CRE Glossary

Absorption Rate

The pace at which available space in a market is leased or sold over a given period, typically expressed in square feet per quarter or year, and used as a core indicator of supply-demand balance in a submarket or property type.

Acceleration Clause

A loan provision allowing the lender, upon an uncured event of default, to declare the entire outstanding principal balance, together with accrued interest, immediately due and payable rather than waiting for the loan's scheduled maturity.

Amortization

The schedule for paying back a loan's principal over time. A 25-year amortization means payments are calculated as if the loan will be fully paid in 25 years.

Appraisal Reduction Amount (ARA)

A contractual term that each CMBS deal defines in its own pooling and servicing agreement; no statute sets it. As an example, not a universal definition: under Section 1.01 of the Pooling and Servicing Agreement for BANK 2019-BNK20 (dated as of September 1, 2019, filed with the SEC as Exhibit 4.1), the Appraisal Reduction Amount for a loan that has had an Appraisal Reduction Event is the amount by which the loan's Stated Principal Balance exceeds a net value: 90% of the property's appraised value plus the loan's escrows, letters of credit and reserves, minus unpaid interest, unreimbursed advances with interest on them, and unpaid taxes, insurance premiums, ground rents and other amounts due. The special servicer calculates it.

Balloon Payment

The large final payment of remaining principal due at the end of a loan term, usually paid by refinancing.

Band of Investment Technique

A method for deriving an overall capitalization rate by weighting the mortgage capitalization rate (debt constant) and the equity capitalization rate (equity dividend rate) by their respective shares of total property value, on the theory that the blended rate must satisfy both the lender's and the equity investor's return requirements.

Cap Rate

Capitalization rate. NOI divided by property price. Shows how much income a property produces compared to its price.

Cap Rate Spread

The difference between a property's capitalization rate and a reference interest rate, most commonly the 10-year U.S. Treasury yield, used as a shorthand measure of the risk premium investors demand for holding real estate versus a risk-free benchmark.

CapEx vs. OpEx Classification (Capitalization Policy)

The internal accounting policy and dollar-threshold framework a property owner or manager uses to determine whether a given expenditure is capitalized to the capital budget and asset basis, or expensed as a current-period repair and maintenance cost against the operating budget.

Capital Stack Overview

The capital stack is the layered combination of debt and equity financing used to fund a commercial real estate deal, ranked by seniority of repayment and priority of claim on cash flow and sale proceeds.

Cash-on-Cash Return

The annual cash income from a property divided by the cash invested. Shows the return on the money actually put in.

Controlling Class

In CMBS, the controlling class is a contractual term that each deal defines in its own documents; no statute sets it. As an example, not a universal definition: under Section 1.01 of the Pooling and Servicing Agreement for BANK 2019-BNK20 (dated as of September 1, 2019, filed with the SEC as Exhibit 4.1), the Controlling Class is, as of any date of determination, the most subordinate class of Control Eligible Certificates then outstanding whose aggregate Certificate Balance, as notionally reduced by the Cumulative Appraisal Reduction Amounts allocable to it, is at least 25% of that class's Original Certificate Balance.

CRE CLO (Commercial Real Estate Collateralized Loan Obligation)

A collateralized loan obligation backed by commercial real estate loans. Its reinvestment period and coverage tests are terms of each securitization's own documents, not requirements of law; the 10-Ks below describe the usual market practice. Lument Finance Trust's Form 10-K for fiscal year 2025 (Item 1, Business) describes CLOs as securities collateralized by pools of commercial real estate debt instruments, often first mortgage loans, and (Item 1A, Risk Factors) says its own CLOs include a reinvestment period during which principal repayments and prepayments on its transitional floating-rate loans may be reinvested in similar assets, subject to eligibility criteria.

Debt Yield

NOI divided by loan amount. The lender's safety number, ignoring interest rates. Lenders usually want 8-10%.

Defeasance

A way to pay off a CMBS loan early by replacing the property collateral with government securities.

DSCR

Debt Service Coverage Ratio. NOI divided by annual debt service. Lenders usually want at least 1.25.

