Our unfiltered guide to the commercial real estate terms you absolutely need to know – complete with examples from the field. This isn't meant to be a comprehensive glossary of all CRE – just a handy cheat sheet of the most common terms that come up, and a sense of how they actually play out in deals. We'll keep updating it with new examples from the field.
Definition: An equity waterfall in which the sponsor (GP) may receive a promote BEFORE the LP's entire capital has been returned and before the LP has earned their preferred return. This structure front-loads promotes to the GP, making them eligible for their sweeteners earlier in the life cycle of the deal.
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Definition: Also known as Non-Recourse Carve Outs, these are exceptions to non-recourse loan agreements that hold borrowers personally liable if they engage in certain acts such as fraud, misrepresentation, withholding key details from lenders, and other malfeasance. Lenders have been ramping up their pursuit of sponsors over bad-boy carveouts recently, as more deals go sour and the ability to refinance dries up.
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Definition: The full outstanding balance of the loan as of the loan maturity date – only applies when the loan has not fully amortized.
Examples from the Field:
Banks Are Extending Office Loans - Are they Also Pretending?
Small companies face balloon payments on their mortgages—and no way to raise the money
Definition: Compounded Annual Growth Rate averages out the returns on an investment over the duration of the investment. A good way to gauge the performance of investments in which the cash flows on the property are volatile year-to-year. Think of CAGR as a way to smoothen them out to give you the overall picture.
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Definition: The most common way in CRE to gauge the value of an income-producing piece of real estate. It represents the rate of return on a real estate investment property based on the income it is expected to generate.If you hear random Marcus & Millichap brokers wax eloquent on "cap rate compression," you'll now know what it means. Cap rates are also influenced by capital market conditions, perceived risk, liquidity, global asset demand and economic expectations.Formula: Cap rate = Stabilized annual NOI/Price
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Definition: Defined as your pre-tax cash flow/total equity contribution. It helps you get a sense of how good the investment is as a factor of your skin in the game.
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Definition: The best way to get long-term rich in real estate. It refers to when a borrower takes out a new mortgage with sufficient loan proceeds to pay off the existing debt plus return enough cash to cover some/all of their initial investment in the property. The holy grail! - you've derisked your bet and can still enjoy the income from it.
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Definition: A special distribution tier in the waterfall that allows for the general partner (GP) to "catch up" with the limited partner's (LP) cash-flow distributions. Typically, it's used to bring the GP in sync with the LP once the LP's IRR target has been met.
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Definition: A loan that starts off as a construction loan but once the project is completed, converts into long-term financing.
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Definition: Buying a real estate asset with income in place that will help offset the carrying costs of that property, with the expectation that one will eventually redevelop the property for a more lucrative purpose.
Examples from the Field:
Commercial Observer: Hudson Square Office Asset Hits the Market for Potential Luxury Apartment Play
Why The At Home Bankruptcy May "Uncover" This Long-Term Covered Land Play
Definition: Written into your loan docs, covenants are the rules the borrower must abide by. Breaking the covenants can mean the lender has a right to demand immediate repayment. These include things like maintaining a minimum DSCR, regular financing reporting, etc. They could also bar the borrower from certain activities, such as taking on further debt on the asset without lender consent, making major modifications to tenant agreements on the property, making significant changes to condo pricing, etc.
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Definition: Debt Service Coverage Ratio - A way to gauge if a property is able to meet its debt obligations. It's basically NOI/Debt Service Payment, and typically expressed as a multiple - usually between 1.2 and 1.25. If DSCR falls below 1, it means a property is not even generating enough income to meet its debt service = bad. DSCR is a universal method of determining whether a property is at risk of default.
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Definition: A Delaware Statutory Trust is an entity that allows CRE investors to defer their capital-gains taxes through a 1031 exchange. DSTs allow investors to roll up their capital into one larger asset via fractional ownership, while deferring capital gains taxes from the sale of other real estate assets.
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Definition: NOI/Loan Amount, expressed as a percentage. Gives a lender a sense of what their return on cost would be were they to take back a property. Debt yield helps lenders understand the size of the loan they can provide a sponsor.
