Commercial real estate terms every agent should know

Commercial real estate terms: where to start

Commercial real estate vocabulary helps agents ask better questions about income, leases, financing, and property use. Definitions alone do not establish what a particular contract requires. Compare marketing statements with signed documents and supporting records.

These are general definitions, not legal, tax, lending, or investment advice. Consult your supervising broker, an attorney, and a CPA when applying them. State rules vary, and local ordinances, lease language, and lender requirements can change the analysis. Every example below is hypothetical; any numbers are illustrative, not market benchmarks.

NOI: net operating income

NOI is property operating income minus operating expenses, generally before debt service, income taxes, depreciation, and capital expenditures. Confirm how reserves and unusual expenses are treated. Hypothetically, $150,000 in operating income less $60,000 in operating expenses produces $90,000 NOI. Reconcile the calculation with actual collections and expense records.

Cap rate: capitalization rate

A cap rate expresses annual NOI as a percentage of property price or value. Hypothetically, $90,000 NOI divided by a $1.5 million price equals 6%. Identify whether the NOI is historical, projected, or stabilized. Comparing cap rates without comparing expense assumptions, condition, location, and lease risk can mislead a buyer.

Cash-on-cash return

Cash-on-cash return generally divides annual pretax cash flow by cash invested. Financing and the definition of cash invested matter. Hypothetically, $20,000 annual cash flow on $250,000 invested equals 8%. Confirm whether closing costs, initial improvements, and reserves are included. This measure alone does not capture appreciation, taxes, or sale proceeds.

DSCR: debt service coverage ratio

DSCR compares income available for debt payments with required debt service. A common property-level calculation is NOI divided by annual debt service, although lender adjustments vary. Hypothetically, $120,000 NOI divided by $100,000 debt service equals 1.20. Ask the lender which expenses, reserves, and income adjustments its underwriting uses.

Debt service

Debt service means required loan payments, typically principal and interest over a stated period. It is separate from property operating expenses. Hypothetically, a buyer evaluating a loan with monthly payments should convert them to the same annual period used for NOI. Confirm balloon payments, interest-only periods, rate changes, and other payment obligations.

NNN: triple-net lease

A triple-net lease generally allocates property taxes, insurance, and maintenance expenses to the tenant in addition to base rent. The lease controls the actual allocation, including structural repairs and capital costs. Hypothetically, an agent comparing two NNN listings should request expense histories and exclusions rather than assuming the landlord has no remaining obligations.

Gross lease

Under a gross lease, the landlord generally pays specified operating expenses from the rent received. Expense stops, utility arrangements, or other exceptions may still apply. Hypothetically, an office tenant offered gross rent should verify whether electricity, after-hours HVAC, and annual expense increases are additional charges. Compare total occupancy costs, not the headline rent alone.

Modified gross lease

A modified gross lease divides operating expenses between landlord and tenant through negotiated terms. The label does not identify a standard division. Hypothetically, a landlord might cover taxes and insurance while the tenant pays utilities and janitorial services. Build a responsibility checklist from the lease and confirm how future increases are allocated.

CAM: common area maintenance

CAM refers to costs associated with maintaining shared property areas, with recoverable charges defined by the lease. Ask about allocation methods, exclusions, caps, management fees, and reconciliation rights. Hypothetically, a retail tenant may pay a share of parking-lot maintenance, but the lease determines whether resurfacing is recoverable and over what period.

LOI: letter of intent

An LOI records proposed business terms before a detailed agreement is completed. Its legal effect depends on its language and applicable law; confidentiality or exclusivity provisions may be binding even when other terms are not. Hypothetically, parties might agree on proposed rent in an LOI while reserving final obligations for an executed lease.

PSA: purchase and sale agreement

A PSA is the contract governing a property purchase, including price, deposits, contingencies, deadlines, representations, and closing obligations. Hypothetically, a buyer may have an inspection termination right that expires before closing. Track notice requirements carefully and have counsel interpret the agreement rather than assuming an informal objection preserves contractual rights.

Due diligence

Due diligence is the investigation used to evaluate a property and transaction before proceeding. Scope may include title, survey, leases, financial records, condition, environmental issues, and permitted uses. Hypothetically, a buyer planning a restaurant should investigate utility capacity and approvals during the contractual review period, with qualified specialists addressing issues outside the agent’s expertise.

