Amortization
the period used to calculate repayment, often 20 to 25 years. A longer amortization lowers payments but increases total interest paid over time.
See in the guide: AmortizationCommercial Real Estate Glossary
Find the commercial real estate terms used in the First-Time Commercial Property Buyer’s Guide.
Definitions
Cap rate
Cap rate is NOI divided by the purchase price, shown as a percentage. It shows the yield you would earn if you paid all cash, and it is a quick way to compare properties. Higher cap rates often reflect more risk or lower growth potential. Cap rate does not account for financing or all future capital needs.
See in the guide: Cap rateCapital Expenditures (CapEx)
major, long-term replacements such as roofs, HVAC systems and parking lot repaving, separate from routine day-to-day maintenance.
See in the guide: Capital Expenditures (CapEx)Cash flow
cash remaining after operating expenses, debt payments and any capital expenditures or reserves included in your analysis.
See in the guide: Cash flowCash-on-cash return
annual cash flow divided by the cash you invested, using a clearly defined and consistent calculation.
See in the guide: Cash-on-cash returnCommon Area Maintenance (CAM)
costs of maintaining shared spaces such as parking lots, lobbies and snow removal, typically passed through to tenants in net leases.
See in the guide: Common Area Maintenance (CAM)Covenants
rates vary by property type, location and borrower strength. Lenders may attach covenants, such as keeping DSCR above a set level or limiting other debt. Understand these before you commit.
See in the guide: CovenantsDebt Service Coverage Ratio (DSCR)
Qualifying income or cash flow divided by required debt payments.
See in the guide: Debt Service Coverage Ratio (DSCR)Equity and down payment
commercial deals commonly require more equity than a home purchase, often in the range of 25% to 35%, though requirements vary by lender and property. Plan for a larger upfront capital commitment.
See in the guide: Equity and down paymentEscalation clause
the lease term that sets how and when rent increases, for example fixed annual percentage bumps or increases tied to CPI (inflation).
See in the guide: Escalation clauseEstoppel certificate
a signed statement from an existing tenant confirming their exact lease terms, rent rate and security deposit before closing.
See in the guide: Estoppel certificateLoan term
the period during which the agreed conditions apply, often around five years. You may need to renew or refinance before the full amortization ends, at then-current rates.
See in the guide: Loan termLoan-to-Value (LTV)
the mortgage amount relative to the property's value.
See in the guide: Loan-to-Value (LTV)Net Operating Income (NOI)
NOI is rental and other property income, less vacancy allowances and operating expenses. It generally excludes mortgage principal and interest, income taxes and capital expenditures. Think of it as the property's profit before financing. Because it drives value, stronger NOI generally supports a higher property value.
See in the guide: Net Operating Income (NOI)Phase I/II Environmental Site Assessment (ESA)
Environmental assessments check the history of the site and possible soil or groundwater contamination.
See in the guide: Phase I/II Environmental Site Assessment (ESA)Pro forma
a projection of future income and expenses after planned renovations or lease-ups. Treat it as the seller's or buyer's forecast, not as proven performance.
See in the guide: Pro formaProperty Condition Assessment (PCA)
Assess the roof, HVAC, structure and capital needs.
See in the guide: Property Condition Assessment (PCA)Rent roll
a detailed ledger of every unit or space, listing current tenants, lease start and end dates, square footage and base rent.
See in the guide: Rent rollTenant improvements (TI) and allowances
renovations made to customize a space for a tenant, or the cash allowance a landlord provides to fund them.
See in the guide: Tenant improvements (TI) and allowancesTrailing 12 Months (T12)
the actual income and expense statement for the past 12 months, used to check real performance against optimistic seller projections.
See in the guide: Trailing 12 Months (T12)Weighted Average Lease Expiry (WALE)
the average remaining lease term across all tenants, weighted by rental income. It is a key indicator of income stability.
See in the guide: Weighted Average Lease Expiry (WALE)Terms needing a definition
Capital cost allowance (CCA)
Definition pending.
See in the guide: Capital cost allowance (CCA)Input tax credits (ITC)
Definition pending.
See in the guide: Input tax credits (ITC)Letter of Intent (LOI)
Definition pending.
See in the guide: Letter of Intent (LOI)Purchase and Sale Agreement (PSA)
Definition pending.
See in the guide: Purchase and Sale Agreement (PSA)Recapture
Definition pending.
See in the guide: Recapture