DealQube glossary · 100 terms

Real Estate Investment Terms

The vocabulary of finding, financing, buying, building, and operating real estate, from A to Z.

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1031 exchange: A US tax provision that lets an investor defer capital gains tax by reinvesting the proceeds from a sold investment property into another like-kind property. Strict deadlines apply: the replacement property must be identified within 45 days and purchased within 180 days of the sale. A qualified intermediary must hold the sale proceeds in between.; Example: An investor sells an apartment building for 3 million dollars, identifies a self-storage facility within 45 days, and closes on it within 180 days, deferring the capital gains tax.

A

Absorption rate: The pace at which available space in a market is leased or sold over a period. It is usually expressed as square feet or units absorbed per month or year. A strong absorption rate signals healthy demand and supports rent growth.; Example: If 120,000 square feet of new industrial space in a market is leased within six months, the absorption rate is 20,000 square feet per month.
Acquisition: The purchase of a property or portfolio. The acquisition process covers everything from first evaluation through negotiation, financing, due diligence, and closing. Disciplined acquisition is where most of an investment's eventual return is decided.; Example: An investor's acquisition of a 200-unit apartment complex takes four months from first offer to closing.
Acquisition fee: A fee a sponsor charges investors for finding, underwriting, and closing a deal. It is usually a percentage of the purchase price and is paid at closing. Investors compare acquisition fees when evaluating sponsors.; Example: A sponsor charges a 1 percent acquisition fee on a 10 million dollar purchase, earning 100,000 dollars at closing.
Amortization: Paying down a loan's principal through regular scheduled payments over time. Early payments are mostly interest, while later payments are mostly principal. The amortization period can be longer than the loan term, leaving a balance due at maturity.; Example: A 25-year amortization schedule on a 10-year loan means the monthly payments are calculated over 25 years, with the remaining balance due at year 10.
Appraisal: An independent professional estimate of a property's market value. Lenders usually require one before approving a loan. Appraisers typically consider comparable sales, income, and replacement cost.; Example: A lender orders an appraisal that values a retail center at 8.2 million dollars, slightly below the 8.5 million dollar purchase price.
Asking price: The price a seller lists a property for. It is often the starting point for negotiation rather than the final price. Buyers compare it with their own underwriting before making an offer.; Example: A seller lists a warehouse with an asking price of 6 million dollars, and the buyer's underwriting supports an offer of 5.6 million dollars.
Asset class: A category of property with similar characteristics, risks, and demand drivers. Common asset classes include multifamily, office, industrial, retail, hospitality, and self-storage. Investors often specialize in one or a few classes.; Example: A fund that focuses on the industrial asset class buys warehouses and distribution centers rather than office buildings.
Asset management: Overseeing a property after acquisition to carry out the business plan and maximize value. Asset managers set strategy, approve budgets, monitor performance, and decide when to refinance or sell. It differs from property management, which handles day-to-day operations.; Example: The asset manager reviews monthly results and decides to raise rents 4 percent at renewals after comparing them with nearby properties.
Assignment: Transferring the rights under a purchase contract to another buyer before closing. The new buyer steps into the original buyer's position and closes the deal. Some contracts prohibit assignment or require the seller's consent.; Example: A buyer under contract for a duplex assigns the contract to another investor for a 15,000 dollar assignment fee.

B

Balloon payment: A large lump sum due at the end of a loan whose regular payments do not fully pay it off. It is common with commercial loans that have long amortization periods but short terms. Borrowers usually plan to refinance or sell before it comes due.; Example: A 5 million dollar loan at 6 percent, amortized over 30 years with a 10-year term, leaves a balloon payment of about 4.2 million dollars at the end of year 10.
Basis point: One hundredth of one percent, or 0.01 percent. Basis points are used to describe small changes in interest rates, cap rates, and yields precisely. 100 basis points equal one percentage point.; Example: A cap rate moving from 6.00 percent to 6.25 percent is an increase of 25 basis points.
Bridge loan: Short-term financing used until a property qualifies for long-term debt. Bridge loans are common during renovation, lease-up, or repositioning. They usually carry higher interest rates and shorter terms than permanent loans.; Example: An investor uses a two-year bridge loan to renovate a half-empty office building, then refinances into a permanent loan once it is leased.
Broker opinion of value (BOV): A commercial real estate broker's estimate of what a property would sell for. Owners often request one when deciding whether to sell. It is less formal than an appraisal and is usually free in hopes of winning the listing.; Example: A broker prepares a BOV estimating that a self-storage facility would sell for 12 to 13 million dollars in the current market.
Build-to-suit: A development built to the specific requirements of a tenant who has committed to lease it. The tenant's commitment reduces the developer's leasing risk. Build-to-suit projects are common for retail stores, medical offices, and distribution centers.; Example: A developer builds a 150,000 square foot warehouse to a logistics company's specifications under a signed 15-year lease.
Buy, build, operate: The three stages of a real estate investment: acquiring a property, developing or improving it, and running it as an income-producing asset. Each stage has its own tasks, data, and decisions. Managing all three in one place keeps the original investment thesis connected to actual results.; Example: An investor buys an older storage facility, builds a climate-controlled addition, and then operates the expanded site, tracking every stage in one system.

