Commercial real estate glossary

The vocabulary of retail and net lease investment, defined properly and with a worked example wherever numbers make it clearer. Written for owners and buyers who want to read a deal rather than be walked through one.

Returns and valuation

Cap rate · Capitalization rate, Going-in cap rate: Net operating income divided by price, expressed as a percentage. The unleveraged first-year yield on the purchase price.; The cap rate is the market's price for a stream of income, so it moves with perceived risk rather than with the building. A lower cap rate means a higher price for the same income, which usually reflects stronger credit, a longer lease, or a better location. Comparing cap rates only tells you something when the two properties carry comparable risk.; Example. A property with $420,000 of NOI selling for $6,000,000 trades at a 7.0% cap rate ($420,000 / $6,000,000). If a buyer will accept a 6.5% cap instead, the same income is worth $6,461,538.
Net operating income · NOI: Rental income less operating expenses, before debt service, capital expenditure, depreciation and income tax.; NOI is the number every valuation hangs off, which is exactly why it is the number most often overstated. Watch for management fees left out, a reserve for replacements omitted, and vacancy assumed at zero. The NOI a seller advertises and the NOI a lender will underwrite are frequently not the same figure.; Example. Gross rent $600,000, plus $120,000 recovered from tenants, less $180,000 of operating expenses, gives NOI of $540,000. Mortgage payments are not deducted.
Cash-on-cash return · Cash on cash, CoC: Annual pre-tax cash flow after debt service, divided by the cash actually invested.; Where cap rate ignores the loan, cash-on-cash is what the equity earns in a year. Leverage raises it whenever the borrowing cost is below the cap rate and lowers it whenever the reverse is true, which is why the same building can look excellent or poor depending only on the debt.; Example. A $5,000,000 purchase with $1,750,000 down. NOI $325,000, debt service $232,000, so cash flow is $93,000. Cash-on-cash is $93,000 / $1,750,000, or 5.3%.
Internal rate of return · IRR: The annualised discount rate at which all projected cash flows, including the sale, net to zero today.; IRR is the only common measure that accounts for the timing of money, which makes it the right yardstick for a hold with a defined exit and the wrong one for comparing a stabilised net lease against a value-add deal. It is also easy to flatter: most of a projected IRR usually sits in the assumed exit cap rate, a number nobody controls.; Example. Invest $1,750,000, collect $93,000 a year for five years, and sell for net proceeds of $2,300,000. Those flows produce roughly a 10.5% IRR. Move the exit price down 10% and it falls to about 7.5%.
Equity multiple: Total cash returned divided by total cash invested, over the whole hold.; The companion to IRR, and a useful check on it. IRR rewards speed; the equity multiple only asks how much came back. A short hold can post a spectacular IRR while returning very little in absolute terms.; Example. $1,750,000 in, $465,000 of cash flow plus $2,300,000 at sale, so $2,765,000 back. The multiple is 1.58x.
Broker Opinion of Value · BOV, Opinion of value: A licensed broker's written estimate of likely sale price, based on comparable sales and current buyer demand.; A BOV is a market read, not an appraisal, and cannot be used where an appraisal is legally required, such as most lender decisions. What it is good for is deciding whether to sell at all, since it reflects what buyers are actually paying right now rather than what a model says.
Basis · Adjusted basis, Cost basis: What you have in a property for tax purposes: purchase price plus capital improvements, less depreciation taken.; Basis decides how much gain exists on a sale, so it matters far more than most owners expect. Years of depreciation deductions push basis down, which means a property held a long time can produce a large taxable gain even when the price has barely moved.; Example. Bought at $3,000,000, spent $400,000 on a roof and parking, took $900,000 of depreciation. Adjusted basis is $2,500,000. A $4,500,000 sale produces $2,000,000 of gain.

