Commercial real estate glossary: 50 terms every broker & investor should know
This is a plain-English commercial real estate glossary covering the 50 terms that come up most in deals, leases and investment analysis. It defines the headline metrics — cap rate (NOI ÷ price), NOI, GRM, DSCR, cash-on-cash and IRR — the lease vocabulary — NNN, gross and modified-gross leases, CAM, TI, WALE, LOI and OM — and the industrial and roles terms brokers, investors and tenants use every day. Each entry is one to three sentences, written to be accurate and usable, not academic.
The terms that drive every deal
- Cap rate = NOI ÷ price — the yield commercial property trades on.
- NNN lease = base rent plus taxes, insurance and CAM passed to the tenant.
- WALE / WAULT = income-weighted average remaining lease term; longer is safer.
- LOI frames the deal; the OM is the seller's pitch document.
- Effective rent, not face rent, is the number that compares deals fairly.
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1031 Exchange
A US tax provision that lets an investor defer capital-gains tax by reinvesting the proceeds of a sold property into a 'like-kind' replacement within set deadlines (45 days to identify, 180 days to close). A core tool for building a portfolio tax-efficiently.
A
Absorption
The net change in occupied space over a period, measured in square feet. Positive (net) absorption means tenants took more space than they vacated; negative absorption means the opposite. It is the headline demand metric for a submarket.
Anchor Tenant
The largest, most creditworthy tenant in a property — typically a supermarket, big-box retailer or major logistics occupier — whose presence draws traffic and other tenants. Anchors usually pay below-market rent in exchange for the demand they create.
B
Build-to-Suit
A development built to a specific tenant's requirements, usually pre-let on a long lease before construction starts. The tenant gets purpose-built space; the developer locks in income from day one.
C
CAM (Common Area Maintenance)
The cost of operating and maintaining the shared parts of a property — car parks, lobbies, landscaping, lighting — recovered from tenants in proportion to the space they lease. CAM is one of the three 'nets' in a triple-net lease.
CAM Reconciliation
The annual true-up where the landlord compares CAM charges actually estimated and billed during the year against real costs incurred, then bills tenants for any shortfall or credits any overpayment.
Cap Ex (Capital Expenditure)
Spending on major improvements that extend a building's life or value — a new roof, HVAC plant, car-park resurfacing — as opposed to routine operating costs. Cap ex is excluded from NOI but reduces the cash an investment actually returns.
Cap Rate (Capitalisation Rate)
The annual yield a property produces, calculated as net operating income (NOI) divided by price or value. A $4m building with $250k NOI has a 6.25% cap rate. Lower cap rates mean higher prices and lower risk; higher cap rates mean cheaper, riskier assets.
Cash-on-Cash Return
The pre-tax cash flow a deal produces in a year divided by the actual cash invested (down payment plus closing costs and capital outlay). Unlike cap rate it accounts for leverage, showing the real return on the equity you put in.
Clear Height
The usable vertical space in a warehouse, measured from the floor to the lowest overhead obstruction (joists, sprinklers or beams). Modern logistics buildings target 36 feet or more to maximise racking and storage density.
Common Area
The parts of a building shared by all tenants — lobbies, hallways, restrooms, lifts, car parks — that no single tenant occupies exclusively. Costs to maintain these areas are recovered through CAM charges and the load factor.
Comps (Comparables)
Recently sold or leased properties similar in type, size, location and quality to the one being valued. Sales comps anchor a purchase price; lease comps anchor a rent. Good comps are the backbone of every CRE valuation and negotiation.
D
DSCR (Debt Service Coverage Ratio)
Net operating income divided by annual debt service (principal plus interest). A DSCR of 1.25 means the property earns 25% more than its loan payments. Lenders typically require 1.20–1.35x to approve commercial financing.
Dock Door
A loading bay where trucks back up to a raised platform for loading and unloading, usually fitted with a leveller and seal. Dock-door count and ratio to floor area are key measures of how efficiently a warehouse moves freight.
E
Effective Rent
The true average rent a landlord receives over a lease term after deducting incentives — rent-free periods, fit-out contributions, capped reviews. Effective rent is almost always lower than the headline face rent and is the figure used to compare deals fairly.