C

Cap rate (capitalization rate): A property's net operating income divided by its value or purchase price. It expresses the unleveraged annual return a property produces. Cap rates are widely used to compare deals and to estimate value from income.; Example: A property with 500,000 dollars of NOI that sells for 8 million dollars trades at a 6.25 percent cap rate.
Capital expenditure (CapEx): Spending on major improvements or replacements that extend a property's life or add value. Examples include roofs, HVAC systems, paving, and unit renovations. CapEx is excluded from net operating income but affects cash flow and returns.; Example: The business plan budgets 600,000 dollars of capital expenditures for new roofs and HVAC units in the first two years.
Capital stack: The layers of money that fund a real estate deal, ranked by risk and repayment priority. Senior debt sits at the bottom with the lowest risk, followed by mezzanine debt, preferred equity, and common equity at the top. Higher layers take more risk and expect higher returns.; Example: A 20 million dollar deal is funded by 13 million in senior debt, 2 million in mezzanine debt, and 5 million in common equity.
Cash flow: The money left after collecting income and paying operating expenses and debt service. Positive cash flow can be distributed to investors or reinvested. It is a key measure of how a property performs year to year.; Example: A property with 600,000 dollars of NOI and 420,000 dollars of annual debt service produces 180,000 dollars of cash flow before capital expenditures.
Cash-on-cash return: Annual pre-tax cash flow divided by the total cash an investor has put into the deal. Unlike cap rate, it reflects the effect of financing. It is a simple way to compare the yearly cash yield of leveraged investments.; Example: An investor who puts in 2 million dollars and receives 160,000 dollars of cash flow in a year earns an 8 percent cash-on-cash return.
Class A, B, and C properties: Informal grades describing a property's quality, age, and location. Class A properties are newer and high quality in strong locations, while Class C properties are older and often need work. The grades help investors compare risk and pricing.; Example: A value-add investor buys a Class C apartment complex, renovates it, and repositions it closer to Class B.
Closing: The final step of a sale, when funds are transferred and ownership changes hands. Documents are signed, the deed is recorded, and loans are funded. After closing, the buyer takes control of the property.; Example: At closing, the buyer's lender funds the loan, the seller signs the deed, and the keys are handed over the same afternoon.
Closing costs: Fees and expenses paid at closing beyond the purchase price. They can include title insurance, lender fees, legal fees, recording fees, and transfer taxes. Buyers should include them in their total project cost.; Example: On a 5 million dollar purchase, the buyer budgets about 150,000 dollars in closing costs.
Comparable sales (comps): Recent sales of similar properties nearby, used to estimate a property's value. Good comps match on property type, size, age, location, and timing. Adjustments are made for differences between each comp and the subject property.; Example: Three similar storage facilities within five miles sold in the past year for 140 to 155 dollars per square foot, which guides the offer price.
Construction loan: Short-term financing that funds building or major renovation. Funds are drawn in stages as work is completed and inspected. Once construction is finished, the loan is usually replaced with permanent financing.; Example: A developer draws on a 15 million dollar construction loan monthly as each phase of a new building is completed.
Contingency: A condition in a purchase contract that must be met before the sale goes through. Common contingencies cover financing, inspection, appraisal, and due diligence. If a contingency is not met, the buyer can usually withdraw without losing their deposit.; Example: The contract includes a 30-day financing contingency, so the buyer can cancel and recover their deposit if the loan is not approved.
Core: A low-risk investment strategy focused on stable, well-leased properties in strong markets. Core deals usually use modest leverage and deliver steady income rather than large gains. They suit investors who prioritize safety and predictable returns.; Example: A pension fund buys a fully leased Class A office building in a major city as a core investment.
Core-plus: A strategy slightly riskier than core, buying good properties with modest room for improvement. Improvements might include light renovations, better management, or leasing up a small vacancy. Core-plus deals target somewhat higher returns than core.; Example: An investor buys a 90 percent leased shopping center and plans to lease the remaining space as a core-plus strategy.
Cost approach: A valuation method that estimates the cost to rebuild a property, subtracts depreciation, and adds the land value. It is most useful for newer buildings or unique properties with few comparable sales. Appraisers often use it alongside the income and sales approaches.; Example: An appraiser estimates a new building would cost 4 million dollars to replace, subtracts 400,000 dollars of depreciation, and adds 1 million dollars of land value for 4.6 million dollars.
Cost segregation: A tax study that assigns parts of a building to shorter depreciation lives. Items such as carpeting, fixtures, and site improvements can be depreciated faster than the building itself. This speeds up deductions and improves early cash flow.; Example: A cost segregation study on a newly purchased property reclassifies 20 percent of the building cost into shorter-lived assets, increasing first-year depreciation.

