CRE Glossary
This is a helpful list of industry terms and what they mean or refer to.
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Debt Service Coverage Ratio (DSCR)
A financial ratio used to evaluate a properties ability to produce income at a level necessary to cover its debt obligations. It is calculated by dividing a properties Net Operating Income (NOI) by its Debt Service.
Debt Yield
A key metric in commercial real estate used to evaluate the risk and potential return of a loan on a property. It is calculated as Net Operating Income divided by the Total Loan Amount.
Gross Operating Income (GOI)
Potential Gross Income (assuming all units are fully occupied) less losses due to vacant units and uncollected rent.
Loaded Interest Coverage Ratio (Loaded ICR)
A comprehensive measurement of a property’s ability to cover its debt payments where, unlike the traditional NOI calculation, the below-the-line items like Asset Management Fees, Leasing Commissions, capital expenditures, legal and accounting fees are all included in the formula. Loaded ICR is calculated as Net Operating Income less all other fees and costs divided by Annual Interest Expense. It is a more cautious and accurate measure used to ensure the property’s income is sufficient to cover debt after accounting for the full cost of ownership.
Loan-to-Cost (LTC)
A key metric in commercial real estate used to evaluate the level of debt in relation to a properties or projects cost. It is calculated as Loan Amount divided by the Total Project Cost
Loan-to-Value (LTV)
A key metric in commercial real estate used to evaluate the level of debt in relation to a properties value. It is calculated as the Loan Amount divided by the properties Appraised Value.
London Inter-Bank Offered Rate (LIBOR)
A prior benchmark interest rate that reflected the cost of banks lending to each other. It was phased out in 2021 and has been replaced primarily by the Secured Overnight Financing Rate (SOFR).
Net Operating Income (NOI)
A key metric in commercial real estate used to evaluate the profitability. It is calculated as the Gross Operating Income less the Operating Expenses.
Operating Expenses (OpEx)
All costs related to maintaining and operating the property. These include Management Fees, Administrative Expenses, Utilities, Repairs and Maintenance, Common Area Maintenance, Insurance, and Property Taxes.
Promote
A performance-based bonus, awarding sponsors/ managers a disproportionate share of profits - above their capital contribution - once investors exceed a target return.
Promote Crystallization
The process of locking in and paying out a sponsor’s performance-based profit at a specific milestone, such as project stabilization or refinancing, rather than waiting for a final asset sale. The process is used to convert estimated unrealized gains into realized, fixed value.
Sizer
A financial tool used by lenders and investors to evaluate and determine the maximum loan amount that can be secured against a commercial property.
Secured Overnight Financing Rate (SOFR)
A benchmark interest rate that reflects the cost of borrowing cash overnight, secured by U.S. Treasury securities.