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Definition: A situation in which a sponsor voluntarily transfers the deed on a distressed property over to a lender, rather than attempting to fight off a foreclosure attempt. Colloquially known as "giving back the keys." For the lender, it's a fast, painless resolution to the problem. For the sponsor, they're avoiding further legal costs and headaches.
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Definition: A stipulation in loan docs that allows a sponsor to receive additional funds from the lender based on the meeting of certain milestones (TCO, sales targets, etc.). Think of earnouts as the releasing of holdbacks (monies held in escrow by the lender).
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Definition: An equity waterfall in which sponsors do not receive a promote until all LP's capital – including unrealized investments – has been returned and the LP has earned their preferred return.
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Definition: Floor-area ratio: A crucial metric in understanding the permitted size of a new development. Gives you a sense of the relationship between the buildable area (currently built or permitted) and the land on which the property is located. The greater the FAR, the denser your project can be. FARs can be increased through rezoning, a variance, or density bonuses.
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Definition: Full ownership of the land underneath a property as well as the building on it. This is ownership not encumbered by a leasehold or ground lease. Ground leases can lead to major disputes over properties once the ground rent goes up.
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Definition: Funds from Operations is how REITs are judged.
Formula: FFO = Net Income + Depreciation + Amortization – Gain/Loss on Sale of Properties
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Definition: Debt on which the interest rate is fixed at the time of origination.
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Definition: The rocket fuel and then kryptonite of Sunbelt multifamily syndicators… Refers to when your interest rate is pegged to a benchmark rate (LIBOR, SFOR) that fluctuates. Big changes to those benchmarks can cause your interest payments to skyrocket and put extreme pressure on your capstack. Conversely, in low-rates periods, floating-rate debt can mean extremely cheap financing that allows you to bet bigger than you might normally. The velocity of recent rate increases has made rate caps a key talking point for CRE.
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Definition: A deal structure in which an investor rents the dirt below their building from another group, paying rent for the privilege of collecting rents on the building above it. Ground leases are subject to periodic rent escalations, which has been the root of much drama.
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Definition: An interest rate cap is a type of derivative contract that provides the purchaser with protection against rising interest rates. It sets a maximum (or cap) level on the interest rate on a floating or variable rate loan. If interest rates rise above this cap, the seller of the cap (often a bank) compensates the buyer for the difference. In commercial real estate, caps are commonly purchased by borrowers to limit the risk of rising interest rates on variable-rate debt.
Examples from the field:
Syndicator Ashcroft pauses distributions, citing rate cap pain
How commercial real estate players use interest rate swaps and caps
Definition: An interest rate swap lets two parties trade their loan payments—swapping fixed rates for variable rates, or vice versa. Real estate investors use these deals to dodge interest rate surprises, turning unpredictable variable payments into steady, fixed ones they can actually plan around.
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Definition: A cash cushion held by your construction lender to cover interest payments when your project isn't generating enough income yet—basically your financial safety net during the building and tenant-hunting phase.
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Definition: It's the yearly return rate your investment actually earns you over its entire life, accounting for when money comes in and goes out. A 15% IRR means your investment effectively grew at 15% per year, considering the timing of all cash flows. Real estate investors use IRR to compare deals and see which properties deliver the best bang for their buck over time.
Key Variations:
Unlevered IRR: The internal rate of return of a string of cash flows without financing
Levered IRR: The internal rate of return of a string of cash flows with financing included
Examples from the field:
Zell-Lurie: Revisiting Return Profiles of Real Estate Investment Vehicles
J.P. Morgan Chase - What is Internal Rate of Return in Commercial Real Estate?
LoopNet - Internal Rate of Return Explained for Real Estate Investors
Definition: What a flag pays to the owner of a hotel property for the privilege of operating it.
Examples from the Field:
HOTELSMag.com - Picking the lock: The cruciality of key money in hotel deals
Akerman LLP - Alternatives to 'Key Money' in Hotel Management Agreements
JLL - The Evolving Landscape of Hotel Management Agreements in Asia Pacific
Definition: In real estate, a leasehold interest refers to a structure where an individual or entity (lessee) leases the land (i.e. ground lease) from the fee simple owner (lessor) of the land for an extended period of time.
