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CRE Glossary

Quick definitions for the commercial real estate and finance terms that come up most in underwriting and deal analysis. Click a term for a one-line definition, or read the full breakdown where one exists.

  • 1031 Exchange

    A 1031 exchange lets an investor defer capital gains tax on the sale of a property by reinvesting the proceeds into another qualifying property.

  • Adaptive Reuse

    Adaptive reuse is the conversion of a building from its original use to a new one, such as turning an old office building into apartments.

  • Age-Restricted Community

    An age-restricted community is a residential property where occupancy is legally limited to residents above a minimum age, most commonly 55 or older.

  • American-Style Waterfall

    An American-style waterfall calculates profit splits on a deal-by-deal basis rather than across the whole fund.

  • AMI (Area Median Income)

    Area median income (AMI) is the median household income for a given county or metro area, published annually by HUD.

  • Amortization

    Amortization is the gradual paydown of a loan's principal balance over time through scheduled payments, each of which covers both interest and principal.

  • Appreciation

    Appreciation is the increase in a property's value over time, driven by factors like rising rents, market demand, or improvements to the property itself.

  • Base Year Stop

    A base year stop sets a tenant's expense reimbursement obligation using the property's operating expenses in the year the lease begins.

  • Break-even Occupancy

    Break-even occupancy is the minimum occupancy rate a property needs to cover its operating expenses and debt service, with no cash left over.

  • Bridge Loan

    A bridge loan is short-term financing used to acquire or reposition a property before permanent financing is put in place.

  • CAM

    CAM, or common area maintenance, refers to the shared costs of operating and maintaining common areas of a property.

  • Cap Rate

    The cap rate (capitalization rate) measures a property's unlevered annual return based on its income, calculated as Net Operating Income divided by purchase.

  • Cash Sweep

    A cash sweep directs excess property cash flow toward paying down debt faster, usually triggered when a covenant like DSCR falls below a set threshold.

  • Cash-on-Cash Return

    Cash-on-cash return measures the annual pre-tax cash flow an investor receives relative to the actual cash they invested, expressed as a percentage.

  • Catch-Up Provision

    A catch-up provision lets the sponsor receive a larger share of profit after investors hit their preferred return.

  • Compliance Period

    The compliance period is the 15 year window during which a LIHTC property must keep its rents and tenant incomes within program limits.

  • Concessions

    Concessions are incentives a landlord offers a tenant to sign a lease, such as free rent, reduced rent, or a tenant improvement allowance.

  • Construction-to-Permanent Loan

    A construction-to-permanent loan converts from a construction loan into a long-term permanent loan once a project is built and stabilized.

  • Core

    Core describes a low-risk investment strategy targeting stabilized, well-located properties with strong tenants and minimal leverage.

  • Core Plus

    Core plus describes an investment strategy similar to core but with modest additional risk, such as slightly higher leverage.

  • Cost Segregation

    Cost segregation is a tax strategy that breaks a property's cost basis into components with shorter depreciation schedules.

  • Curtailment

    Curtailment is an extra payment made toward a loan's principal balance, beyond the scheduled payment.

  • Debt Covenants

    Debt covenants are conditions in a loan agreement that a borrower must maintain, such as a minimum DSCR or occupancy level.

  • Debt Yield

    Debt yield measures loan risk by dividing a property's NOI by the loan amount, showing a lender's return if it had to take the property back and sell it.

  • Deed in Lieu of Foreclosure

    A deed in lieu of foreclosure is an agreement where a borrower voluntarily transfers property ownership to the lender to avoid formal foreclosure.

  • Depreciation

    Depreciation is a tax deduction that lets real estate owners write off a portion of a property's value each year, reflecting the building's theoretical wear.

  • Direct Capitalization

    Direct capitalization values a property by dividing its NOI by a market cap rate.

  • Discounted Cash Flow

    A discounted cash flow, or DCF, analysis values a property by projecting its future cash flows and discounting them back to present value.

  • DSCR

    The Debt Service Coverage Ratio (DSCR) measures a property's ability to cover its debt payments from its operating income.

  • Easement

    An easement is a legal right for someone other than the property owner to use part of the property for a specific purpose.

  • Effective Gross Income (EGI)

    Effective gross income (EGI) is a property's total income after subtracting vacancy and credit loss from gross potential rent.

  • Eligible Basis

    Eligible basis is the portion of a LIHTC property's development costs that qualifies for tax credits, generally excluding land and a few other costs.

  • Equity Multiple

    Equity multiple measures the total cash returned to an investor relative to the cash invested, without accounting for how long it took to earn it.

  • European-Style Waterfall

    A European-style waterfall requires all invested capital across the fund to be returned to investors before the sponsor earns any promote.

  • Expense Ratio

    Expense ratio measures the share of a property's income consumed by operating expenses, expressed as a percentage.

  • Expense Stop

    An expense stop is a dollar amount per square foot that a landlord covers before a tenant becomes responsible for their share of additional.

  • Fee Simple

    Fee simple is full, unrestricted ownership of a property, including the land and everything on it, for an indefinite duration.

  • Free and Clear Return

    A free and clear return is the return a property would generate with no debt at all, calculated as NOI divided by purchase price.

  • Full Service Gross Lease

    A full service gross lease is a lease structure where the landlord pays all operating expenses out of the rent collected.

  • Gross Potential Rent (GPR)

    Gross potential rent (GPR) is the total rent a property would collect if every unit were leased at market rent with zero vacancy.

  • Ground Lease

    A ground lease is a long-term lease of land, where the tenant owns and operates any buildings built on the land during the lease term.

