The Ultimate Guide to Commercial Real Estate Terminology

1. Cap Rate (Capitalization Rate)

Let’s kick things off with one of the most commonly used terms in CRE: cap rate. This is a way to measure the potential return on an investment property. Think of it as the speedometer of your investment.

Here’s the formula: Cap Rate = Net Operating Income (NOI) / Purchase Price

A higher cap rate usually means higher returns, but it might also mean higher risk. Want to run the numbers yourself? Check out the cap rate calculators on Investsheets.com!

2. NOI (Net Operating Income)

This one’s simple. NOI is the total income a property generates after you subtract operating expenses (but not mortgage payments). It’s a key number that helps you figure out how profitable a property is.

For example, if your property earns $100,000 in rent but costs $30,000 in expenses, your NOI is $70,000. Boom. You’re now one step closer to making smart investment decisions.

3. Gross Lease vs. Net Lease

These are two lease types you’ll run into often. Here’s how they’re different:

• Gross Lease: The landlord covers most property expenses (taxes, maintenance, insurance).

• Net Lease: The tenant takes on some or all of those expenses. A “triple net lease” (NNN) is when the tenant pays taxes, insurance, and maintenance.

If you’re managing multiple leases, the templates at Investsheets.com can make your life way easier.

4. Loan-to-Value Ratio (LTV)

This term measures how much of the property’s value is being financed by a loan. For example, if you’re buying a $1,000,000 property and borrowing $750,000, your LTV is 75%.

Why does this matter? Because lenders use it to decide how risky your deal is. A lower LTV means you’re putting in more equity, which can lower your risk profile.

5. DSCR (Debt Service Coverage Ratio)

DSCR is a fancy way of saying, “Can this property cover its debt payments?” Here’s the formula: DSCR = NOI / Debt Payments

If your DSCR is less than 1, you’re not making enough money to cover your loan payments. Aim for a DSCR of 1.25 or higher to keep lenders happy.

6. Tenant Improvements (TIs)

Ever walk into a commercial space and wonder, “Who pays for these fancy upgrades?” That’s where tenant improvements come in. This term refers to changes made to a property to meet a tenant’s needs, and the costs are often shared between the landlord and tenant.

7. CAM (Common Area Maintenance)

In multi-tenant properties, CAM fees cover shared spaces like lobbies or parking lots. These costs are typically split among tenants. CAM fees can sometimes be a deal-breaker, so keep them in mind when analyzing leases. (And yes, we’ve got a spreadsheet for that on Investsheets.com!)

8. Pro Forma

This is your crystal ball. A pro forma is a financial statement that forecasts a property’s future performance. It’s like a cheat sheet for understanding whether a deal is worth pursuing.

9. Vacancy Rate

The vacancy rate tells you what percentage of a property is unoccupied. High vacancy rates could signal a weak market or poorly managed property, while low rates are a good sign.

10. Rent Roll

A rent roll is a summary of all the tenants in a property, including what they’re paying and when their leases expire. It’s a must-have document when analyzing multi-tenant properties, and you can find templates for creating one at—you guessed it—Investsheets.com.

11. IRR (Internal Rate of Return)

IRR is a way to measure the profitability of an investment over time. While it sounds complicated, think of it as a way to gauge whether a deal is worth your time and money.

12. Earnest Money

When you’re making an offer, you’ll often need to put down earnest money to show you’re serious. It’s like a deposit that’s held until the deal closes.

13. Due Diligence

This is the period when you’re investigating a property before closing. You’ll review financials, inspect the property, and make sure there are no surprises. Our due diligence checklist at Investsheets.com can help you stay organized.

14. Absorption Rate

This term tells you how quickly properties are being leased or sold in a specific market. A high absorption rate means demand is strong, while a low rate suggests there’s more supply than demand.

15. Equity

Equity is the amount of money you’ve invested in a property. It’s calculated as: Equity = Property Value – Outstanding Loan Balance

Think of equity as your skin in the game. As you pay down your loan and the property appreciates, your equity grows—and that’s how you build wealth in CRE.