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Commercial Real Estate Terminology |
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Add-on Factor - See Core Factor Annual Debt Service (ADS) - The total amount of principal and interest to be paid each year to satisfy the obligations of a loan contract. Assessed Value - The value of real property established by the tax assessor of the community which the property is situated in for the purpose of levying real estate taxes. Assessed value is NOT market value but could be similar. B Base Rent - Base rent is rent which does not include any triple net costs/NNN. This is usually quoted similar to this: $10.00 PSF NNN. This means the base rent is $10.00 per square foot and in addition, you will be responsible for your pro rata share of property expenses beyond the base rent, typically the annual real estate tax, property insurance and common area maintenance. The annual base rent is the amount upon which escalations are calculated. C Cap Rate - See capitalization rate. Capital Gain - Taxable income derived from the sale of a capital asset. It is equal to the sales price less the cost of sale, adjusted basis, suspended losses, excess cost recovery, and recapture of straight-line cost recovery. Capitalization Rate - A percentage that relates the value of an income-producing property to its future income, expressed as net operating income divided by purchase price. Also referred to as cap rate. Cash-On-Cash Rate - A return measure that is calculated as cash flow before taxes divided by the initial equity investment. CCIM - A CCIM (Certified Commercial Investment Member) is a recognized expert in the commercial and investment real estate industry. The CCIM lapel pin is earned after successfully completing a designation process that ensures CCIMs are proficient not only in theory, but also in practice. CCIMs have completed a curriculum that covers essential skill sets including ethics, interest-based negotiations, financial analysis, market analysis, user decision analysis, and investment analysis for commercial investment real estate. Finally, they have demonstrated their proficiency in the CCIM skill sets by successfully completing a comprehensive examination. Ceiling Height - The difference between ceiling height and clear ceiling height is that the ceiling height as measured from the floor to the underside of the roof, and clear ceiling height is measured from the floor to the underside of the prominently lowest hanging object on the ceiling, whether that be a light or a sprinkler or a beam. Clear Ceiling Height - A building's clear height is defined as the usable height to which a tenant can store its product on racking. This figure is measured below any obstructions such as joists, lights or sprinklers. Common Area Maintenance (CAM) - This is the amount of additional rent charged to the tenant to maintain the common areas of the property shared by all tenants. Typical examples include such work as landscaping, snow plowing, exterior lighting, basically anything in common with all the tenants. This is considered ONE of the nets in NNN or Triple Net. Comparable Market Approach - See Market data approach Cost Approach - A method of determining the market value of a property by evaluating the costs of creating a property exactly like the subject. Core Factor - Represents the percentage of net rentable square feet devoted to the building's common areas (lobbies, restrooms, corridors, etc.) This factor can be computed for an entire building or a single floor of a building. Also known as a loss factor or rentable/useable (R/U) factor, it is calculated by dividing the rentable square footage by the usable square footage. D Debt-Coverage Ratio (DCR) - Ratio of net operating income to annual debt service. Expressed as net operating income divided by annual debt service. Depreciation - The loss of utility and value of a property. Discount Rate - The percentage rate at which money or cash flows are discounted. The discount rate reflects both the market risk-free rate of interest and a risk premium. Also see opportunity cost. Due Diligence - The process of examining a property, related documents, and procedures conducted by or for the potential lender or purchaser to reduce risk. Applying a consistent standard of inspection and investigation one can determine if the actual conditions do or do not reflect the information as represented. E Economic Obsolescence - The reduction in a property’s value due to external circumstances such as legislation or changes in nearby property use. Escalation Clause - A clause in a lease which allows the landlord to increase the rent in the future to reflect changes in expenses paid by the landlord, such as real estate taxes, operating costs, etc. This can take three forms: 1) fixed periodic increases, 2) adjustments based on the Consumer Price Index (cost-of-living increases), and/or 3) an increase tied to the increased costs of operating the property. Exchange - Under Section 1031 of the Internal Revenue Code, like-kind property used in a trade or business or held as an investment can be exchanged tax-deferred. Under a fully qualified Section 1031 exchange, real estate is traded for other like-kind property. All capital gains taxes are deferred until the newly acquired real estate is disposed of in a taxable transaction. The underlying philosophy behind the deferral of capital gains taxes is that taxation should not occur as long as the original investment remains intact in the form of (like-kind) real estate (like-kind refers to real property as such, rather than the quality or quantity of property). Exclusive Use Clause - This clause prevents the landlord from leasing any other premises on the development to a direct competitor of yours or another tenant operating the same type of business. It might be worth considering such a clause to protect your investment for the long term – especially if you are in the service industry and expect a lot of walk-in traffic. F Fair Market Value of an Asset (or liability) - The amount at which the asset (or liability) could be bought (or incurred) or sold (or settled) in a current transaction between willing parties, that is, other than in a forced or liquidation sale. Feasibility Analysis - The process of evaluating a proposed project to