Glossary

Commercial real estate, defined.

Plain-English definitions of the underwriting and diligence terms behind every CRE deal.

Commercial real estate underwriting

The process of evaluating a commercial property investment by analyzing its income, expenses, leases and market to estimate value, risk and return.

Rent roll

A document listing every unit or tenant in a property with its rent, lease term, area and occupancy — the backbone of the income side of an underwriting model.

T-12 (trailing twelve months)

A statement of a property's income and expenses over the trailing twelve months, used to establish normalized net operating income.

Net operating income (NOI)

A property's income after operating expenses but before debt service and taxes — the core measure of operating profitability in CRE.

Capitalization rate (cap rate)

The ratio of a property's net operating income to its value or price — a quick measure of expected return used to value income property.

Debt service coverage ratio (DSCR)

Net operating income divided by annual debt service — a lender's measure of whether a property's income covers its loan payments.

Lease abstraction

Extracting the key economic and legal terms from a lease — rent, term, escalations, options, recoveries — into a structured summary.

Offering memorandum (OM)

The marketing and information package a seller or broker prepares for a property on the market, including its stated assumptions and financials.

Pro forma

A forward-looking financial model projecting a property's income, expenses, cash flow and returns under a set of assumptions.

Due diligence (CRE)

The investigation a buyer performs before closing — verifying the financials, leases, title, condition and legal standing of a property.

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