Commercial Real Estate Terms and Definitions

For many new investors entering commercial real estate, the industry can feel like learning a foreign language. The endless jargon and complex financial terms can be overwhelming at first. The most successful investors, however, are the ones who take the time to truly understand this language — because once you do, every deal, document, and discussion starts to make a lot more sense.

This guide is designed to do just that by pulling back the curtain and giving you the essential, practical terminology you need to invest in Commercial Real Estate (CRE) with confidence.

To start, let’s cover the key concepts that serve as a blueprint for any Limited Partner.

Limited Partner (LP): A passive investor who contributes capital to a deal but has no active role in managing the property. As an LP, your role is to invest your capital, receive regular updates, and collect passive returns, leaving the operational stress to others.
General Partner (GP): The active managing partner or team who sources, acquires, and manages the asset. The GP handles all of the day-to-day operations, strategic decision-making, and execution of the business plan for a predetermined fee.
Accredited vs. Non-Accredited Investor: An Accredited Investor is an individual who meets specific SEC income ($200k individual or $300k joint income for the last two years) or net worth (over $1 million, excluding primary residence) requirements.
Real Estate Syndication: This is a highly accessible investment model where a group of investors, both GPs and LPs, pool their capital to acquire a single, large property that would be too expensive for one person to purchase alone. This collaboration democratizes investment by allowing you to participate in institutional-grade deals without taking on the role of a landlord. Syndications typically fall under two main SEC exemptions:

- Rule 506(b): The most common exemption, which permits the syndicator to include up to 35 Non-Accredited Investors in addition to unlimited Accredited investors, but strictly prohibits any form of general solicitation or public advertising of the offering.
- Rule 506(c): This exemption permits the syndicator to use general solicitation and publicly advertise the deal (e.g., on a website or social media), but requires that all participating investors be Accredited, with the GP taking reasonable steps to verify their status.

Depreciation: For real estate investors, depreciation is a crucial non-cash tax deduction that accounts for a property’s natural wear and tear over time, but it’s a powerful tool to reduce your taxable passive income. For instance, the tax benefit from depreciation on a Multifamily property can help offset some of the cash flow you receive and eventual sale profits, lowering your overall tax liability.
Due Diligence: This is the exhaustive review period before closing on a property where the GP confirms everything about the deal. It involves everything from inspecting the property and reviewing financial statements to checking all legal and tax documents to ensure no hidden surprises exist. As an LP, you’ll want to see a clear and organized due diligence process from your GP.
Net Operating Income (NOI): NOI is a measure of the property’s profitability, calculated as all revenue from the property minus all operating expenses. It is an important metric because it excludes debt payments and income taxes, allowing investors to see the asset’s true operational performance. For example, if a building generates $100,000 in rent and has $40,000 in operating costs, its NOI is $60,000.
Capitalization Rate (Cap Rate): The cap rate is the rate of return on a real estate investment property, based on the income it’s expected to generate. You calculate it by dividing a property’s NOI by its current market value, giving you a quick way to compare a potential deal to others in the same market. For instance, a property with a $60,000 NOI and a $1,000,000 value has a 6% cap rate.
Cash-on-Cash Return: This metric shows the annual pre-tax cash flow you receive from a deal as a percentage of the cash you invested. For example, if you put $100,000 in a deal and receive $8,000 in cash flow in the first year, your cash-on-cash return is 8%.
Debt Service Coverage Ratio (DSCR): A lender uses this ratio to determine the property’s ability to cover its debt payments from its NOI. A DSCR of 1.25, for instance, means the property’s NOI is 1.25 times larger than its annual debt service. Lenders usually require a DSCR of 1.25 or higher to approve a loan.
Return on Investment (ROI): A metric that measures the profitability of a real estate investment by comparing the total profit to the total investment costs. It is expressed as a percentage. ROI can be calculated differently depending on whether the property is a “flip” or a long-term rental, but it always helps you understand your return relative to the money spent. For example, you bought a property for $100,000 and spent $50,000 on renovations, making your total investment $150,000. If you then sell the property for $200,000, your gain on investment is $50,000. Your ROI would be ($50,000 / $150,000) = 0.33, or 33%.
Debt Payment: The recurring payment made to the lender, typically monthly, which consists of both the principal (reducing the loan balance) and interest (the cost of borrowing the money). Understanding the debt structure is fundamental to evaluating risk.
Leasing Metrics: A collection of Key Performance Indicators (KPIs) used to analyze the efficiency and health of a property’s rental operations. These metrics, in combination, paint a clear picture of tenant demand and retention.
Leasing % (Pre-leased %): The percentage of units that have a signed lease, regardless of whether the tenant has physically moved in. This metric is particularly critical for tracking performance during the lease-up phase of new construction or a value-add repositioning.
Occupancy %: The percentage of units that are currently occupied by a paying tenant. A high occupancy rate is a direct indicator of tenant demand and management effectiveness.
Vacancy %: The percentage of units that are currently unoccupied and not generating income (calculated as 100% minus the Occupancy %). High vacancy is a drain on cash flow and signals underlying market or property issues.
Operating Expenses (OpEx): All day-to-day costs required to run and maintain the property and generate income. This includes property taxes, insurance, utilities, maintenance, and property management fees, but excludes debt service and capital expenditures.
Absorption Rate: This is the rate at which available rental units are leased in a specific market over a given period. A high absorption rate indicates strong demand and a healthy market, while a low rate can signal oversupply. For example, if a market has 500 new units and 450 are leased in one year, the absorption rate is 90%, indicating a strong market.
Loss to Lease: This is the difference between the rent a property is currently collecting and the rent it could be collecting if all units were at current market rates. This loss often occurs when long-term tenants have leases at below-market rates. For instance, if a tenant pays $1,500/month, but the market rate for their unit is now $1,700/month, the $200 difference is the Loss to Lease.
Turnover Rate: This measures the percentage of tenants who move out of a property at the end of their lease term. A high turnover rate can be costly for a property because of expenses associated with lost rent, make-ready expenses, marketing, and re-leasing. As an LP, a high turnover rate can signal an issue with management, while a low turnover rate indicates a stable asset.