D

Deal pipeline: The set of opportunities an investor is tracking, organized by stage. Typical stages include sourced, under review, offer made, under contract, and closed. A well-managed pipeline shows what is coming and where deals are stalling.; Example: An acquisitions team has 40 deals in its pipeline: 30 under review, 6 with offers out, 3 under contract, and 1 closing this month.
Debt service: The total principal and interest payments due on a loan over a period. It is usually measured annually for real estate analysis. Debt service is paid from net operating income before cash is distributed to investors.; Example: A loan with monthly payments of 35,000 dollars has annual debt service of 420,000 dollars.
Debt service coverage ratio (DSCR): Net operating income divided by annual debt service. It shows whether a property's income can comfortably cover its loan payments. Lenders often require a minimum DSCR, such as 1.25, before approving a loan.; Example: A property with 525,000 dollars of NOI and 420,000 dollars of annual debt service has a DSCR of 1.25.
Debt yield: Net operating income divided by the loan amount. Lenders use it as a risk measure that does not depend on interest rates or amortization. A higher debt yield means a safer loan.; Example: A 6 million dollar loan on a property with 600,000 dollars of NOI has a debt yield of 10 percent.
Deed: The legal document that transfers ownership of real property from seller to buyer. It is signed at closing and recorded with the local government. Different types of deeds offer different guarantees about the title.; Example: At closing, the seller signs a warranty deed, which the title company then records with the county.
Depreciation: A tax deduction that spreads the cost of a building over its useful life. In the US, residential rental buildings are generally depreciated over 27.5 years and commercial buildings over 39 years. Land itself is not depreciated.; Example: An investor deducts depreciation each year on a commercial building, reducing taxable income even though no cash was spent that year.
Development: Creating new real estate, from land acquisition and entitlements through design, construction, and lease-up. Development offers higher potential returns but carries more risk than buying existing buildings. Timelines often run several years.; Example: A developer buys land, secures zoning approval, builds a 100-unit apartment complex, and leases it up over three years.
Disposition: The sale of a property. Dispositions are usually planned as part of the investment strategy from the day the property is acquired. Timing a disposition well can have a large effect on final returns.; Example: After stabilizing a property over four years, the investor begins the disposition and sells at a lower cap rate than it was bought at.
Due diligence: The investigation a buyer completes before closing to confirm a deal is what it appears to be. It covers financials, leases, title, zoning, environmental reports, and physical condition. Findings can lead to a lower price, new terms, or walking away.; Example: During due diligence, the buyer discovers two major leases expire next year and renegotiates the price down by 300,000 dollars.