1031 exchange

A Section 1031 exchange can defer recognition of qualifying gain when qualifying investment or business real property is exchanged under federal requirements. It does not automatically eliminate tax. Deferred exchanges generally involve a 45-day identification period and a completion deadline that may be earlier than 180 days because of the tax-return deadline. [1](https://www.irs.gov/instructions/i8824)

Hypothetically, an investor planning to replace a rental property should consult a CPA, attorney, and qualified intermediary before selling. Receiving proceeds directly can jeopardize deferral.

OM: offering memorandum

An OM is a marketing document describing a property, its financial information, and the proposed investment opportunity. It may contain projections and assumptions rather than verified results. Hypothetically, an OM might assume vacant space leases quickly. Ask for the supporting leases, expense records, and market evidence before presenting projected income as dependable.

Rent roll

A rent roll summarizes tenancy information, often including tenant names, areas, rents, lease dates, deposits, and concessions. It is a snapshot that should be reconciled with executed leases and amendments. Hypothetically, a rent roll may show scheduled rent even though a tenant has unpaid balances. Request collections and delinquency records separately.

T-12: trailing twelve months

A T-12 reports income and expenses for the most recent twelve-month period specified in the statement. It provides operating history rather than a forecast. Hypothetically, a property’s T-12 may include a one-time repair or omit a newly increased insurance premium. Review monthly detail and explain adjustments instead of silently changing the reported totals.

Absorption

Absorption describes space taken up in a defined market over a period. Net absorption measures the change in occupied space; gross absorption generally measures leasing or occupancy activity without subtracting space vacated, depending on the provider. Hypothetically, strong leasing activity can coexist with negative net absorption when more space becomes vacant. Check methodology and boundaries.

Tenant improvements

Tenant improvements are alterations that prepare premises for a tenant’s use. A tenant improvement allowance is the landlord’s negotiated contribution, subject to the lease. Hypothetically, an allowance might cover approved construction but exclude furniture. Confirm responsibility for design, permits, overruns, reimbursement conditions, completion deadlines, and improvements remaining when the lease ends.

Estoppel certificate

An estoppel certificate generally asks a tenant to confirm specified lease facts, such as rent, lease dates, amendments, and known defaults. Its effect depends on the document and applicable law. Hypothetically, a buyer may request certificates to check whether tenants report concessions missing from the seller’s files. Counsel should address discrepancies before closing.

SNDA: subordination, nondisturbance, and attornment

An SNDA addresses relationships among tenant, landlord, and lender. It typically covers lease priority, conditions for protecting occupancy after foreclosure, and recognition of a successor landlord. Hypothetically, a tenant may seek continued occupancy if the lender forecloses. Have counsel review the actual protections, conditions, notice rights, and obligations rather than relying on the acronym.

Vacancy

Vacancy measures unoccupied space, usually as a share of relevant inventory. Physical vacancy and economic vacancy differ: the latter concerns lost potential income and may reflect concessions or collection losses. Hypothetically, a fully occupied building can still lose income through unpaid rent. State the measurement date, area basis, and definition before comparing vacancy figures.

Basis

Tax basis generally starts with acquisition cost and eligible acquisition costs, then changes through adjustments such as capital improvements and depreciation. Investment discussions may use “basis” informally to mean total cost. Hypothetically, a buyer’s acquisition price and later adjusted tax basis can differ. Ask which meaning applies and have a CPA calculate tax basis.

Zoning

Zoning regulates land uses and development through local rules, potentially including density, setbacks, parking, and permitted activities. Existing occupancy does not prove a proposed use is allowed. Hypothetically, converting warehouse space to a fitness studio may require approvals. Verify the proposed use with the appropriate authority and distinguish zoning permission from building, fire, and accessibility compliance.

Rentable versus usable space

Usable space generally refers to space available for a tenant’s use under the applicable measurement standard. Rentable space may include an allocated share of common areas. Definitions vary by property type and standard. Hypothetically, two offices with identical usable areas can have different rentable areas. Confirm measurements and the rent calculation before comparing quoted rates.

Frequently asked questions

Sources and further reading

• IRS: Instructions for Form 8824
• JLL: Glossary of real estate terms and definitions
• National Association of Realtors: Under the Radar, lease structures and NOI

This guide is general education. Requirements vary by state. Consult your broker, attorney, or CPA before acting on licensing, contracts, referral compensation, or tax questions.

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