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 percentage of a property that must stay leased to cover operating expenses and debt service — the cushion before it goes 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 the layered financing of a deal — 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-producing real estate bought for its future redevelopment upside — the in-place rent "covers" the carry while you hold the optionality on the land.

Debt yield is NOI divided by the loan amount — the lender's return if it had to take the property back day one. It can't be gamed by low rates 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 is earnings before interest, taxes, depreciation, amortization, and rent — a tenant's operating cash flow before it pays rent. Rent coverage = EBITDAR ÷ rent.

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

The equity multiple is total cash returned divided by equity invested — a 2.0x means you doubled your money. It measures total profit, where 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 whether a deal makes money.

Gross potential rent is the total rent a property would collect 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 where the borrower pays only interest, no principal — 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 the deal's net present value to zero. The headline number for levered real estate returns.

Loan-to-cost is the loan amount divided by 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 in the capital stack — 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 each year for future repairs and replacements — roofs, systems, surfacing, turnover. Underwriting NOI before reserves overstates yield.

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

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 the purchase price divided by building area — the per-foot basis metric for industrial, retail, and office deals and a replacement-cost check.

Price per unit is the purchase price divided by the number of units — the per-door basis metric used to compare 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, and where optimistic assumptions hide.

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

Rent coverage is the tenant's EBITDAR divided by the annual rent — how many times the tenant's earnings cover the rent. ~1.5–2.0x is the institutional comfort zone.

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 simultaneously leases it back, becoming the tenant. It unlocks capital but can carry above-market rent.

Stabilized NOI is the net operating income a property reaches once it's fully leased at market rents on a normalized expense load — the basis for value-add 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 net cash flow at each rollover.

The true cap rate divides NOI rebuilt on real economics — actual landlord expenses, reserves, realistic vacancy — by price. It's the yield you actually keep, unlike the broker cap.

Vacancy and credit loss is the deduction from gross potential rent for empty space and uncollected rent — the gap between the rent roll and what's actually collected.

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

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 in which deal cash flows are 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 divided by total project cost — the cap rate you create by building or repositioning, and the basis for the development spread.