Due Diligence Overview

Due diligence overview introduces the four categories used to verify a commercial real estate deal before closing (financial, legal, physical, and environmental) and explains why each requires a different type of expert reviewer.

Effective Gross Income (EGI)

Gross Potential Rent minus loss to lease, vacancy/credit loss and concessions, plus other income: the realistic income a property actually collects.

Equity Waterfalls & the Promote

An equity waterfall is the contractual sequence (return of capital, then preferred return, then residual profit split) that determines how cash flows to LPs and the GP, with the GP promote giving the sponsor an outsized share of profit earned above the preferred return as incentive compensation.

Estoppel Certificate

A signed statement from a tenant (or, in a ground lease context, a ground lessor or lessee) confirming the current status of a lease (including rent, term, defaults, and any side agreements) for the benefit of a buyer, lender, or other reliant party.

Exit Cap Rate

The assumed cap rate used to estimate a property's sale value at the end of a hold period.

Going-In Cap Rate

The cap rate at the time of purchase: NOI at acquisition divided by the purchase price.

Gross Lease

A lease where the landlord pays all operating expenses.

Gross Potential Rent (GPR)

The total rent a property would collect if every unit were leased at full market rent with zero vacancy.

Income Approach (Direct Capitalization)

Direct capitalization estimates a property's market value by dividing its stabilized net operating income by a capitalization rate extracted from comparable sales in the market.

Interest-Only (IO)

A period during which loan payments cover interest only, with no reduction of principal.

Lease Abstract

A condensed summary document extracting the key business and legal terms of a lease (parties, premises, term, rent, options, and obligations) into a standardized format for underwriting, asset management, and due diligence.

Leasing Commission (LC)

The fee a landlord pays to procuring and/or listing brokers for arranging a lease transaction, typically calculated as a percentage of total lease value or a per-square-foot rate scaled by lease term.

Letter of Intent (LOI)

A preliminary, generally non-binding document in which a prospective buyer or tenant sets out the key business terms it is prepared to accept, used to establish deal alignment before either party incurs the cost of drafting a full purchase and sale agreement or lease.

Loan Sizing

The process of determining the maximum loan amount a lender will offer, based on the most restrictive of several constraints (LTV, LTC, DSCR, Debt Yield).

LTV

Loan-to-Value. Loan amount divided by property value. Lenders usually want 65-75%.

Mezzanine Debt Basics

Mezzanine debt is subordinate financing that ranks below the senior mortgage but above equity, typically secured by a pledge of the borrowing entity's ownership interests rather than a lien on the real property, priced with a higher rate to reflect its subordinate position.

Modified Gross Lease

A lease where landlord and tenant share operating expenses, often through an Expense Stop.

Natural Vacancy Rate (NVR)

The structural equilibrium vacancy rate at which rent growth is neither accelerating nor decelerating in a given market: the rate implied by a market's frictional turnover needs, below which landlords gain pricing power and above which they lose it.

NNN Lease

Triple Net Lease. A lease where the tenant pays taxes, insurance, and maintenance.

NOI

Net Operating Income. Property income minus operating expenses, before paying the loan.

NOI Bridge (NOI Walk)

A waterfall-style analysis that reconciles net operating income from one period to another (prior-year actual to current-year budget, or budget to reforecast) by isolating and quantifying each driver of the change rather than presenting only the net dollar delta.

Non-Recourse

A loan where the lender can only take the property, not the borrower's personal assets, if the loan fails.

Non-Recourse Carve-Out Guaranty (Bad-Boy Guaranty)

A guaranty attached to an otherwise non-recourse loan under which a principal or sponsor becomes personally liable, either for actual losses caused or for the full loan balance, upon the occurrence of specified 'bad acts' such as fraud, waste, misapplication of funds, or an unauthorized bankruptcy filing.

Operating Expense Ratio (OER)

Total operating expenses divided by effective gross income, expressed as a percentage, used to benchmark a property's cost efficiency against its own budget, peer assets, and published industry survey data.

Operating Expenses (OpEx)

The recurring costs of running a property: taxes, insurance, utilities, repairs, management, and reserves.

