Some Lingo Terms for Commercial Real Estate ?


Can anyone list some lingo terms that I should know and understand while investing in commercial real estate ? Can anyone list any interest sites that might help me ?


If you look to the left, there is a link to an investing glossary.

You can also check out:


Thank you

There’s many terms that you should know. Here is just a few:

Cap Rate
net cash flow
debt service
know about leases
loan to value

Debt Coverage Ratio

Also known as Debt Service Coverage Ratio (DSCR).  The debt coverage 
ratio is a widely used benchmark which measures an income producing 
property's ability to cover the monthly mortgage payments.  The DCR 
is calculated by dividing the net operating income (NOI) by a property's
annual debt service.  Annual debt service equals the annual total of all 
interest and principal paid for all loans on a property.  A debt coverage 
ratio of less than 1 indicates that the income generated by a property 
is insufficient to cover the mortgage payments and operating expenses. 
For example,  a DCR of .9 indicates a negative income.  There is only 
enough income available after paying operating expenses to pay 90% of 
the annual mortgage payments or debt service.  A property with a DCR
of 1.25 generates 1.25 times as much annual  income as the annual debt 
service on the property.  In this example, the property creates 25% more 
income (NOI) than is required to cover the annual debt service.

Example:  We are considering buying an investment property with a net 
operating income of $24,000 and annual debt service of $20,000.  The 
DCR for this property would be equal to 1.2.   This means that it generates 
20% more annual net operating income than is required to cover the annual 
mortgage payment amount.

                                           Net Operating Income               $24,000
Debt Coverage Ratio  =  ------------------------------  =  -----------  =    1.2
                                            Annual Debt Service                 $20,000

Many lending institutions require a minimum debt coverage ratio value to 
procure a loan for income producing properties.   DCR requirements for 
lending institutions may vary from as low as 1.1 to as high as 1.35.   From 
a lending institutions perspective, the higher the debt coverage ratio value, 
the more income there is available to cover the debt service and thus the 
less the risk.

Net Operating Income (NOI) is calculated as follows.

                 Gross Rents Possible                       35,000
                 Other Income                                    2,000
             Total Gross Income                              37,000
                 Less Vacancy Amount                        3,000
             Gross Operating Income                      34,000
                 Less Operating Expenses                 10,000
              Net Operating Income                         24,000

Operating Expenses include the following items; advertising, insurance, 
maintenance, property taxes, property management,  repairs, supplies, etc.

Lenders use the debt coverage ratio to determine if an income producing 
property has sufficient income to cover the operating expenses and debt 
service.  To acquire a loan for an income producing property, the debt
coverage ratio must usually be greater than 1.1 and most lenders require a         

                      Cap Rate  - Capitalization Rate                                   

The Capitalization Rate or Cap Rate is a ratio used to estimate the 
value of income producing properties.  Put simply, the cap rate is the 
net operating income divided by the sales price or value of a property 
expressed as a percentage.  Investors, lenders and appraisers use the
cap rate to estimate the purchase price for different types of  income 
producing properties.  A market cap rate is determined by evaluating 
the financial data of similar properties which have recently sold in a 
specific market.  It provides a more reliable estimate of value than a 
market Gross Rent Multiplier since the cap rate calculation utilizes 
more of a property's financial detail. The GRM calculation only 
considers a property's selling price and gross rents. The Cap Rate 
calculation incorporates a property's selling price, gross rents, non 
rental income, vacancy amount and operating expenses thus providing 
a more reliable estimate of value.  

If we have a seller and an interested buyer for particular piece of 
income property, the seller is trying to get the highest price for the 
property or sell at the lowest cap rate possible.  The buyer is trying to 
purchase the property at the lowest price possible which translates into 
a higher cap rate.  The lower the selling price the higher the cap rate.     
The higher the selling price, the lower the cap rate.  In summary, from 
an investor's or buyer's perspective, the higher the cap rate, the better.
Investors expect a larger return when investing in high risk income 
properties.  The Cap rate may vary in different areas of a city for many 
reasons such as desirability of location, level of crime and general 
condition of an area.  You would expect lower capitalization rates in 
newer or more desirable areas of a city and higher cap rates in less 
desirable areas to compensate for the added risk.  In a real estate 
market where net operating incomes are increasing and cap rates are 
declining over time for a given type of investment property such as 
office buildings, values will be generally increasing.  If net operating 
incomes are decreasing and capitalization rates are increasing over 
time in a given market place, property values will be declining.

If you would like to find out what the cap rate is for a particular type of 
property in a given market place, check with an appraiser or lender in 
that area.  Be aware that the frequency of sales for commercial income 
properties in a given market place may be low and reliable capitalization 
rate data may not be available.  If you are able to obtain a market cap 
rate from an appraiser or lender for the type of property you are 
evaluating, check to see if the cap rate value was determined with 
recent sales of comparable properties or if it was constructed.  When 
adequate financial data is unavailable, appraisers may construct a cap 
rate through analysis of its component parts thus reducing the credibility
of the results.  Cap rates which are determined by evaluating the recent 
actions of buyers and sellers in a particular market place will produce 
the best market value estimate for a property. 

If you are able to obtain a market cap rate, you can then use this   
information to estimate what similar income properties should sell for.  
This will help you to gauge whether or not the asking price for a  
particular piece of property is over or under priced. 

                                               NOI                                                                   NOI
                    Cap Rate  =     --------                        Estimated Value  =    ------------- 
                                             Value                                                              Cap Rate

Example 1:   A property has a NOI of $155,000 and the asking price 
is $1,200,000.

                     Cap Rate =       --------------    X     100   =  12.9 rounded

Example 2:  A property has a NOI of $120,000 and Cap Rates in the 
area for this type of property average about 12%.       

                      Estimated Market Value  =     ------------     =     $1,000,000

Net operating income is determined by subtracting vacancy amount and
operating expenses from a property's gross income.  Operating expenses
include the following items: advertising, insurance, maintenance, property
taxes, property management, repairs, supplies, utilities, etc.  Operating  
expenses do not include the following items; Improvements such as a new 
roof, personal property such as a lawn mower, mortgage payments, 
income and capital gains taxes, loan origination fees, etc.

Appraisers use the Income Approach, Cost Replacement and Market 
Comparison methods to estimate the value of property.  The Income  
Approach utilizes the theory of Capitalization.