses only above a base year threshold. If base year expenses are $10/sq ft and year 2 expenses are $12/sq ft, tenant pays overage ($2/sq ft). Protects landlords from expense inflation.
Free Rent
Tenant concession where no rent is due for an initial period (e.g., 3 months free on a 5-year lease). Often used in soft markets. When underwriting, always convert to effective rent by spreading the concession over the full lease term.
Going-In Cap Rate
The cap rate at acquisition. If you buy a property for $10M with $500k NOI, your going-in cap rate is 5%. Backward-looking metric based on current/historical NOI. See cap rate guide.
Gross Lease
Tenant pays only base rent; landlord covers all operating expenses (property taxes, insurance, maintenance, utilities). Most expensive lease structure for landlords, simplest for tenants. Common in Class A office and multifamily. See lease types guide.
Ground Lease
Landlord owns land, tenant owns/develops building and pays annual ground rent (30–99 years typical). Used in prime retail/office locations. See lease types guide.
Holdover Tenant
A tenant remaining in the space after the lease has expired. Typically occupies at month-to-month terms and at a higher rent (often 125–150% of last lease rate). Holdover tenants have no renewal rights and can be evicted per local law.
Internal Rate of Return (IRR)
The annualized return on equity accounting for timing of all cash flows (initial investment, annual distributions, and sale proceeds). Most comprehensive return metric. Target IRR for CRE: 12–25% depending on risk profile.
Letter of Intent (LOI)
Non-binding preliminary agreement outlining purchase price, terms, and key conditions (due diligence period, financing contingencies, inspection rights). Precedes the formal purchase agreement. Usually includes a due diligence period of 30–60 days.
Loan-to-Value (LTV)
Loan amount divided by property value. An $8M loan on a $10M property = 80% LTV. Lenders limit LTV to 60–80% based on property class and creditworthiness. Higher LTV = more borrower risk, lower LTV = more owner equity.
Loss Factor
In office buildings, the difference between usable square footage (actual office space) and rentable square footage (includes share of common areas). If usable is 8,000 sq ft but rentable is 10,000 sq ft, loss factor = 20%. Standard loss factor: 15–25%.
Market Rent
Rent comparable properties are commanding in the submarket. If comparable Class A office is leasing at $50/sq ft but your tenant pays $35/sq ft, you have upside on renewal. Market rent is key to NOI growth assumptions.
Modified Gross Lease
Hybrid lease where tenant pays base rent plus some (but not all) operating expenses. Common structure: base year + overage (tenant reimburses portion of expense increases above base year). See lease types guide.
Net Absorption
Change in vacant space over a period, accounting for new supply. If 100k sq ft leased but 50k sq ft new construction completed, net absorption = 50k sq ft. Can be negative in oversupplied markets (more space vacant than leased).
Net Operating Income (NOI)
Gross rental income minus operating expenses, excluding debt service and capital expenditures. Foundation of all CRE valuation. Property Value = NOI / Cap Rate. See NOI guide.
Net Rentable Area (NRA)
Rentable square footage including the tenant's pro-rata share of common areas (lobbies, hallways, restrooms). Used for rent calculations. In office buildings, NRA is typically 15–25% larger than usable area due to common area allocation.
Operating Expense Ratio
Operating expenses divided by effective gross income (EGI). A property with $1M EGI and $400k opex has 40% operating expense ratio. Lower ratios indicate higher NOI margins. NNN leases have lower ratios (tenants pay most expenses).
Pass-Through Expenses
Operating costs billed directly to tenants on a pro-rata basis. In NNN or Modified Gross leases, property taxes, insurance, and CAM are pass-throughs. Tenants receive annual true-up bills if actual expenses exceed budgeted amounts.
Preferred Return
Guaranteed annual distribution to preferred equity or LP investors before other distributions. Typically 6–8%. Example: if preferred return is 7% and LP capital is $10M, LPs receive 7% ($700k/year) before GP receives any profit share.
Pro Forma
Projected financial statements (P&L, cash flow, balance sheet) for future periods, typically 5–10 years. Used in underwriting and valuation. Pro forma NOI assumes normalized operations and is forward-looking (unlike historical T12 actuals).
Promote
Additional profit share earned by the GP (general partner) once a hurdle rate is exceeded. Example: GP gets 30% of profits above 15% IRR. Aligns GP incentives with LP returns and rewards outperformance.
Reversion Value
Estimated sale price at end of hold period (typically year 5 or 10). Calculated using exit cap rate applied to stabilized exit year NOI. Example: $800k NOI / 5% exit cap rate = $16M reversion value. Terminal value in DCF models.
Stabilized NOI
NOI after all rent-ups, renovations, and lease-ups are complete and operations normalize. Year 1 may show low NOI if the property was partially vacant; stabilized NOI (typically year 2–3) shows sustainable earnings.
Tenant Improvement (TI) Allowance
Cash allowance the landlord provides to fit out a tenant's space. Typical allowance: $40–100/sq ft depending on market and property class. TI allowances are rent concessions and should be amortized into underwriting.
Terminal Cap Rate (Exit Cap Rate)
Assumed cap rate when selling at end of hold period. Used to calculate reversion value. If you assume 5.5% exit cap rate and stabilized NOI is $800k, exit value = $14.5M. Market cap rates and interest rates drive exit cap rate assumptions.
Triple Net Lease (NNN)
Tenant pays base rent plus three "nets": property taxes, insurance, and common area maintenance. Landlord's responsibility is minimal. High NOI margins (50–65%) but landlord pays for structural repairs. See lease types guide.
Usable Square Footage
The actual rentable space within a tenant's demise (walls, partitions, bathrooms), excluding shared common areas. In a 10,000 sq ft floor with 2,000 sq ft of common areas, usable is 8,000 sq ft. Rentable (NRA) is 10,000 sq ft.
Vacancy Rate
Percentage of available space that is unoccupied. A building with 100,000 sq ft total and 10,000 sq ft vacant has 10% vacancy. Submarket vacancy indicates supply/demand balance and affects rent growth and tenant retention assumptions.
Weighted Average Lease Term (WALT)
Average remaining lease term across all tenants, weighted by rent contribution. A property with 50% rent from 5-year leases and 50% from 2-year leases has 3.5-year WALT. Long WALT reduces turnover/vacancy risk.
Yield on Cost
First-year NOI divided by total acquisition cost (purchase price + CapEx). If you buy a $10M property and spend $1M on renovations, yield on cost = NOI / $11M. Development projects use yield on cost instead of cap rate since the property is not yet stabilized.
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