Multifamily Property Classes

Multifamily properties are classified into different “classes” based on age, location, and condition. This is a shorthand way to describe the risk and potential of a property, and it helps you understand a GP’s strategy.

Class A: These are the newest, highest-quality buildings, often with top-of-the-line amenities in prime locations. They typically attract high-income tenants and command the highest rents, but they also offer the lowest cash flow returns because of their high price.
Class B: This class includes well-maintained properties, typically built , in good locations with a stable tenant base. They offer a balance of moderate cash flow and the potential for a “value-add” strategy to upgrade them to Class B+.
Class C: These are older properties that are in fair condition and often located in working-class neighborhoods. They typically offer strong cash flow, but also come with higher management and capital expenditure costs to address deferred maintenance.

*Note that at El Dorado Capital, we focus on B and C properties for maximum ROI.

Assisted Living Terminology

Assisted living is a specialized niche within Commercial Real Estate. When you are looking at a deal, you need to understand the different types of senior living to determine if the property aligns with the investment thesis.

Independent Living (IL): Independent living communities are designed for active seniors who want a lifestyle with less maintenance and more social engagement. These facilities do not offer medical care but provide amenities like housekeeping and dining.
Assisted Living (AL): This type of community is for seniors who need help with daily activities such as bathing or medication management, while still living as independently as possible. Residents receive 24/7 staff assistance, meals, housekeeping, and social activities.
Memory Care (MC): Memory care is a specialized form of assisted living for seniors with cognitive impairments such as dementia or Alzheimer’s. These communities provide a secure environment with structured routines and staff trained to support memory function.
Skilled Nursing (SN): This refers to facilities that provide 24-hour medical care for seniors with serious health conditions or those recovering from a hospital stay. This is a highly regulated environment that offers services like medical monitoring and rehabilitation.

*Note that El Dorado Capital focuses on Assisted Living & Memory Care.

The Next Steps

Knowledge is only the first step; without action, it holds no value. With clarity and understanding, the path to passive wealth becomes one of deliberate and informed choices rather than chance. The key lies in evaluating each opportunity with care, maintaining discipline through market cycles, and allowing patience and consistency to compound over time.

Disclaimer

Bharat Kona and El Dorado Capital are not licensed financial advisors, accountants, or attorneys. The information provided in this blog is for educational and informational purposes only and should not be considered professional financial, investment, legal, or tax advice. All investments, including real estate, carry inherent risks influenced by market conditions, economic factors, and other variables beyond our control. Readers are encouraged to conduct their own research and consult with certified financial advisors, legal professionals, or tax experts before making any investment decisions.