Equity Multiple
Total cash returned to an investor divided by total cash invested, across the whole hold. A 2.0x equity multiple means you got back twice what you put in. Unlike IRR it ignores timing, so it is read alongside IRR, not instead of it.
Estoppel (Estoppel Certificate)
A signed statement from a tenant confirming the key facts of their lease — rent, term, deposits, any defaults — relied on by buyers and lenders during a sale or refinance. It 'estops' the tenant from later disputing those facts.
F
Face Rent
The headline rent quoted in a lease before any incentives are applied. Landlords prefer to preserve a high face rent (to protect valuations and comps) and give value back through rent-free periods or fit-out, which is why effective rent matters.
G
Gross Lease
A lease where the tenant pays a single all-in rent and the landlord covers operating expenses — taxes, insurance, maintenance — out of that rent. Simple for tenants, but the landlord carries the risk of rising costs.
GRM (Gross Rent Multiplier)
Property price divided by gross annual rental income. Because it needs only price and rent, GRM is the fast screen for ranking a long deal list before doing the deeper NOI and cap-rate work on the shortlist.
Ground Lease
A long-term lease (often 50–99 years) of land only, where the tenant builds and owns improvements on it for the term, then hands them back at expiry. Common for landmark sites and when an owner wants income without selling the land.
H
Holdover
When a tenant stays in occupation after the lease has expired without a new agreement signed. Most leases impose a holdover rent premium (often 125–200% of the prior rate) to push both sides to renew or vacate promptly.
I
Industrial Outdoor Storage (IOS)
Low-coverage industrial sites used primarily for outdoor storage of vehicles, containers, equipment or materials, with minimal building area. IOS has become a sought-after asset class for trucking, construction and last-mile logistics users.
IRR (Internal Rate of Return)
The annualised return that makes the present value of all a deal's cash flows equal zero. IRR accounts for both the size and the timing of cash flows, making it the standard yardstick for comparing investments over a hold period.
L
Landlord Rep
A broker engaged by an owner to lease or sell space — marketing the property, sourcing tenants or buyers, and negotiating on the landlord's behalf. The counterpart to a tenant rep, who represents the occupier's side.
Last-Mile
The final leg of delivery, from a local distribution facility to the end customer. Last-mile logistics demand drives the value of smaller, close-in urban warehouses that let operators reach dense populations quickly.
Lease Abstract
A concise summary of a lease's commercial terms — parties, premises, term, rent, reviews, options, key obligations — pulled from the full document so analysts and asset managers can act without reading 80 pages of legal text.
Load Factor
The ratio that converts a tenant's usable area into rentable area by adding their share of common space. A 15% load factor on 10,000 usable sq ft means the tenant pays rent on 11,500 rentable sq ft. Also called the loss factor or add-on factor.
LOI (Letter of Intent)
A short, mostly non-binding document setting out the key business terms of a deal — price or rent, term, conditions — before lawyers draft the binding contract or lease. The LOI frames the negotiation and signals serious intent.
Loan-to-Value (LTV)
The loan amount as a percentage of a property's value or price. A $3m loan on a $5m building is 60% LTV. Lower LTV means more equity and less lender risk; commercial lenders typically cap LTV at 65–75%.
M
Mezzanine Debt
A layer of financing that sits between senior debt and equity in the capital stack. It carries a higher interest rate than the senior loan and is often secured against ownership interests rather than the property itself, filling the gap when senior debt won't cover the deal.
Modified Gross Lease
A middle ground between gross and net leases: the tenant pays base rent plus some, but not all, operating expenses (often utilities and cleaning), while the landlord retains others such as property taxes and structural costs. Terms vary deal to deal.
N
NNN / Triple Net Lease
A lease where the tenant pays base rent plus the three 'nets' — property taxes, building insurance and common-area maintenance — usually quoted per square foot. The landlord receives a near-passive, predictable income with costs passed through to the tenant.
NOI (Net Operating Income)
A property's annual income after operating expenses but before mortgage payments, depreciation and capital expenditure. NOI is the numerator in the cap-rate formula and the single most important number in commercial valuation.
O
Occupier
The business that actually uses a commercial space — the tenant in occupation, or an owner-occupier in its own building. Occupier intelligence tracks who these businesses are and when they are likely to move, expand or contract.
