Commercial Terms


Annual Debt Service (ADS) = Interest + Principal payments over a 12 month period

CAP Rate = Annual NOI / Cost​​​​​​​​​​​​​​

Cash Flow (CF) = Net Profit = Net Operating Income - ADS​​​​​​​

Effective Gross Rental Income (EGI) = Gross Rental Income - Vacancy Factor
I.E. Gross Income of $100,000 on a rental with a vacancy factor of 5% = $5000
Therefore EGI in this case is = $100,000-$5,000 = $95,000​​​​​​​

Gross Rental Income (GRI) = Gross Rental Income from a rental property before expenses.

Net Operating Income (NOI) = EGI - OpEx​​​​​​​

Total Operating Expenses (OpEx) 
OpEx would be normal and re-occuring expenses
i.e. taxes, insurance, repairs & maintenance, supplies, legal, admin, management, accounting, etc....
OpEx would not include:
Mortgage (Finance Expense), Depreciation, Vacancy, Capital Items / improvements (i.e. roof, windows, parking lot replacement, etc...)​​​​​​​

Vacancy Factor = Commercial real estate may not always be 100% rented.  Vacancy factor takes into account this situation. Many will take into consideration at least a 5% vacancy factor when working on a deal.

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A

  • Absorption Rate – The rate at which available commercial space is leased in a given market over a specific time.
  • Anchor Tenant – A major tenant (e.g., a big retailer) that attracts customers and other businesses to a commercial property.
  • Appraisal – A professional valuation of a property’s market value.
  • As-Is Condition – A property sold in its current state without repairs or improvements by the seller.

B

  • Base Rent – The minimum rent due under a lease, excluding additional costs like maintenance and taxes.
  • Build-to-Suit – A property constructed specifically for a tenant's needs.
  • Broker Opinion of Value (BOV) – An estimate of a property’s value provided by a broker, not as formal as an appraisal.

C

  • Capitalization Rate (Cap Rate) – A measure of return on investment, calculated as Net Operating Income (NOI) ÷ Purchase Price.
  • Common Area Maintenance (CAM) Charges – Fees paid by tenants for shared space upkeep, such as hallways, parking lots, or landscaping.
  • Cash Flow – The net income from a property after all expenses, including mortgage payments.
  • Class A, B, C Properties – A ranking system for commercial buildings based on quality, location, and amenities.

D

  • Debt Service – The total loan payments (principal + interest) required for a mortgage.
  • Due Diligence – The research and investigation period before finalizing a real estate transaction.
  • Depreciation – The decrease in property value over time due to aging or wear and tear.

E

  • Equity – The difference between a property’s market value and the amount owed on it.
  • Escalation Clause – A lease clause that allows rent increases over time due to inflation or other factors.
  • Exclusive Listing – A listing agreement where only one broker has the right to sell or lease the property.

F

  • Fair Market Value (FMV) – The estimated price a property would sell for under normal market conditions.
  • Fixed Lease – A lease agreement with a set rental amount for a specific period.
  • Flex Space – A property with both office and warehouse space.

G

  • Gross Lease – A lease where the landlord covers operating expenses, and the tenant pays a fixed rent.
  • Gross Rent Multiplier (GRM) – A quick valuation tool calculated as Property Price ÷ Gross Rental Income.
  • Ground Lease – A long-term lease where a tenant rents the land and may develop on it.

H

  • Highest and Best Use – The most profitable use of a property that is legally and physically possible.
  • Holdover Tenant – A tenant who remains in a property after their lease expires, sometimes paying rent on a month-to-month basis.

I

  • Industrial Property – Properties used for manufacturing, storage, or distribution.
  • Internal Rate of Return (IRR) – A measure of an investment’s profitability over time.
  • Investment Property – A property purchased primarily to generate income rather than for personal use.

J

  • Joint Venture (JV) – A business arrangement where two or more parties invest in a commercial property.

K

  • Key Money – An upfront fee sometimes paid by a tenant for a lease in highly desirable locations.

L

  • Leasehold Estate – A tenant’s right to occupy a property for a specified period.
  • Letter of Intent (LOI) – A non-binding document outlining preliminary lease or purchase terms.
  • Lien – A legal claim against a property for unpaid debts.

M

  • Mixed-Use Development – A property that combines different uses, such as residential, office, and retail space.
  • Market Rent – The rental rate based on comparable properties in the area.
  • Modified Gross Lease – A lease where the tenant and landlord share some operating costs.

N

  • Net Operating Income (NOI) – A property’s revenue minus operating expenses, excluding mortgage payments.
  • Net Lease – A lease where the tenant pays for some or all property expenses (taxes, insurance, maintenance).
  • Non-Recourse Loan – A loan where the lender cannot pursue the borrower personally if they default.

O

  • Occupancy Rate – The percentage of rented space compared to the total available space.
  • Operating Expenses – Costs associated with running a property, such as maintenance, taxes, and insurance.

P

  • Percentage Lease – A lease where the tenant pays a base rent plus a percentage of their sales revenue.
  • Pro Forma – A financial projection showing expected income, expenses, and profitability of a property.
  • Prime Location – A highly desirable commercial area with strong tenant demand.

Q

  • Qualified Tenant – A tenant who meets the financial and business requirements to lease a property.
  • Quiet Enjoyment – A tenant’s right to use the property without interference from the landlord.

R

  • Real Estate Investment Trust (REIT) – A company that owns and manages income-producing properties.
  • Rent Roll – A report showing all rental income from a commercial property.
  • Replacement Cost – The estimated cost to rebuild a property with similar materials.

S

  • Sublease – When a tenant leases their rented space to another party.
  • Syndication – A group of investors pooling money to buy commercial property.
  • Site Selection – The process of choosing the best location for a business or development.

T

  • Triple Net Lease (NNN) – A lease where the tenant pays property taxes, insurance, and maintenance, in addition to rent.
  • Tenant Improvements (TI) – Custom modifications a landlord or tenant makes to a commercial space.
  • Turnkey Property – A fully equipped and operational property ready for immediate use.

U

  • Underwriting – The process of evaluating the risk of a real estate investment or loan.
  • Use Clause – A lease provision that defines how the tenant can use the property.

V

  • Vacancy Rate – The percentage of unoccupied rental units in a property or market.
  • Value-Add Property – A commercial property that has potential for increased value through renovations or management improvements.

W

  • Working Capital – The funds available for the day-to-day expenses of managing a property.
  • Weighted Average Lease Term (WALT) – The average remaining lease term for tenants in a commercial property.

Z

  • Zoning – Local government regulations that determine how a property can be used (e.g., residential, commercial, industrial).
  • Zero Cash Flow Property – A property where rental income matches debt payments, leaving no excess cash flow.