Leases and tenants

Triple net lease · NNN, Net lease: A lease where the tenant pays property taxes, building insurance and maintenance in addition to rent.; The appeal is predictability: the landlord's income is closer to the rent cheque than in any other structure. The word is used loosely, though. An absolute net lease leaves the landlord with nothing at all, while many so-called NNN leases still leave roof and structure with the owner. Read the lease rather than the marketing.
Single-tenant net lease · STNL: One building, one tenant, usually on a long net lease. The classic passive commercial holding.; Risk here is binary, which is the whole point and the whole danger. A fully occupied building throws off predictable income; the day that tenant leaves, occupancy goes to zero rather than dropping a few percent. That is why credit and remaining lease term drive pricing more than the real estate does.; Example. A pharmacy or quick-service restaurant on a 15-year corporate-guaranteed lease.
Multi-tenant retail: A property with several tenants, such as a strip centre, neighbourhood centre or power centre.; The opposite risk profile to single-tenant. Losing one tenant costs you a slice of income rather than all of it, so cash flow is steadier, but the property needs active management: leasing, common area maintenance, and a rolling schedule of expiries to stay on top of.
Credit tenant: A tenant whose parent company carries a published investment-grade credit rating.; Credit is what converts a lease into a bond-like instrument, and it compresses cap rates accordingly. The distinction that actually matters on a signature page is whether the corporate entity guarantees the lease or a franchisee does, because those are very different promises at very different prices.
Corporate guarantee: The parent company, not just the local operating entity, stands behind the lease obligations.; Two identical-looking buildings with the same brand over the door can differ by a full percentage point of cap rate on this alone. A franchisee guarantee is backed by that operator's balance sheet, which is usually a very small fraction of the brand's.
WALT · Weighted average lease term: Average remaining lease term across tenants, weighted by each tenant's share of income.; Weighting is what makes this useful. A centre can show a healthy simple average while its largest income contributor expires next year, and only the weighted figure exposes that.; Example. An anchor at 60% of income with 3 years left, and small shops at 40% with 8 years, gives a WALT of 5 years, not 5.5.
Occupier: The business that uses the space, as distinct from the investor who owns it. Standard industry usage for the tenant side of the market.; Brokerages split along this line: occupier services means representing businesses looking for space, while investment sales means representing owners and buyers of the asset. Confusing the two is the fastest way to end up with the wrong adviser, because they are different jobs with different incentives.
Percentage rent: Additional rent calculated as a percentage of the tenant's sales above an agreed breakpoint.; Common in retail and a genuine signal of health, because it gives the landlord visibility into store performance. It also makes income more cyclical, which lenders and buyers discount accordingly.; Example. 6% of sales above a $2,000,000 natural breakpoint. A store doing $2,500,000 pays an extra $30,000.
Co-tenancy clause: A lease provision letting a tenant cut rent or exit if an anchor or a set share of the centre goes dark.; One of the most underestimated risks in multi-tenant retail. A single anchor departure can trigger rent reductions across many leases at once, so the income does not fall in a straight line, it steps down. Diligence means reading every co-tenancy clause, not sampling them.

1031 exchange

1031 exchange · Like-kind exchange, Section 1031: A sale and reinvestment structured under IRC Section 1031 so that capital gain is deferred rather than recognised.; Deferral is not forgiveness: the gain rides along in the basis of the replacement property until a future taxable sale. Since 2017 it applies to real property only. The mechanics are unforgiving on timing, and the deadlines do not move for a deal that falls apart.
Qualified Intermediary · QI, Accommodator, Exchange facilitator: The independent party that holds sale proceeds during an exchange so the taxpayer never takes receipt of them.; Legally required in practice, and must be engaged BEFORE the relinquished sale closes. Taking actual or constructive receipt of the proceeds ends the exchange, and no paperwork afterwards repairs it. The QI cannot be your agent, employee, attorney, accountant or broker, nor anyone who has served you in those roles in the prior two years.
Boot · Cash boot, Mortgage boot: Anything received in an exchange that is not like-kind property. Boot is what gets taxed.; Two kinds, and the second surprises people. Cash boot is sale proceeds you did not reinvest. Mortgage boot is debt relieved and not replaced, which can be triggered by buying at the same price with less leverage. Recognised gain is the lesser of your realised gain and your total boot.; Example. Sell for $5,000,000 net, buy for $4,600,000: $400,000 of cash boot. Pay off $2,000,000 of debt and take only $1,400,000 on the replacement: $600,000 of mortgage boot on top.
45-day identification period: Replacement property must be identified in writing, signed, and delivered to the Qualified Intermediary within 45 calendar days of the relinquished closing.; Calendar days, including weekends and holidays, with no extension for a deal that collapses. Identification must be unambiguous: a street address or legal description, not a description of the kind of property you want.
180-day exchange period: The replacement purchase must close within 180 calendar days of the relinquished closing.; It runs from the same closing date as the 45-day clock rather than starting after it, so it is 135 days after identification, not 180. It is also capped by your tax return due date for that year including extensions, which can shorten a late-year exchange unless the return is extended.
Debt replacement: Replacing the mortgage debt paid off on the sale, so that debt relief does not become taxable boot.; Full deferral requires replacing both value and debt. New cash brought to the closing can substitute for debt, but only to the extent it is actually deployed into the replacement property. Money wired in and left sitting does not offset debt relief.
Delaware Statutory Trust · DST: A fractional ownership structure that qualifies as replacement property for a 1031 exchange.; Often used to place leftover proceeds that would otherwise be boot, or as a fallback when the 45-day clock is running out. The trade-off is control and liquidity: a DST investor is entirely passive and generally cannot exit at will.
Reverse exchange: An exchange where the replacement property is acquired before the relinquished property is sold.; Used when the right building appears before yours has sold. An exchange accommodation titleholder parks one of the properties, which makes these more expensive and more paperwork-heavy than a forward exchange, and usually requires financing arranged with the structure in mind.