determine if that project will satisfy the objectives set forth by the agents involved (including owners, investors, developers, and lessees). G Gross Leasable Area (GLA) - The total floor area designed for tenant occupancy and exclusive use, including basements, mezzanines, and upper floors, and it is measured from the center line of joint partitions and from outside wall faces. GLA is that area on which tenants pay rent; it is the area that produces income. Gross Lease - A type of lease in which the tenant pays a flat sum for rent, covering all landlord-paid expenses, including taxes, insurance, maintenance, utilities, etc. By having all these costs thrown in, you can better forecast your monthly expenses and also avoid potentially high bills associated with these operating costs. See Modified Gross Lease. Gross Operating Income - The total income generated by the operations of a property before payment of operating expenses. It is calculated from potential rental income, plus other income affected by vacancy, less vacancy and credit losses, plus other income not affected by vacancy. The Annual Property Operating Data form or the Cash Flow Analysis Worksheet can be used to calculate a property’s gross operating income. Gross Rent Multiplier (GRM) - A method investors may use to determine market value. This method calculates the market value of a property by using the gross rents an investor anticipates the property will produce at end of year 1 multiplied by a given factor (known as the gross rent multiplier extracted from the marketplace). H Highest and Best Use - The reasonably probable and legal use of vacant land or an improved property, which is physically possible, appropriately supported, financially feasible, and that results in the highest value. I Income Capitalization Approach - A method to estimate the value of an income-producing property by converting net operating income into a value. The cap rate is divided into the net operating income to obtain the estimated value. Value = net operating income ÷ capitalization rate Interest-Only Loan - A method of loan amortization in which interest is paid periodically over the term of the loan and the entire original loan amount is paid at maturity. Internal Rate of Return (IRR) - The percentage rate earned on each dollar that remains in an investment each year. The IRR of an investment is the discount rate at which the sum of the present value of future cash flows equals the initial capital investment. J No terms available K No Terms available L Landlord - A lessor or owner of leased property. Lease - A contract that creates the relationship of landlord and tenant. A contractually binding agreement that grants a right to exclusive possession or use of property, usually in return for a periodic payment called rent. Letter of Intent (LOI) - This is an informal, non-binding and preliminary understanding between the tenant (or buyer) and the landlord (or seller) indicating intent to move forward with formal lease (or purchase) negotiations. In New Hampshire these are just an outline of the deal and neither party is bound by the terms within an LOI. In Massachusetts an LOI could be considered an agreement and could put you under contract unless it specifically states it is not binding on either party. Load Factor - The ratio of rentable area to useable area. The load factor is a gauge by which a user can evaluate different sites with comparable rents. It is also known as the Core Factor or Add-on Factor. Loan Point - A charge prepaid by the borrower upon the origination of a loan. One point equals one percent of the loan amount. Loan-To-Value Ratio (L/V) - The amount of money borrowed in relation to the total market value of a property. Expressed as the loan amount divided by the property value. M Marketability - The ability to sell or lease a property quickly. Marketability deals with the appeal and demand for a property, good, or service. Market Data Approach - A method of determining the property’s value by analyzing recent sales or rental prices of comparable properties. Modified Gross Lease - This is similar to Gross Lease, however one or more of the expenses are NOT included. You have to ask each time for different properties what those expenses are. N Net Lease - With a net lease, you will pay for other building operating costs such as property taxes, insurance, repairs, utilities, etc. in addition to your base rent. NNN - See Triple Net - Each N means Net. Each Net represents an expense you will typically be asked to pay on a pro rata share in a Net Lease. Pro rata share is typically the percentage you use based on the total square footage of the property. Expenses would include Real Estate Taxes, Property Insurance and Common Area Maintenance (CAM) but could include other/more expenses. Example: If you leased 5,000 square feet of a 20,000 square foot building, your pro rata share would be 25% of the property expenses that you would pay in addition to your base rent. Net Operating Income (NOI) - The potential rental income plus other income, less vacancy, credit losses, and operating expenses. NOI is expressed BEFORE debt service. Net Present Value (NPV) - The sum of all future cash flows discounted to present value and netted against the initial investment. |
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Obsolescence - In reference to the inadequacy, disuse, outdated, or non-functionality of facilities, infrastructure, products, or production technologies due to effects of time, changing market conditions, or decay (a factor considered in depreciation to cover the decline in value of fixed assets due to the invention and adoption of new production technologies, or changing consumer demand). Office - Low-rise - Fewer than seven stories high above ground level. Mid-rise - Between seven and twenty-five stories above ground level. High-rise - Higher than twenty-five stories above ground level. Office Property - A commercial property type used to maintain or occupy professional or business office. Such properties typically house management and staff operations. The term office can refer to whole buildings, floors, parts of floors, and office parks. Office space that can be used for a variety of purposes is sometimes referred to as generic office space. Office properties may be classified