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Intermediate terms

Essential Commercial Real Estate Investing Terms

This curated collection includes key terms that might be helpful when exploring Commercial Real Estate (CRE) investing. It focuses on the unique vocabulary of non-residential properties, covering specialized lease terminology, space measurement, and key property concepts. These terms were selected based on common questions and areas where investors often need clarity.

Learning Path

1

Price Per Square Foot

Price Per Square Foot (PPSF) is a real estate metric calculated by dividing a property's total price by its finished square footage, used to compare property values on a standardized basis.

Beginner12-15 min
2

Debt Service

Debt service is the total amount of principal and interest payments required to repay a loan over a specific period, typically for a mortgage or other property-related financing.

Beginner11-12 min
3

Debt Service Coverage Ratio

The Debt Service Coverage Ratio (DSCR) is a financial metric used in commercial real estate lending to assess a property's ability to generate sufficient Net Operating Income (NOI) to cover its annual mortgage debt payments.

Advanced15-18 min
4

Office Building

An office building is a commercial property designed for businesses to conduct administrative, professional, or commercial operations, offering spaces for work and meetings.

Beginner13-15 min
5

Class B Building

A Class B building is a commercial or multifamily property that is typically older but well-maintained, offering functional amenities and a balance between quality and affordability, often targeted for value-add investment strategies.

Intermediate13-14 min
6

Capitalization Rate

The Capitalization Rate (Cap Rate) is a real estate valuation metric used to estimate the potential rate of return on an investment property, calculated by dividing its Net Operating Income (NOI) by its current market value.

Intermediate14-15 min
7

Industrial Warehouse

An industrial warehouse is a large commercial building used for storing, manufacturing, or distributing goods and materials, serving as a critical link in the supply chain for various industries.

Beginner13-15 min
8

Cash-on-Cash Return

Cash-on-Cash Return (CoC) is a real estate investment metric that calculates the annual pre-tax cash flow generated by a property as a percentage of the total cash an investor has invested.

Intermediate15-18 min
9

Net Operating Income

Net Operating Income (NOI) is a key real estate metric representing a property's annual income after deducting all operating expenses, but before accounting for debt service, income taxes, and capital expenditures.

Intermediate11-12 min
10

Internal Rate of Return

The Internal Rate of Return (IRR) is a sophisticated financial metric used in capital budgeting to estimate the profitability of potential investments, representing the discount rate at which the net present value (NPV) of all cash flows from a particular project equals zero.

Advanced15-18 min
11

Usable Square Footage

Usable square footage is the actual area within a commercial property that a tenant occupies and can use for their business operations, excluding common areas and structural elements.

Intermediate13-15 min
12

Discounted Cash Flow

Discounted Cash Flow (DCF) is a valuation method that estimates the intrinsic value of an investment by projecting its future cash flows and discounting them back to their present value.

Intermediate14-15 min
13

Due Diligence

Due diligence is the critical process of investigating and verifying all material facts about a property and its financials before a real estate acquisition, aiming to identify risks and ensure an informed investment decision.

Intermediate14-15 min
14

Net Lease

A net lease is a commercial real estate lease structure where the tenant is responsible for paying a portion or all of the property's operating expenses in addition to base rent.

Intermediate15-18 min
15

Commercial Real Estate

Commercial Real Estate (CRE) refers to properties used exclusively for business activities or to generate income, encompassing office, retail, industrial, and large multifamily assets.

Intermediate14-15 min
16

1031 Exchange

A 1031 Exchange allows real estate investors to defer capital gains and depreciation recapture taxes when selling an investment property by reinvesting the proceeds into a new "like-kind" investment property within strict IRS timelines.

Advanced15-18 min
17

Tenant Improvement

Tenant Improvement (TI) refers to modifications made to a commercial space to customize it for a tenant's specific needs, often funded in part by a Tenant Improvement Allowance (TIA) from the landlord.

Intermediate15-18 min
18

Real Estate Investment Trust

A Real Estate Investment Trust (REIT) is a company that owns, operates, or finances income-producing real estate, allowing individuals to invest in large-scale property portfolios through publicly traded shares.

Intermediate15-18 min
19

Operating Expenses

Operating expenses are the ongoing costs of running and maintaining a real estate investment property, excluding mortgage principal and interest payments, and capital expenditures.

Beginner13-14 min
20

Gross Lease

A gross lease is a rental agreement where the tenant pays a fixed, all-inclusive rent, and the landlord covers most or all of the property's operating expenses, such as taxes, insurance, and utilities.

Intermediate13-14 min
21

Letter of Intent

A Letter of Intent (LOI) is a non-binding document outlining preliminary terms for a real estate transaction, signaling serious interest and guiding future negotiations before a formal purchase agreement.

Intermediate17 min
22

Rentable Square Footage

Rentable Square Footage (RSF) is the total area a commercial tenant pays rent on, encompassing their exclusive usable space plus a proportional share of the building's common areas.

Intermediate14 min
23

Anchor Tenant

An anchor tenant is a prominent, well-known commercial business that attracts significant customer traffic to a property, enhancing its value and stability for real estate investors.

Intermediate13-16 min
24

Class A Building

Class A buildings represent the highest quality and most desirable properties in the commercial real estate market, characterized by prime locations, modern amenities, superior construction, and professional management.

Intermediate16-17 min
25

Common Area Maintenance

Common Area Maintenance (CAM) refers to the costs associated with operating and maintaining shared areas in a commercial property, which are typically passed through to tenants as part of their lease agreements.

Intermediate13-14 min
26

Lease Agreement

A legally binding contract between a landlord and a tenant that outlines the terms and conditions of renting a property, including rent, duration, and responsibilities.

Beginner18-20 min
27

Triple Net Lease

A Triple Net Lease (NNN) is a commercial real estate lease where the tenant pays base rent plus property taxes, building insurance, and common area maintenance, making it a highly passive investment for landlords.

Intermediate15-18 min
28

Retail Center

A retail center is a commercial property designed for various retail businesses, ranging from small strip malls to large shopping centers, providing goods and services to consumers.

Beginner14 min
29

Base Rent

Base rent is the fixed, minimum rent amount paid by a tenant to a landlord for the use of a property, excluding additional charges like operating expenses, taxes, or utilities.

Beginner12-13 min
30

Loss Factor

The Loss Factor in commercial real estate measures the proportion of a tenant's rentable space that is allocated to common areas and not directly usable. It's calculated as the ratio of rentable square footage to usable square footage, impacting effective rent and property efficiency.

Intermediate13 min
31

Class C Building

Class C buildings are older, typically 20+ years, in less desirable locations, often requiring significant renovation, but offer high cash flow potential and value-add opportunities for investors.

Intermediate13-16 min