  • Implied Value

    Implied value is the property value derived by dividing NOI by a chosen cap rate, rearranging the cap rate formula to solve for value instead of return.

  • Interest Rate Cap

    An interest rate cap is a financial instrument that limits how high the interest rate on a floating-rate loan can rise.

  • IO Period (Interest-Only Period)

    An interest-only (IO) period is a stretch of a loan term, often the first 1 to 3 years, during which the borrower pays only interest and no principal.

  • IRR (Internal Rate of Return)

    IRR is the annualized rate of return an investment generates over its hold period, accounting for the size and timing of every cash flow in and out.

  • Leasing Commissions

    Leasing commissions are fees paid to brokers for finding and signing a tenant.

  • Leverage

    Leverage is the use of borrowed money to control a larger asset than an investor's own cash could buy alone.

  • LIHTC

    The Low-Income Housing Tax Credit (LIHTC) is a federal program that gives developers tax credits in exchange for building or rehabilitating rental housing.

  • Loan Sizing

    Loan sizing is the process of determining the maximum loan a property can support, based on the most restrictive of several tests, typically LTV, LTC, DSCR.

  • Loan-to-Cost (LTC)

    Loan-to-cost (LTC) is the ratio of a loan amount to the total cost of a project, including acquisition plus construction or renovation costs.

  • Loan-to-Value (LTV)

    Loan-to-value (LTV) is the ratio of a loan amount to the appraised or purchase value of the property securing it, expressed as a percentage.

  • Loss-to-Lease

    Loss-to-lease is the difference between a unit's market rent and the rent currently being charged under an in-place lease.

  • Mezzanine Debt

    Mezzanine debt sits between senior debt and equity in a property's capital stack.

  • MOIC

    MOIC, or multiple on invested capital, measures total cash returned to investors divided by total cash invested.

  • Mortgage Constant

    The mortgage constant is the ratio of a loan's annual debt service to its original loan amount, expressed as a percentage.

  • Negative Leverage

    Negative leverage occurs when the cost of debt is higher than a property's cap rate, meaning borrowing actually reduces returns instead of amplifying them.

  • Net Lease

    A net lease is a lease structure where the tenant pays some or all property expenses, such as taxes, insurance, and maintenance, in addition to base rent.

  • NOI

    Net Operating Income (NOI) is a property's income after operating expenses but before debt service, capital expenditures, and taxes.

  • Opportunistic

    Opportunistic describes the highest-risk investment strategy, often involving ground-up development, major repositioning, or distressed assets.

  • Preferred Equity

    Preferred equity is an ownership position that gets paid before common equity but after debt.

  • Preferred Return

    A preferred return is the minimum annual return investors receive before the sponsor collects any profit share.

  • Prepayment Penalty

    A prepayment penalty is a fee charged when a borrower pays off a loan before its scheduled maturity.

  • Pro Forma

    A pro forma is a projection of future financial performance based on assumptions rather than actual results.

  • Promote

    A promote, also called carried interest, is the share of profit a sponsor earns for managing a deal, on top of their ownership stake.

  • Qualified Basis

    Qualified basis is eligible basis multiplied by the percentage of units reserved for low-income tenants.

  • Recapture

    Recapture is the repayment of LIHTC tax credits triggered when a property falls out of compliance during its 15 year compliance period.

  • Rent Roll

    A rent roll is a report listing every unit or tenant in a property, along with lease terms, rent, and occupancy status as of a specific date.

  • Rent-to-Income Ratio

    The rent-to-income ratio compares a tenant's rent to their gross income, used to screen whether a household can reasonably afford a unit.

  • Replacement Cost

    Replacement cost is the estimated cost to rebuild a property from scratch at current construction prices.

  • Residual Land Value Analysis

    Residual land value analysis calculates the maximum price a developer can pay for land by working backward from a project's projected value.

  • Right of First Refusal

    A right of first refusal, or ROFR, gives a party the right to match any offer on a property before the owner can sell to someone else.

  • RUBS (Ratio Utility Billing System)

    RUBS is a method for allocating a property's shared utility costs across tenants based on a formula, typically unit square footage or number of occupants.

  • Set-Aside Tests

    Set-aside tests are the minimum share of units a LIHTC property must reserve for lower-income tenants to qualify for tax credits.

  • Special Servicer

    A special servicer manages loans that are in default or at risk of default, typically for loans that have been securitized.

  • T12

    A T12 (trailing twelve months) is a financial statement showing a property's actual income and expenses for the twelve months.

  • Tax Credits

    Tax credits reduce a taxpayer's liability dollar for dollar, unlike a deduction, which only reduces taxable income.

  • Tenancy in Common

    Tenancy in common, or TIC, is a form of co-ownership where two or more parties each hold an individual, undivided share of a property.

  • Tenant Improvements

    Tenant improvements, or TIs, are the buildout costs a landlord funds to prepare a space for a specific tenant.

  • Tenant Rollover Risk

    Tenant rollover risk is the risk that a significant share of a property's leases expire around the same time, creating income uncertainty.

  • Value-Add

    Value-add describes an investment strategy targeting properties with unrealized upside, typically through renovations, operational improvements.

  • Weighted Average Lease Term

    WALT, or weighted average lease term, measures the average time remaining on a property's leases, weighted by the size or income of each lease.

  • XIRR

    XIRR is a variation of IRR used when cash flows happen on irregular dates rather than evenly spaced periods.

  • Year 15

    Year 15 refers to the end of a LIHTC property's 15 year compliance period, after which the risk of credit recapture ends.

  • Yield Maintenance

    Yield maintenance is a prepayment penalty that compensates the lender for the interest they would have earned had the loan not been paid off early.

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