Commercial Real Estate Glossary
Plain-language definitions of the terms that come up in commercial sales, leases, financing, and underwriting.
- 1031 exchange
- A tax-deferred exchange of investment or business real property for other like-kind real property under Section 1031 of the Internal Revenue Code. 1031 Exchange Rules and Timeline for Commercial Property
- Absorption
- The amount of space leased or occupied in a market over a period, net of space vacated. Positive absorption means demand is outpacing new vacancy.
- ALTA/NSPS survey
- A boundary survey prepared to standards set by the American Land Title Association and the National Society of Professional Surveyors, commonly required for commercial loans.
- Annual average daily traffic (AADT)
- FDOT's estimate of the average number of vehicles per day on a road segment over a year, built from sample counts and flagged as final, interim, or a cross-reference. Site Selection for a Pasco County Business: A Checklist With FDOT Traffic Data
- Base year
- In a gross or modified gross lease, the year whose operating expenses set the baseline. The tenant pays its share of increases above that year. NNN, Modified Gross, and Full Service Leases: Who Pays What
- Basis
- What an owner has invested in a property, including purchase price and capital improvements. In underwriting, a low basis gives more room for error.
- Broker Opinion of Value (BOV)
- A broker's estimate of a property's likely sale price or value range based on comparable sales, income, and market conditions. Not an appraisal. Broker Opinion of Value (BOV): What It Is and When You Need an Appraisal
- Build-to-suit
- A building constructed for a specific tenant or owner-user, often under a long-term lease signed before construction.
- CAM (common area maintenance)
- Costs to operate and maintain shared areas of a property, typically passed through to tenants in net leases. NNN, Modified Gross, and Full Service Leases: Who Pays What
- Cap rate
- Net operating income divided by value or price. A one-year, unlevered measure of yield. Cap Rate: What It Tells You and What It Doesn't
- Cash-on-cash return
- Annual cash flow after debt service divided by the equity invested. Cash-on-Cash, IRR, and Equity Multiple: Measuring Return on Your Equity
- CCIM
- Certified Commercial Investment Member, a designation awarded by the CCIM Institute for commercial real estate financial and investment analysis.
- CDC (Certified Development Company)
- A nonprofit lender that provides the SBA-backed portion of a 504 loan. SBA 504 and 7(a) Loans for Owner-Occupied Commercial Property
- Debt service coverage ratio (DSCR)
- Net operating income divided by annual debt service. Lenders set minimums to size loans. DSCR and Debt Yield: How Lenders Size a Commercial Loan
- Debt yield
- Net operating income divided by the loan amount. DSCR and Debt Yield: How Lenders Size a Commercial Loan
- Effective gross income (EGI)
- Gross potential rent minus vacancy and credit loss, plus reimbursements and other income. Net Operating Income (NOI): What Counts, What Doesn't, and Why Trailing Numbers Win
- Entitlement
- Government approvals that allow a specific use or development on a property, such as zoning, site plan, and permits.
- Equity multiple
- Total cash returned to investors divided by the equity invested. Cash-on-Cash, IRR, and Equity Multiple: Measuring Return on Your Equity
- Estoppel certificate
- A tenant's signed statement confirming lease facts such as rent, term, and defaults, relied on by buyers and lenders. Commercial Lease Terms That Carry the Money and the Risk
- Exclusive use clause
- A lease provision preventing a landlord from leasing other space in the property to a competing use.
- Expense stop
- A fixed dollar amount of operating expenses the landlord covers; the tenant pays costs above it.
- Gross lease
- A lease where the landlord pays most property operating expenses from the rent. NNN, Modified Gross, and Full Service Leases: Who Pays What
- Highest and best use
- The reasonably probable and legal use of a property that is physically possible, financially feasible, and produces the highest value.
- Holdover
- A tenant remaining in possession after the lease expires, usually at a premium rent set by the lease. Commercial Lease Terms That Carry the Money and the Risk
- IRR (internal rate of return)
- The discount rate that sets the net present value of an investment's cash flows to zero. Cash-on-Cash, IRR, and Equity Multiple: Measuring Return on Your Equity
- Letter of intent (LOI)
- A usually non-binding summary of the main deal terms, signed before a lease or purchase contract is drafted. Commercial Lease Terms That Carry the Money and the Risk
- Loan-to-value (LTV)
- The loan amount divided by the property's appraised value. DSCR and Debt Yield: How Lenders Size a Commercial Loan
- Modified gross lease
- A lease where landlord and tenant split operating expenses, often with the tenant paying utilities and increases over a base year. NNN, Modified Gross, and Full Service Leases: Who Pays What
- Net effective rent
- Base rent over the lease term, minus the value of concessions such as free rent and tenant improvement allowances, divided by the number of years. Leasing Your Commercial Space in Florida: A Landlord's Guide
- Net operating income (NOI)
- Effective gross income minus operating expenses, before debt service and income taxes. Net Operating Income (NOI): What Counts, What Doesn't, and Why Trailing Numbers Win
- Owner-user
- A buyer who will occupy the property for its own business.
- Personal guaranty
- A personal promise by a business owner to cover the tenant's lease obligations if the business doesn't. Commercial Lease Terms That Carry the Money and the Risk
- Phase I Environmental Site Assessment
- A records review and site inspection for recognized environmental conditions, commonly performed to ASTM E1527-21. Commercial Real Estate Due Diligence Checklist
- Pro forma
- Projected income and expenses. Useful for spotting upside. A weak basis for price.
- Qualified intermediary
- An independent party that holds sale proceeds during a 1031 exchange so the taxpayer never receives them. 1031 Exchange Rules and Timeline for Commercial Property
- Rent roll
- A schedule of a property's tenants, spaces, rents, lease dates, and deposits.
- Replacement cost
- What it would cost today to build a property with the same utility.
- Sale-leaseback
- A transaction in which an owner sells a property and leases it back from the buyer. Buy or Lease Commercial Property? Separate the Two Decisions
- SNDA
- Subordination, non-disturbance, and attornment agreement between a tenant, landlord, and lender. Commercial Lease Terms That Carry the Money and the Risk
- T-12
- The trailing twelve months of a property's actual income and expenses. Net Operating Income (NOI): What Counts, What Doesn't, and Why Trailing Numbers Win
- Tenant improvement (TI) allowance
- Money a landlord contributes toward building out a tenant's space. Commercial Lease Terms That Carry the Money and the Risk
- Triple net (NNN) lease
- A lease where the tenant pays rent plus a share of property taxes, insurance, and common area maintenance. NNN, Modified Gross, and Full Service Leases: Who Pays What
- Yield on cost
- Stabilized NOI divided by the total project cost, including land at market value.
- Zoning verification letter
- A letter from the local government confirming a property's zoning and, often, the legal status of its current use. Commercial Real Estate Due Diligence Checklist