E

Earnest money: A deposit a buyer makes after signing a purchase contract to show commitment. It is held in escrow and applied to the purchase price at closing. If the buyer backs out without a valid contingency, the seller may keep it.; Example: The buyer deposits 100,000 dollars of earnest money with the title company within three days of signing the contract.
Effective gross income (EGI): Potential rental income plus other income, minus vacancy and credit losses. It represents the income a property can realistically expect to collect. Operating expenses are subtracted from EGI to arrive at net operating income.; Example: A property with 1 million dollars of potential rent, 50,000 dollars of other income, and 70,000 dollars of vacancy loss has an EGI of 980,000 dollars.
Entitlements: The government approvals needed to develop a property for a planned use. They can include zoning changes, site plan approval, variances, and permits. Securing entitlements can take months or years and is a major risk in development.; Example: A developer spends 14 months obtaining entitlements to build townhomes on land that was previously zoned for commercial use.
Environmental site assessment (Phase I): A review of a property's current and past uses to identify possible environmental contamination. It relies on records, interviews, and a site visit, without testing soil or water. If it finds concerns, a Phase II assessment with sampling may follow.; Example: A Phase I report finds that a gas station operated on the site decades ago, so the buyer orders soil testing before closing.
Equity multiple: Total cash distributions received divided by total equity invested. It shows how many times investors get their money back over the life of a deal. Unlike IRR, it does not account for how long that takes.; Example: Investors contribute 5 million dollars and receive 10 million dollars in total distributions, an equity multiple of 2.0x.
Escrow: Holding funds or documents with a neutral third party until the conditions of a transaction are met. Earnest money and closing funds are typically held in escrow. Lenders may also hold escrow accounts for taxes and insurance.; Example: The title company holds the buyer's deposit in escrow until all contingencies are satisfied and the deal closes.
Estoppel certificate: A statement signed by a tenant confirming the key terms of their lease and that no defaults or disputes exist. Buyers and lenders rely on estoppels to verify the rent roll. Leases usually require tenants to provide them on request.; Example: Before closing on a shopping center, the buyer collects estoppel certificates from all 18 tenants confirming their rents and lease dates.
Exit cap rate: The cap rate assumed at the time a property is sold. It is used to estimate the future sale price in an investment projection. Conservative underwriting usually assumes an exit cap rate higher than the purchase cap rate.; Example: An investor buys at a 6.0 percent cap rate but models the sale in year five at a 6.5 percent exit cap rate to be conservative.

F

Feasibility study: An analysis of whether a proposed project is practical and financially viable. It examines market demand, costs, regulations, site conditions, and projected returns. A feasibility study helps decide whether to move forward before committing major capital.; Example: A feasibility study shows enough unmet storage demand within three miles to support a new 70,000 square foot facility.

G

General partner (GP): The sponsor who manages a real estate investment and makes its decisions. The GP finds the deal, arranges financing, and oversees the business plan. GPs usually contribute a smaller share of equity but earn fees and a promote.; Example: The general partner contributes 10 percent of the equity, manages the renovation, and earns a share of profits above an 8 percent preferred return.
Gross leasable area (GLA): The total floor area available for tenants to lease. It excludes common areas such as hallways and mechanical rooms. GLA is widely used to measure retail and industrial properties.; Example: A shopping center has 120,000 square feet of gross leasable area across 22 storefronts.
Gross potential rent: The rent a property would earn if every unit were leased at market rates with no vacancy. It is the starting point for income projections. Actual income is lower once vacancy and concessions are subtracted.; Example: A 100-unit building with average market rent of 1,500 dollars a month has a gross potential rent of 1.8 million dollars a year.
Gross rent multiplier: A property's price divided by its gross annual rent. It is a quick valuation measure that ignores operating expenses. It is most useful for comparing similar properties in the same market.; Example: A building priced at 2.4 million dollars with 300,000 dollars of annual gross rent has a gross rent multiplier of 8.
Ground lease: A long-term lease of land on which the tenant builds or owns the improvements. Terms often run 50 to 99 years. When the lease ends, the buildings typically revert to the landowner.; Example: A hotel developer signs a 75-year ground lease on a downtown parcel and builds a hotel on the leased land.

H

Highest and best use: The use of a property that is legally permitted, physically possible, financially feasible, and produces the highest value. Appraisers use it to determine market value. A property's current use is not always its highest and best use.; Example: An appraiser concludes that the highest and best use of an aging single-story retail site is redevelopment into apartments.
Hold period: How long an investor plans to own a property before selling it. The hold period shapes the business plan, financing choices, and return projections. Typical hold periods range from three to ten years.; Example: A value-add fund underwrites a five-year hold period, allowing time to renovate, raise rents, and sell.
Hurdle rate: The minimum return that must be achieved before the sponsor earns a larger share of profits. Hurdles are usually expressed as an IRR or preferred return. A deal may include several hurdles with increasing sponsor shares.; Example: Investors receive all distributions until they reach an 8 percent IRR hurdle, after which the sponsor's share of profits increases.

