CRE Underwriting Glossary

A 1031 exchange lets an investor defer capital-gains tax by reinvesting sale proceeds into like-kind property within strict 45-day and 180-day deadlines.

Break-even occupancy is the share of a property that must stay leased to cover operating expenses and debt service before it turns cash-flow negative.

The broker cap uses headline NOI; the true cap backs out reserves and landlord-retained costs. The gap is the yield a seller's pro forma hides.

The cap rate is net operating income divided by price — the going-in yield of a real estate deal. Here's how it works and where the broker number bends.

The capital stack is a deal's layered financing — senior debt, mezzanine, preferred equity, and common equity — ordered by repayment priority and risk.

Cash-on-cash return is annual pre-tax cash flow divided by the equity invested — the levered cash yield on the actual dollars you put into a deal.

A covered land play is income real estate bought for its redevelopment upside — the in-place rent covers the carry while you hold the land optionality.

Debt yield is NOI ÷ loan amount — the lender's return if it took the property back day one, ungameable by a low rate or long amortization.

DSCR is NOI divided by annual debt service — the first test every lender runs. Below 1.0x the property can't cover its loan from operations.

EBITDAR = EBITDA + rent added back — a tenant's pre-rent earnings. Rent coverage = EBITDAR ÷ rent, with a 1.5x–2.0x institutional floor.

Effective gross income is gross potential rent plus other income, less vacancy and credit loss — the revenue a property actually collects, just above NOI.

The equity multiple is total cash returned ÷ equity invested — 2.0x means you doubled your money. It measures total profit; IRR measures speed.

The going-in cap rate values a deal at purchase; the exit (terminal) cap rate values it at sale. The spread between them often decides the profit.

Gross potential rent is the total rent at 100% occupancy and full market rents — the theoretical top line before vacancy and credit loss.

The gross rent multiplier is price divided by gross annual rent — a fast screening ratio that ignores expenses, best used to cross-check the cap rate.

An interest-only period is a loan phase with no principal payments — boosting early cash flow and DSCR before payments step up to amortizing.

Industrial outdoor storage is low-coverage land leased for truck, trailer, container, and equipment storage — priced on rent per acre, not per square foot.

IRR is the annualized, time-weighted return on equity — the discount rate that sets a deal's NPV to zero, and the headline number for levered returns.

Loan-to-cost is the loan ÷ total project cost — the leverage measure lenders use on value-add and development deals where price isn't the whole story.

Loan-to-value is the loan amount divided by the property's value or price — the core measure of how much leverage a deal carries.

Loss to lease is the gap between a unit's in-place rent and its market rent — the embedded upside, or the rent left on the table, at acquisition.

Mezzanine debt is a junior loan between senior debt and equity — higher cost and leverage, repaid after the senior lender and before equity.

A triple-net lease passes the three property expenses — taxes, insurance, and maintenance/CAM — to the tenant. But "NNN" rarely means zero landlord cost.

Net operating income is a property's income after operating expenses but before debt service and capital items. It drives cap rate, valuation, and DSCR.

Reserves are capital set aside yearly for future repairs and replacements — roofs, systems, turnover. Underwriting NOI before reserves overstates yield.

The operating expense ratio is operating expenses ÷ effective gross income — a quick read on how much of a property's revenue running it consumes.

The preferred return is the threshold yield limited partners earn before the sponsor shares in profits — the first profit tier in an equity waterfall.

Price per square foot is purchase price ÷ building area — the per-foot basis metric for industrial, retail, and office deals, and a replacement-cost check.

Price per unit is purchase price ÷ number of units — the per-door basis metric for comparing multifamily deals against comps and replacement cost.

A pro-forma is the forward-looking projection of a property's income, expenses, and returns — the model a deal is underwritten on, where optimism hides.

Recourse debt lets the lender pursue the borrower's other assets on default; non-recourse debt is limited to the property, subject to bad-boy carve-outs.

Rent coverage ratio = EBITDAR ÷ annual rent — the sale-leaseback durability test. 1.5x–2.0x is the institutional floor for a non-rated tenant.

Replacement reserves are an annual set-aside for future capital expenses — roofs, HVAC, parking, unit turns — deducted to reach a true, sustainable NOI.

A sale-leaseback is when an owner-occupier sells its property and leases it back, becoming the tenant — unlocking capital but often at above-market rent.

Stabilized NOI is the net operating income a property reaches once fully leased at market rents on a normalized expense load — the basis for exit value.

TI and LC are the capital costs of signing a tenant — build-out allowances and broker commissions — a real leasing cost below NOI that erodes cash flow.

The true cap rate divides NOI rebuilt on real economics — actual landlord costs, reserves, realistic vacancy — by price. The yield you actually keep.

Vacancy and credit loss is the deduction from gross potential rent for empty space and uncollected rent — the gap between the rent roll and collections.

The four CRE risk-return profiles — core, core-plus, value-add, and opportunistic — describe how much risk a strategy takes and the return expected.

WALT is the average remaining lease term across a property's tenants, weighted by their size or rent. It measures income durability and rollover risk.

The equity waterfall is the order deal cash is split between LPs and the GP. The promote is the GP's outsized share above a preferred-return hurdle.

Yield on cost is stabilized NOI ÷ total project cost — the cap rate you create by building or repositioning, and the basis for the development spread.