OM (Offering Memorandum)
The marketing and due-diligence document a seller's broker prepares to present an investment property — covering the asset, tenancy, financials, market and offer process. The OM is the primary pitch a buyer evaluates before bidding.
P
Percentage Rent
Extra rent a retail tenant pays as a percentage of sales above an agreed breakpoint, on top of base rent. It lets landlords share in a store's success and is standard in shopping-centre leases.
Preferred Equity
An equity investment that ranks ahead of common equity for returns and repayment, usually earning a fixed preferred return before common holders are paid. It sits below debt but above common equity in the capital stack, balancing risk and reward.
Pro Forma
A projected financial statement for a property — forecast income, expenses, NOI and cash flow over a hold period, based on assumptions about rents, vacancy and growth. Buyers stress-test the seller's pro forma against their own view of the market.
R
Recovery
The portion of operating expenses a landlord recovers back from tenants under net or modified-gross leases. The recovery rate measures how much of total expenses is passed through, a key driver of net effective income.
Rent Roll
A schedule of all leases in a property — tenant, suite, area, rent, term dates, reviews and options. The rent roll is the first document a buyer or lender reads to understand the income and the lease-expiry risk it is buying.
S
Sale-Leaseback
A transaction where an owner-occupier sells its property to an investor and simultaneously leases it back on a long term. The seller frees up capital while keeping operational control; the buyer gets a stable, single-tenant income stream.
Spec Building
A property developed speculatively — built without a tenant or buyer signed up in advance, on the bet that demand will fill it. The opposite of a build-to-suit, carrying more leasing risk but offering faster delivery to the market.
Stabilised
A property that has reached a normal, sustainable level of occupancy and income — typically once it hits market-level occupancy (often around 90–95%) after lease-up. Stabilised assets are valued on actual income rather than projections.
Submarket
A defined geographic slice of a larger market — a cluster of suburbs, an industrial precinct or a CBD fringe — with its own supply, demand and rent dynamics. Brokers and funds analyse and prospect at the submarket level, not the whole metro.
T
TI (Tenant Improvement)
Work done to fit out a space for a specific tenant — partitions, finishes, services — often funded wholly or partly by a landlord allowance (the TI allowance) negotiated into the lease. A major lever in leasing economics.
Tenant Rep
A broker who represents the occupier rather than the landlord — finding space, advising on options and negotiating the lease on the tenant's behalf. Tenant-rep work avoids the conflict of representing both sides of a deal.
U
Usable vs Rentable Area
Usable area is the space a tenant can actually occupy and use; rentable area is usable area plus the tenant's share of common space. Rent is charged on rentable area, so the gap between the two — the load factor — directly affects cost.
V
Vacancy Rate
The share of leasable space in a building or market that is unoccupied, expressed as a percentage. Rising vacancy signals weakening demand and downward pressure on rents; falling vacancy signals the reverse.
W
WALE / WAULT
Weighted Average Lease Expiry (WALE), known as WAULT in the UK, measures the average remaining lease term across a property or portfolio, weighted by income or area. A longer WALE means more secure, durable income and lower re-letting risk.
Frequently asked questions
What does cap rate mean in commercial real estate?
Cap rate (capitalisation rate) is a property's annual yield, calculated as net operating income (NOI) divided by its price or value. A $4,000,000 building producing $250,000 of NOI has a 6.25% cap rate. Lower cap rates mean higher prices and lower perceived risk; higher cap rates mean cheaper, riskier assets.
What is a NNN (triple net) lease?
A triple net or NNN lease is one where the tenant pays base rent plus the three 'nets' — property taxes, building insurance and common-area maintenance (CAM) — usually on top of rent quoted per square foot. It gives the landlord a near-passive, predictable income because most operating costs are passed through to the tenant.
What is WALE?
WALE stands for Weighted Average Lease Expiry — the average remaining lease term across a property or portfolio, weighted by income or floor area. It is called WAULT in the UK. A longer WALE indicates more secure, durable income and lower risk of near-term vacancy.
What is an offering memorandum (OM)?
An offering memorandum is the marketing and due-diligence document a seller's broker prepares to present an investment property to buyers. It covers the asset, tenancy, financials, market context and the offer process, and is the primary document a buyer evaluates before submitting a bid.
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