I

Income approach: A valuation method based on the income a property produces. The most common version divides net operating income by a market cap rate. It is the primary method for valuing income-producing commercial property.; Example: An appraiser divides 700,000 dollars of NOI by a 7 percent market cap rate to arrive at a 10 million dollar value.
Interest-only loan: A loan, or a period within one, in which payments cover only interest and no principal. It lowers payments and boosts cash flow, especially during renovation or lease-up. The full principal remains due later.; Example: A loan with two years of interest-only payments lets the investor fund renovations from cash flow before principal payments begin.
Internal rate of return (IRR): The annualized return that makes the net present value of all of an investment's cash flows equal to zero. IRR accounts for both the size and the timing of cash flows. It is the most common measure for comparing real estate investments of different lengths.; Example: An investor puts in 1 million dollars, receives 60,000 dollars a year for five years, and gets 1.3 million dollars back at sale, an IRR of roughly 11 percent.

J

Joint venture (JV): A partnership between two or more parties to invest in a specific property or project. One partner often brings capital and the other brings expertise and management. The JV agreement sets out decision rights and how profits are shared.; Example: A local operator forms a joint venture with an institutional investor, which provides 90 percent of the equity for a storage development.

L

Lease term: The length of time a lease is in effect. Commercial leases often run from three to fifteen years, while residential leases are usually one year. Longer terms provide more income stability for the owner.; Example: A medical office tenant signs a ten-year lease term with two five-year renewal options.
Lease-up: The period after construction or renovation when a property is being leased to reach stable occupancy. Income during lease-up is below its long-term level. Lease-up speed is a key assumption in development underwriting.; Example: A new self-storage facility is projected to take three years of lease-up to reach 90 percent occupancy.
Letter of intent (LOI): A usually non-binding document that sets out the main terms of a proposed purchase. It covers price, deposit, timelines, and key contingencies before a formal contract is drafted. Signing an LOI signals serious intent and starts detailed negotiations.; Example: A buyer submits an LOI offering 7.5 million dollars with a 45-day due diligence period and a 30-day close.
Leverage: Using borrowed money to finance an investment. Leverage can increase returns when property income exceeds the cost of debt. It also increases risk, because loan payments are due regardless of performance.; Example: Buying a 10 million dollar property with 7 million dollars of debt and 3 million dollars of equity uses 70 percent leverage.
Limited partner (LP): A passive investor who contributes capital to a real estate investment but does not manage it. LPs usually provide most of the equity. Their liability is generally limited to the amount they invest.; Example: A doctor invests 250,000 dollars as a limited partner in an apartment fund and receives quarterly distributions.
Loan-to-cost (LTC): The loan amount divided by the total project cost, including purchase price, construction, and soft costs. It is commonly used in construction and value-add lending. Lenders cap LTC to make sure the borrower has meaningful equity at risk.; Example: A lender provides a 7.5 million dollar loan on a project costing 10 million dollars, a loan-to-cost of 75 percent.
Loan-to-value (LTV): The loan amount divided by the property's appraised value. It measures how much of the property is financed with debt. Lower LTV means more equity cushion and less risk for the lender.; Example: A 6 million dollar loan on a property appraised at 10 million dollars has a 60 percent LTV.

M

Market rent: The rent a property could earn if leased today at current market rates. It is estimated from recent leases at comparable properties. The gap between in-place rent and market rent often drives value-add strategies.; Example: Tenants at a building pay an average of 1,200 dollars a month, while market rent for similar units nearby is 1,400 dollars.
Mezzanine debt: A loan that sits between senior debt and equity in the capital stack. It is typically secured by the ownership interests in the property rather than the property itself. It carries more risk and a higher interest rate than senior debt.; Example: To reduce the equity required, a sponsor adds a 2 million dollar mezzanine loan at 11 percent on top of a senior loan at 6.5 percent.