Debt

Debt service coverage ratio · DSCR: Net operating income divided by annual debt service.; The main lending constraint on most commercial loans. Lenders typically want 1.20x to 1.35x depending on asset and tenant quality, and a deal that fails DSCR will be resized to a smaller loan regardless of the appraised value.; Example. NOI of $325,000 against $232,000 of debt service is a DSCR of 1.40x.
Loan-to-value · LTV: Loan amount as a percentage of appraised value.; The other lending constraint, and the binding one only when DSCR is comfortable. In practice a lender applies both tests and lends the lesser result, so a strong LTV offer can still shrink once coverage is run.
Amortisation · Amortization, Amort: The schedule over which loan principal is repaid, often longer than the loan's actual term.; A 25-year amortisation on a 10-year term means a large balance still outstanding at maturity, which is the refinancing risk buried in most commercial loans. Interest-only periods raise early cash-on-cash returns and postpone that repayment entirely.
Assumable loan: Existing debt a buyer can take over rather than replacing with a new loan.; Ordinarily a footnote, and occasionally the whole deal. Where an in-place loan carries a rate well below current market, the assumption can be worth more than any negotiation on price, and it should be valued explicitly rather than treated as a convenience.

Retail specifics

Anchor tenant: The largest tenant in a centre, relied on to generate the foot traffic smaller tenants depend on.; Anchors typically pay below-market rent in exchange for the traffic they bring. Their real value is indirect, and it shows up in what the small shops will pay and in the co-tenancy clauses that reference them.
Shadow anchor: A major traffic driver adjacent to a centre but not part of it and not paying rent to its owner.; Genuinely valuable and completely outside your control, which is the point to hold onto. A centre priced on shadow-anchor traffic is exposed to a decision made by an owner you have no relationship with.
Gross leasable area · GLA: Total floor area available to be leased to tenants, measured in square feet.; The denominator behind rent per square foot and most comparisons between centres. Confirm how it was measured before relying on it: definitions vary, and a generous measurement quietly lowers the apparent rent per foot.
Common area maintenance · CAM: Shared costs of running the property, such as parking, landscaping and lighting, recovered from tenants.; CAM recovery is where multi-tenant income leaks. Caps, exclusions, base-year structures and administrative fee limits vary lease by lease, so a centre can be fully occupied and still under-recovering by a meaningful margin.
Outparcel · Pad site: A separately developed site at the edge of a larger centre, typically on the main road frontage.; Often a bank, restaurant or drive-through. Outparcels usually trade at lower cap rates than the centre behind them, because they read to buyers as single-tenant net lease rather than as multi-tenant retail.
Dark store · Going dark: A tenant that stops operating while continuing to pay rent under the lease.; Paying but empty is worse than it sounds. The income continues, so the rent roll looks intact, while the traffic that supports neighbouring tenants disappears and co-tenancy clauses may already be triggered. Continuous operation clauses are what prevent it, and plenty of leases lack one.

Process and documents

Estoppel certificate: A signed statement from a tenant confirming the lease terms, rent paid, and that no disputes exist.; The buyer's protection against a rent roll that does not match reality. Tenants confirm the facts in writing, which is how undisclosed side agreements and rent concessions surface before closing rather than after.
SNDA · Subordination, non-disturbance and attornment: An agreement between lender, landlord and tenant governing what happens to the lease in a foreclosure.; The non-disturbance half is what the tenant cares about: their lease survives even if the landlord's lender takes the property. Lenders generally require these on significant leases, and chasing them late is a common closing delay.
Letter of intent · LOI: A non-binding outline of the principal deal terms, signed before contract drafting begins.; Non-binding as to the deal, but rarely non-binding throughout: confidentiality and exclusivity provisions inside an LOI usually do bind. It is also where a 1031 buyer should surface their timing, since the closing date is a real constraint rather than a preference.
Rent roll: A schedule of every tenant with their space, rent, lease dates, options and recoveries.; The first document to ask for and the one that repays close reading. Options, expiries and recovery structures are where value hides, and a rent roll that will not reconcile to the operating statements is a finding in itself.
Sale-leaseback: An owner-occupier sells its property and simultaneously leases it back, becoming the tenant.; A financing decision dressed as a real estate transaction: it converts owned equity into cash while keeping operational control. For the buyer, pricing turns on the covenant of a tenant who is also the seller, so lease terms are being set by the party with the most to gain from setting them well.
Cost segregation · Cost seg: An engineering study reclassifying building components into shorter depreciation lives to accelerate deductions.; Frequently paired with a 1031 purchase, and worth understanding as a trade rather than a free gain: accelerating depreciation lowers basis faster, which increases recapture exposure on a later taxable sale. Whether it is right depends on the holding plan and the taxpayer, not the property.

Definitions are the easy part. Seeing them applied to your own numbers is the useful part.

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Definitions are general education about how the industry uses these terms. Nothing here is tax advice, legal advice, or a recommendation about any specific property or transaction.