Examples from the Field:
CoStar News - Developers seek buyer of leasehold interest in Manhattan mixed-use building
Poyner Spruill LLP - Protecting an Interest in a Ground Lease – A Lender's Perspective
Crain's New York Business - Ground-lease co-ops like Carnegie House face price hike
The Real Deal - How ground leases became "ticking time bombs" for iconic properties
The Real Deal - Inflation and Lawsuits Prompt New Ground Lease Models
Holland & Knight - Regulatory Changes Impact Leasehold Condominiums in New York
Definition: The letter of intent, or LOI, is most often used by the buyer at the early stages of a real estate purchase. The buyer sends a "letter" to the seller conveying the terms under which the buyer would proceed the acquisition of a seller's property.
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Definition: The difference between in-place rent (or contract rent) and market rent. The loss-to-lease concept is most often used in multifamily underwriting. Because contractual lease rates lag the actual market, the loss-to-lease metric acts to help the real estate professional forecast coming changes to actual income going forward.
Examples from the field:
Assets America - Loss to Lease - Everything You Need to Know
RealPage Analytics - Loss to Lease is Plunging, Suggesting Renewal Rent Growth Will Cool Off
Bisnow - Multifamily Giants Outperforming 2021 Expectations, Sitting Pretty Heading Into 2022
Definition: The limited partner (or partners), typically brings the majority of the equity capital and only weighs in on critical decisions.
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Definition: Loan to Cost (LTC) is the ratio of the outstanding loan balance to total project cost. The higher the loan-to-cost, the less cash equity the borrower has invested in the property (i.e. less skin in the game) and therefore the higher the risk that the borrower will default on the loan.
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Definition: Loan to Value (LTV) is the ratio of the outstanding loan balance to the value of the property expressed as a percentage. The higher the loan-to-value, the less likely the borrower will be able to repay the loan at maturity.
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Wall Street Prep - Loan to Value Ratio (LTV) | Formula + Calculator
Big Builders Jump Into ‘Financing Gap’ to Fuel NYC Construction Boom
Definition: A tenant who leases directly from the property owner and subsequently subleases all (or portion of) the property to other tenants.
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Definition: Mezzanine debt is a junior loan that is secured by an interest in the entity that owns the real estate, rather than on the real estate itself. It is a riskier piece of the capital stack, but can be attractive for lenders both due to its higher returns and because, in the case of a default, a mezz lender can foreclose via a UCC foreclosure rather than going through the courts.
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Definition: Multiple on Invested Capital gives you a sense of your return on invested capital. All inflows/All capital contributions.
Examples from the Field:
Career Principles: BrightStone Private Equity's 2.3x MOIC on San Francisco Office Building
Stock Analysis: Commercial Real Estate Fund 1.5x MOIC Over Five Years
Definition: Debt instrument originated by a state or local government for financing public projects. These bonds are generally exempt from federal as well as state and local taxes, and as a result investors demand a lower yield relative to bonds that aren't tax-exempt.
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Definition: Net absorption is the rate at which rentable area is leased up over a period of time in a given market. The net absorption figure considers construction of new space, demolition of existing space and any additional vacancies during that period. It is often used to forecast demand and supply trends and is thus a key indicator for both property owners and developers, significantly influencing their pricing and timing decisions.
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Definition: The gross amount of rent payable by a tenant less any costs incurred by the landlord in order to lease the space to the tenant. Such costs typically include leasing commissions, tenant improvements and/or rent-free periods.
Formula: Net Effective Rent = Gross Rent less Landlord Costs (LC, TI, free rent)
Definition: A commercial lease where the tenant pays base rent plus pays for its pro rata share of some or all operating expenses related to the tenant's occupancy of the space.
Definition: The real estate professional subtracts operating expenses from effective gross income.
Formula: Effective Gross Income – Operating Expenses = Net Operating Income
Definition: A state in the United States where the sales price of a sold property is not publicly available.