N

Net operating income (NOI): A property's income minus its operating expenses. It is calculated before debt payments, capital expenditures, depreciation, and income taxes. NOI is the basis for most commercial real estate valuations.; Example: A property with 1.2 million dollars of effective gross income and 500,000 dollars of operating expenses has an NOI of 700,000 dollars.
Non-recourse loan: A loan secured only by the property, so the lender cannot pursue the borrower's other assets if it defaults. Non-recourse loans usually include carve-outs, sometimes called bad-boy provisions, for fraud or misconduct. They are common in commercial real estate.; Example: When a property's value falls below its non-recourse loan balance, the lender can take the property but cannot seek the borrower's other assets.

O

Off-market deal: A property sold privately, without being publicly listed or broadly marketed. Off-market deals may offer less competition and better pricing. They often come through relationships with owners and brokers.; Example: A broker introduces an investor to an owner who wants to sell quietly, and the two agree on an off-market sale.
Offering memorandum (OM): A marketing document describing a property for sale. It typically includes financials, rent roll, location details, and investment highlights. Buyers use it as the starting point for their underwriting.; Example: A broker sends the offering memorandum for a 150-unit apartment complex to 50 qualified buyers.
Operating expenses: The costs of running a property, such as taxes, insurance, utilities, repairs, payroll, and management fees. They exclude debt service and capital expenditures. Controlling operating expenses directly raises net operating income.; Example: An investor cuts operating expenses by 40,000 dollars a year by appealing property taxes and rebidding the landscaping contract.
Opportunistic: A high-risk, high-return investment strategy. Examples include ground-up development, major redevelopment, and turning around distressed properties. Opportunistic investors expect the highest returns to compensate for the risk.; Example: An opportunistic fund buys a vacant office building and converts it into apartments.

P

Portfolio: A collection of properties owned or managed together. Portfolios may be diversified across asset classes and markets, or concentrated in one. Looking at the portfolio as a whole helps investors balance risk and return.; Example: An investor's portfolio includes 12 storage facilities and 4 apartment buildings across three states.
Preferred equity: Equity that is paid back before common equity but after all debt. It usually earns a fixed return and has limited upside. Preferred equity fills gaps in the capital stack between debt and common equity.; Example: A preferred equity investor contributes 3 million dollars at a 10 percent return, paid before common equity investors receive distributions.
Preferred return: A minimum annual return paid to investors before the sponsor shares in profits. It is often 6 to 8 percent and may accumulate if not paid in full each year. It aligns the sponsor's incentives with investor returns.; Example: Investors receive an 8 percent preferred return on their capital before the sponsor earns any share of the profits.
Pro forma: A projection of a property's future income, expenses, and returns based on stated assumptions. Pro formas are central to underwriting and investment decisions. Their accuracy depends on how realistic the assumptions are.; Example: The pro forma assumes 3 percent annual rent growth and a 6.5 percent exit cap rate, producing a projected 14 percent IRR.
Promote: The share of profits a sponsor earns above its capital contribution once investors' return hurdles are met. It is also called carried interest. The promote rewards the sponsor for strong performance.; Example: After investors achieve a 12 percent IRR, the sponsor's promote entitles it to 30 percent of further profits.
Purchase and sale agreement (PSA): The binding contract that sets the terms of a property purchase. It covers price, deposit, contingencies, closing date, and representations from both sides. Once signed, both parties are legally committed subject to its conditions.; Example: After agreeing on an LOI, the buyer and seller negotiate a 40-page purchase and sale agreement over two weeks.

R

Recourse loan: A loan that lets the lender pursue the borrower's other assets if the property does not cover the debt. Recourse is common on smaller and construction loans. It adds personal risk for the borrower.; Example: A developer signs a full recourse construction loan, personally guaranteeing repayment if the project falls short.
Refinance: Replacing an existing loan with a new one. Investors refinance to lower the interest rate, extend the term, or pull out equity after a property's value has increased. A cash-out refinance can return capital to investors without selling.; Example: After renovations raise the property's value, the owner refinances and returns 2 million dollars of equity to investors.
Rent roll: A list of a property's tenants and units with their rents, lease dates, deposits, and balances. It is one of the most important documents in due diligence. Buyers compare it with leases and bank deposits to verify income.; Example: The rent roll shows 95 of 100 units occupied, with an average rent of 1,350 dollars a month.
Replacement cost: The cost to build a similar property today. Buying below replacement cost can offer protection, because new competitors would need higher rents to justify building. It is also used in insurance and appraisal.; Example: An investor buys a storage facility for 90 dollars per square foot when building a new one would cost 130 dollars per square foot.
Return on cost: Stabilized net operating income divided by the total project cost. It is also called yield on cost. Developers compare it with market cap rates to judge whether a project creates value.; Example: A project costing 20 million dollars expected to produce 1.5 million dollars of stabilized NOI has a 7.5 percent return on cost.

