7 Commercial Real Estate Terms Every Broker or Investor Should Know

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7 Commercial Real Estate Terms Every Broker or Investor Should Know

Commercial real estate (CRE) is full of industry jargon that can be overwhelming for new investors and even some seasoned professionals. Whether you're brokering deals, acquiring properties, or managing assets, understanding key terms is crucial for making informed decisions and negotiating effectively.

Here are seven essential CRE terms every broker and investor should know:

1. Cap Rate (Capitalization Rate)

The cap rate is a key metric used to evaluate the return on investment (ROI) of an income-producing property. It’s calculated as:

📌 Cap Rate = Net Operating Income (NOI) / Purchase Price

A higher cap rate generally indicates a higher risk and return, while a lower cap rate signals a more stable, lower-yielding asset.

2. Net Operating Income (NOI)

NOI is the total income generated from a property after operating expenses are deducted but before debt service and taxes. It’s a crucial number for assessing a property’s profitability.

📌 NOI = Gross Income – Operating Expenses

Higher NOI means stronger cash flow, making the property more attractive to investors.

3. Triple Net Lease (NNN Lease)

A lease structure where the tenant is responsible for property taxes, insurance, and maintenance in addition to rent.

✅ Pros for Investors: Predictable cash flow, minimal landlord responsibilities.
❌ Cons: Lower rent than gross leases, depends on tenant creditworthiness.

NNN leases are common for single-tenant retail properties, such as gas stations, convenience stores, and fast-food restaurants.

4. Loan-to-Value Ratio (LTV)

LTV measures the percentage of a property’s value that is financed through debt.

📌 LTV = Loan Amount / Property Value

A lower LTV means less risk for lenders and often results in better financing terms. Investors use LTV to assess leverage and financing strategy.

5. Debt Service Coverage Ratio (DSCR)

DSCR is used by lenders to evaluate a borrower’s ability to repay a loan based on property income.

📌 DSCR = NOI / Debt Service

A DSCR above 1.25 is generally preferred by lenders, indicating that the property generates 25% more income than needed to cover debt payments.

6. 1031 Exchange

A tax-deferral strategy allowing investors to reinvest proceeds from a property sale into a like-kind property while deferring capital gains taxes.

✅ Key Benefits: Keeps capital compounding, maximizes portfolio growth.
⚠️ Rules: Strict timelines—must identify a replacement property within 45 days and close within 180 days.

7. Tenant Creditworthiness

The financial strength of a tenant, often assessed through credit ratings, financial statements, and business performance.

📌 Investment-Grade Tenants: Rated BBB- or higher by S&P or Moody’s—considered lower risk.
📌 Non-Investment-Grade Tenants: Higher risk but often offer higher cap rates.

Tenant quality impacts lease stability, property value, and financing terms.

Final Thoughts

Understanding these core commercial real estate terms will help you analyze deals more effectively, negotiate smarter, and make better investment decisions. Whether you're a seasoned broker or an investor looking to grow your portfolio, mastering these fundamentals is essential

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