Definition: Special economic development zones created as part of the Tax Cuts and Jobs Act of 2017. Individuals and companies that invest in qualified opportunity zones enjoy special tax treatment to encourage investment in these distressed areas within the United States. The purpose of the creation of these zones, and the corresponding tax benefits of doing so, is meant to spur job growth and economic activity in these areas. Individuals and companies that invest in opportunity zones can choose to temporarily defer tax on capital gains if those gains are invested in a qualified opportunity zone.
Examples from the Field:
Economic Innovation Group: OZ Investment Led to 313,000 Net New Housing Units from 2019-2024
Urban Institute: Opportunity Zones Need to Be Retooled to Achieve Impact
Definition: In real estate, the term is commonly used in waterfall distribution models to reference the pro-rata distribution of profits based on each investor's initial equity contribution percentage. The term is likewise commonly used to describe the cash flow from and to two or more lenders holding an equal position in the capital stack of a real estate investment.
Definition: A long-term mortgage loan typically secured by a fully stabilized and performing real estate asset. A Permanent Loan (i.e. Permanent Financing) often includes a fixed interest rate with a longer loan term (7+ years). The permanent loan may or may not include an interest-only payment period for part or all of the loan term. These loans almost universally come with a penalty (i.e. yield maintenance, defeasance, % penalty, etc.) for prepaying the loan before maturity and many include a lock-out period early in the loan term during which the borrower is forbidden from prep
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Definition: Preferred equity is capital that sits between debt and common equity in the capital stack. Pref investors typically get a fixed return on their money and are ahead of common equity (but behind debt) when it comes to a property's cash flows and liquidation proceeds. Pref doesn't come due at a set time and could be structured in a way to allow the holder to get equity-like upside. It's often used in distressed contexts, or when senior debt is hard to come by (like in the last couple years.)
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Definition: A fee charged by a lender for agreeing to allow a borrower to payoff a loan prior to the end of the contractual loan period. A prepayment penalty (i.e. prepayment fee) is meant to cover the cost to lender of a loan paid off prior to the agreed upon date, especially as it relate to the lender's reinvestment cost and interest rate risk.
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Definition: A quitclaim deed is a type of deed that transfers all interest the seller has, or may have, but there are no warranties of title and no guarantees against any encumbrances. This type of deed provides no legal recourse for the new owner.
Definition: A list of tenants in an income producing real estate asset and the property owners' reflection of all the rental income derived from the tenants at a specific time (usually at the end of the month).
Definition: Revenue Per Available Room is a metric used in hotel underwriting to calculate the amount of revenue each available room generates in a given period.
Definition: A contractual clause that enables a third party to step in and purchase and/or lease a property based on what was negotiated between the Owner and a potential buyer/lessee.
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Definition: A transaction in commercial real estate where, upon completion of the sale, the seller immediately leases back the property from the new owner (i.e. buyer). The lease is generally NNN and long-term and converts the seller/lessee from an owner to a tenant.
Examples from the Field:
The Real Deal: Savanna nabs another discounted office building with $50M short-sale deal
Commercial Observer: Short Sales as a Viable Option for Lenders
WSJ: Surge in Commercial-Property Foreclosures Suggests Bottom Is Near
Definition: The designated party responsible for handling situations whereby the borrower defaults. A special servicer has the authority to structure loan workouts or institute foreclosure proceedings. This is in contrast with a standard mortgage servicer who has limited legal power and is merely responsible for collecting rental payments from the borrower.
Examples from the Field:
MBA: KeyBank and CWCapital Asset Management are Largest Named Special Servicers in 2024
Trepp: CMBS Special Servicing Rate Rose to 8.23% in June 2024, with Office at 10.79%
Definition: A form of loan guarantee only enforceable by a lender when certain default or credit events occur (e.g. if a borrower violates operating covenants, does not meet net worth requirements, files for voluntary bankruptcy, etc.). In springing recourse or springing liability, when such adverse events occur, the borrower's guarantor (i.e. principal) becomes partially or fully liable for the loan obligation regardless of whether the loan is non-recourse or not.
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Definition: Stabilization refers to a point in time when a property reaches its market potential in terms of occupancy, income, and expenses. This is commonly referenced in terms of Stabilized NOI, or the NOI once the property has reached that market potential.