S

Sale-leaseback: Selling a property and immediately leasing it back from the buyer. The seller frees up capital tied up in real estate while continuing to use the property. The buyer gains a long-term tenant from day one.; Example: A manufacturer sells its factory for 15 million dollars and signs a 20-year lease to keep operating there.
Sensitivity analysis: Testing how a deal's returns change when key assumptions change. Common variables include rent growth, vacancy, interest rates, and exit cap rate. It shows which assumptions matter most and how much risk a deal carries.; Example: Sensitivity analysis shows the IRR drops from 15 percent to 10 percent if the exit cap rate rises by 75 basis points.
Sponsor: The person or firm that finds, organizes, and manages a real estate investment. The sponsor usually acts as general partner and is responsible for the business plan. Investors evaluate sponsors on track record, alignment, and fees.; Example: A sponsor raises 8 million dollars from limited partners to acquire and renovate a 120-unit apartment property.
Stabilized property: A property that has reached its expected long-term occupancy and income. Stabilization typically follows lease-up, renovation, or repositioning. Stabilized properties qualify for permanent financing and lower cap rates.; Example: After two years of lease-up, the property reaches 92 percent occupancy and is considered stabilized.

T

T-12 (trailing twelve months): An operating statement showing a property's actual income and expenses for the most recent 12 months. Buyers and lenders rely on it to verify performance. It is usually compared with the seller's pro forma.; Example: The seller's pro forma shows 800,000 dollars of NOI, but the T-12 shows actual NOI of 730,000 dollars.
Tenant improvements (TI): Changes made to a space to meet a specific tenant's needs. Landlords often contribute through a TI allowance, expressed in dollars per square foot. TI costs are a major factor in leasing commercial space.; Example: To land a new office tenant, the landlord offers a TI allowance of 40 dollars per square foot for a 5,000 square foot suite.
Title insurance: Insurance that protects owners and lenders against losses from defects in a property's title. Defects might include unknown liens, errors in public records, or fraud. It is usually purchased once at closing.; Example: Title insurance covers the owner's loss when a contractor's lien from before the purchase is discovered after closing.
Triple net lease (NNN): A lease in which the tenant pays rent plus property taxes, insurance, and maintenance. The landlord receives a more predictable net income with fewer expenses. NNN leases are common for single-tenant retail and industrial properties.; Example: A pharmacy pays 300,000 dollars a year in rent under a triple net lease and also pays the property's taxes, insurance, and upkeep.

U

Underwriting: The analysis of a deal's risks and expected returns. It combines market data, property financials, and assumptions to reach a value and a go or no-go decision. Careful underwriting is the foundation of good investment decisions.; Example: The acquisitions team underwrites a property and concludes it can pay up to 9.2 million dollars and still meet its target returns.

V

Vacancy rate: The percentage of a property's units or space that is unleased. It can be measured physically or economically. Vacancy assumptions directly affect projected income.; Example: A 200-unit property with 14 empty units has a 7 percent vacancy rate.
Value-add: A strategy of buying a property with room to improve. Improvements might include renovation, better management, or repositioning to raise income and value. Value-add deals target higher returns than core or core-plus.; Example: An investor buys a dated apartment complex, renovates the kitchens, and raises rents by 200 dollars a month per unit.

W

Waterfall: The rules that set the order in which cash flows and profits are distributed among investors and the sponsor. A typical waterfall returns capital first, pays a preferred return, then splits remaining profits. Higher tiers usually give the sponsor a larger share.; Example: Under the waterfall, investors receive their capital and an 8 percent preferred return, then profits split 70 to 30 between investors and sponsor.

Z

Zoning: Local rules that control how land in a given area can be used and what can be built on it. Zoning regulates use, density, height, setbacks, and parking. A property's zoning can greatly limit or expand its potential value.; Example: A parcel zoned for light industrial use allows a self-storage facility, but a rezoning would be needed to build apartments.