Preferred Equity Basics

Preferred equity is a capital layer that sits senior to common equity but junior to all debt, offering investors a fixed, typically cumulative preferred return in exchange for limited upside participation and no lien on the real estate.

Qualified Contract

Under 26 U.S.C. 42(h)(6)(I), after the 14th year of a LIHTC building's compliance period the owner may submit a written request asking the state housing credit agency to find a buyer for the low-income portion of the building. Under 42(h)(6)(E)(i)(II), if the agency cannot present a qualified contract within the following one-year period, the building's extended use period ends.

Recourse

A loan where the lender can also go after the borrower's personal assets if the loan fails.

Rent Roll

A list of all tenants, how much they pay, and how long their leases last. Proves the property's income.

Replacement Cost Value (RCV)

The cost to repair or rebuild damaged property using materials and construction methods of like kind and quality, at current prices, with no deduction for physical depreciation.

Replacement Reserve

A segregated account, funded through periodic contributions such as a lender-required monthly escrow or an owner-funded operating reserve, earmarked specifically for the future repair or replacement of major capital components as they reach the end of their useful life.

RIDEA Structure (REIT Investment Diversification and Empowerment Act)

A structure in which a REIT leases a qualified health care property to its own taxable REIT subsidiary, which has the property run by an eligible independent contractor. Under 26 U.S.C. 856(d)(8)(B), the rent the subsidiary pays the REIT can still count as rents from real property.

Sales Comparison Approach

The sales comparison approach estimates value by analyzing recent sales of similar properties and adjusting each for differences in size, age, condition, location, and sale date to reach a supportable $/unit or $/SF conclusion for the subject.

Section 1111(b) Election

Under 11 U.S.C. 1111(b)(2), a class of undersecured creditors in a Chapter 11 case can elect to have its claim treated as a secured claim to the full extent the claim is allowed, notwithstanding 11 U.S.C. 506(a), instead of having it split into a secured claim equal to the collateral's value and an unsecured deficiency claim.

Single-Asset Real Estate (SARE) Entity

Under 11 U.S.C. 101(51B), single asset real estate is real property constituting a single property or project, other than residential property with fewer than four units, that generates substantially all of a debtor's gross income and on which the debtor conducts no substantial business other than operating the property and activities incidental to it.

Subordination, Non-Disturbance, and Attornment Agreement (SNDA)

A three-part agreement among a lender, landlord, and tenant that subordinates the tenant's lease to the lender's mortgage, obligates the lender not to disturb the tenant's possession upon foreclosure so long as the tenant is not in default, and requires the tenant to attorn to the lender or a foreclosure purchaser as its new landlord.

Substantive Non-Consolidation Opinion

A legal opinion, delivered by borrower's counsel to the lender, that the borrower's assets would not be substantively consolidated in bankruptcy with those of its affiliates. No statute requires it; lenders require it by contract in the loan agreement. Section 1.1 of the loan agreement dated as of September 30, 2014 between Wells Fargo Bank and subsidiaries of Consolidated-Tomoka Land Co. (filed with the SEC as Exhibit 10.38 to Consolidated-Tomoka's Form 10-Q of October 28, 2014) defines the Non-Consolidation Opinion as the substantive non-consolidation opinion delivered to the lender at the loan's closing.

Supply, Demand & Absorption

Supply, demand, and absorption analysis examines how vacant space, the pipeline of new construction, and the pace at which space is leased interact to determine whether market rents rise, fall, or hold steady.

Tenant Improvement Allowance (TIA)

A dollar amount, usually expressed per rentable square foot, that a landlord contributes toward the cost of building out or renovating a tenant's space.

Term Sheet

A written summary of the loan a lender is willing to make: amount, rate, term, and conditions.

Title Commitment Basics

A title commitment is a title insurer's preliminary promise to issue a policy: Schedule A identifies the property, parties, and proposed loan amount, while Schedule B lists the requirements that must be cleared and the exceptions the policy will not cover.

Yield Maintenance

A prepayment penalty that pays the lender the value of the interest they lose if the loan is paid early.