Definition: A form of permanent financing utilized to retire existing short-term debt, such as construction loans or bridge loans. Commonly known in the industry as a construction loan takeout or bridge loan takeout, these loans are structured with extended repayment periods and fixed payment schedules typical of permanent mortgage loans. Often a Fannie loan or agency loan.
Definition: From the perspective of a real estate developer, Tax Increment Financing (TIF) represents a strategic financing mechanism that reduces the initial financial burden of developing underutilized or distressed properties. By capitalizing on the future tax revenues generated by enhanced property values within a TIF district, developers can secure upfront funding or subsidies for critical infrastructure improvements, thus mitigating risk and enhancing the overall feasibility of their projects.
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Definition: Temporary Certificate of Occupancy - An official document issued by a local building authority or other designated agency that authorizes the temporary use or occupancy of a building or structure before the completion of all construction. This certificate confirms that the premises are safe for occupancy in compliance with relevant codes, although certain sections or aspects of the project may still be under construction.
Definition: An ownership structure whereby two or more individuals may own an equal or unequal undivided share in a property. This partnership structure enables lower income investors the opportunity to purchase more expensive real estate which they otherwise may not have been able to afford individually. However, when mortgaging a property, the lender will also require that all co-tenants share joint liability for the loan, thereby increasing the risk of the TIC structure.
Definition: The cherry-on-top profit participation that the general partner (GP) or sponsor earns above their initial equity contribution, typically after the deal crosses a predetermined "hurdle rate." It is the GP's reward for sourcing, operating and executing a successful deal.
How It Works:
LPs receive their initial investment back plus a preferred return (often 6-8%)
Once this hurdle rate is met, the GP takes a bigger share of the remaining profits
Commonly structured as an 80/20 split favoring LPs until hurdle is met, then 50/50 or 70/30 split thereafter
Bigger and more sophisticated LPs will often strike a hard bargain on the promote, often negotiating promote terms, hurdle rates, and catch-up provisions
Smaller and more unsophisticated LPs may not have the leverage or expertise to do so
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Definition: A charge levied by the state or local government when property is sold from one individual/entity to another.
Definition: Also referred to as a T12 or TTM, the Trailing Twelve Months is a reflection of a properties last 12 months' financial performance. The report shows actual historical data rather than forward looking estimates (typically presented by the broker) in the OM, thereby helping the investor make a more informed valuation of the property.
Definition: Related to UCC Article 9, this type of foreclosure generally occurs when there is mezzanine debt encumbering the property. When a mezzanine borrower breaches any term or is in default, the mezzanine lender has the option to foreclose on the borrower's collateral interest, which is an interest in the entity that owns the real property rather than on the real property itself. This type of foreclosure is a faster and less expensive process than a foreclosure on real estate would be.
Examples from the Field:
Commercial Observer: UCC Foreclosures Spiked from 25 in 2022 to Expected 70 in 2024
The Real Deal: Charles Cohen could see the credits roll, with largest debt auction yet
The Real Deal: Blackstone Seeks $145M UCC Foreclosure on Penn-Florida's Via Mizner Building
The Promote Podcast: Inside Grant Cardone’s UCC Foreclosure Rescue in Boca
Definition: A metric in commercial real estate that measures how much contract rent is remaining at the property. Specifically, the WALT measures the weighted average remaining contract lease term for all tenants at a property. Generally rental income is used as the weight in calculating the weighted average. Weighted Average Lease Term is an important measurement for analyzing office, retail, and industrial properties.
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Definition: Yield-on-cost is the net operating income (or sometimes cash flow from operations) at stabilization divided by the total project cost, whereas the capitalization rate (cap rate) is the stabilized net operating income (or sometimes cash flow from operations) divided by the market value of the property.
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Definition: A real estate investment where all excess cash flow from a property goes to pay down the senior mortgage. Zero cash flow investments are generally leased to credit-rated, single-tenant NNN tenants, and the loan is sized/crafted such that the debt service equals the lease payments and the loan term and amortization match the lease term. Much of the benefit of owning this type of property comes in the losses, due to depreciation, over the hold period that offset gains on other investments in an investor's portfolio. Modeling the taxable losses is essential to understanding the yield of such an investment.