The world of commercial real estate is full of specialized jargon and easily confused abbreviations – like CRE, which stands, obviously, for commercial real estate.

Here, we’ll demystify 26 tricky terms you’re likely to encounter as a first-time buyer or investor:

Class A buildings are the newest and most luxurious, while Class D buildings are older and in less desirable locations.

  1. Amortization Schedule
    A table that shows the breakdown of each loan payment over time, including the balance owed and the portions of the payment that go toward principal and interest.
  1. Annual Depreciation Allowance
    The amount of a commercial property’s value that can be deducted from taxable income each year to account for the property’s depreciation.
  1. BRRRR (Buy, Rehab, Rent, Refinance, Repeat) Method
    A real estate investment strategy that involves purchasing a commercial property, renovating it, renting it out, refinancing it to extract equity, and then repeating the process.
  1. Building Classifications
    A system that categorizes commercial buildings based on their age, location, amenities, and quality of construction. Class A buildings are the newest and most luxurious, while Class D buildings are older and in less desirable locations.
  1. Build-to-Suit
    A type of commercial real estate development in which a property is designed and constructed according to the specific needs and requirements of a single tenant.
  1. Capital Expenditure (CapEx)
    The money spent on improving or repairing a commercial property, such as renovating the building, replacing the roof, or upgrading the HVAC system.
  1. Cash-on-Cash Return
    A measure of the return on investment that compares the cash flow generated by a commercial property to the amount of cash invested in the property.
  1. Debt-Service Coverage Ratio (DSCR)
    A measure of a commercial property borrowers’ ability to cover debt payments on the property, calculated by dividing the property’s net operating income by its debt service payments.
  1. Easement
    A legal right to use another person’s property, such as a shared driveway or a utility easement, for a specific purpose.
  1. Fair Housing Act
    A federal law that prohibits discrimination in housing on the basis of race, color, religion, national origin, sex (including gender identity and sexual orientation), disability, and familial status.
  1. Floor Area Ratio (FAR)
    The ratio of a commercial building’s total floor area to the area of the lot on which it is built.
  1. Fractional Ownership
    A type of real estate ownership in which multiple individuals each own a portion of a commercial property, often used for high-end assets or commercial real estate investment trusts.
  1. Gross Rent Multiplier
    A measure of the value of a commercial property that compares its sale price to its annual rental income.
  1. House Hacking
    A real estate investment strategy in which an investor purchases a multiunit property, lives in one of the units, and rents out the other units to generate income and cover the mortgage payment.
  1. Leverage
    The use of borrowed money to increase the potential return on investment. In commercial real estate, leverage typically refers to taking out a mortgage or other debt to finance the purchase of a property.
  1. Like-Kind Transfer (1031 Exchange)
    A tax-deferred exchange of one investment property for another, allowing investors to defer paying capital gains taxes on the sale of the original property, which gets its name from Section 1031 of the Internal Revenue Code.
  1. Mezzanine Loan
    A type of financing that sits between the senior debt and equity layers of a commercial real estate investment, typically used to fill the gap between the amount of senior debt available and the total cost of the project.
  1. Prepayment Penalty
    A fee charged to a borrower for paying off a loan early, intended to compensate the lender for the lost interest that would have been earned over the remaining term of the loan.
  1. Pro Forma
    A financial projection of the expected income and expenses of a commercial property, used to estimate the potential profitability of an investment.
  1. Real Estate Investment Trust (REIT)
    A type of investment vehicle that allows investors to buy shares in a professionally managed portfolio of commercial real estate assets.
  1. Real Estate Owned (REO)
    A property that has been foreclosed upon and taken back by the lender, typically a bank or other financial institution.
  1. Sweat Equity
    The value that an investor adds to a commercial property through their own labor or expertise, such as by managing the property, performing renovations, or handling leasing and tenant relations.
  1. Triple Net Lease (NNN)
    A type of commercial lease in which the tenant is responsible for paying for all operating expenses, including property taxes, insurance, and maintenance, in addition to the base rent.
  1. Turnkey
    A term used to describe a commercial property that is fully renovated, furnished, and ready to lease, requiring minimal additional investment or work from the investor.
  1. Waterfall
    A profit-sharing arrangement in which the profits from a commercial real estate investment are first distributed to investors until a certain percentage of return is achieved, after which any additional profits are split between the investors and the sponsor of the investment.
  1. Zoning Ordinances
    A set of local government regulations that govern the allowable uses of land and buildings in a specific area, including restrictions on building height, lot coverage, and property use.

Defining Success

If you’re ready to put your commercial real estate knowledge into action, consult your financial institution.

 

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