as Class A, B, or C. Class A properties are the most functionally modern, elevator, ADA accessibility and typically have a central core for utilities, elevators, staircases and other building services. Properties classed B and C in the same market typically command lower rents because they are older and in need of modernization. They may not be as efficient or desirable as Class A properties because their design or condition causes functional problems. Operating Expenses - Cash outlays necessary to operate and maintain a property. Examples of operating expenses include real estate taxes, property insurance, property management and maintenance expenses, utilities, and legal or accounting expenses. Operating expenses do not include capital expenditures, debt service, or cost recovery. Overage Rent - See percentage rent. P Participation Mortgage - A loan secured by real property, with a stated interest rate that also provides for a share to the lender in annual net cash flow, gain on sale, or proceeds from refinancing the property. Passive Income - Income from rental activity, limited business interests, or other activities in which the investor does not materially participate. Percentage Rent - In consideration for creating and owning a shopping environment that will generate gross sales for a tenant, landlords often want to share in the financial success of a tenant's store. In order to share in such success, landlords can negotiate for percentage rent provisions to be added in their leases. A percentage rent provision provides that if the tenant achieves a certain amount of gross sales in a given year, they will pay a percentage of such gross sales to the landlord as additional rent. In a lease with a percentage rent provision, the landlord will receive a minimum amount of rent (called the annual fixed rent or annual minimum rent) and, in the event the tenant's gross sales increase over a certain amount (sometimes called the "breakpoint"), the landlord will also receive a certain percentage of the gross sales over the breakpoint. If the parties intend that the landlord should receive a certain percentage of the tenant's total gross sales, then a "natural breakpoint" will be used. A "natural breakpoint" is the amount of gross sales that, when multiplied by the applicable percentage, equals the amount of annual fixed rent [natural breakpoint x _____% = annual fixed rent]. Stated another way, it is determined by dividing annual fixed rent by the applicable percentage [natural breakpoint = annual fixed rent ÷ ____%]. Positive Leverage - Borrowed funds are invested at a rate of return higher than the cost of the funds to the borrower. Power Center - This retail center is dominated by several large anchors, including discount department stores, off-price stores, warehouse clubs, or category killers--stores that offer tremendous selection in a particular merchandise category at low prices. The center typically consists of several freestanding (unconnected) anchors and only a minimum amount of small specialty tenants. Present Value (PV) - The sum of all future benefits or costs accruing to the owner of an asset when such benefits or costs are discounted to the present by an appropriate discount rate. Present Value Method - A comparison technique that compares the present values of the cash flows for any two real estate alternatives. The best user alternative is based on the lower present value amount. It is not the same as net present value. Price - The dollar amount that was offered, asked, or actually paid for a property. Q Qualify - First stage of four-stage transaction management process pertaining to the process of gathering and evealuating information to measure a client's/customer's readiness, willingness, and ability to consummate a transaction. The acronym QUALIFY represents the considerations of quantify, usage, authority, latitude, intention, financial, and yield involved in the qualify stage. R Rate of Return - The percentage return on each dollar invested. Also known as yield. Real Estate Cycles (Phases) - The regularly repeating sequence of economic downturns and upturns and associated changes in real estate market transactions tied to market dynamics and changing macro-economic conditions, whose phases include (in order) recession, recovery, expansion, and oversupply. Real Estate Fluctuations - Short-term variations in real estate prices or rents (usually lasting anywhere from one day to a few months) caused by natural hazards (such as tornadoes, hurricanes, floods, earthquakes, and wildfires), terrorist attacks, or boosts or shocks to the local economy (such as the entry or exit of major employers). Real Estate Trends - Long-term movements or tendencies in the demand for commercial real estate (which can typically last for years or decades), usually tied to macro-economic or business cycles. Recession - A period of reduced economic activity or a general economic downtown marked by a decline in employment, production, sales, profits, and weak economic growth that is not as severe or prolonged as a depression. As a result, sales in real estate markets are slow, property values and price levels are flat or decreasing, and there is virtually no construction of new stock given excess supply of units in most real estate markets. Recovery - A period of increasing economic activity or a general economic upturn, typically following a stabilization of key sectors and industries, marked by increasing sales and recovering prices in real estate markets as a direct result of an external shock (for example, a favorable tax code revision) or an increase in demand for commercial real estate which, in turn, leads to the absorption of excess space. Little or no construction occurs during the initial stages of this phase until most of the excess space is absorbed or until reasonable financing opportunities become available. Regional Center - This ceter type provides general merchandise (a large percentage of which is apparel) and servies in full depth and variety. Its main attractions are its anchors: traditional, mass merchant, discount department stores, or fashion speciality stores. A typical regional center is usually enclosed with an inward orientation of the stores connected by a common walkway and parking surrounds the outside perimeter. Rent Concession - A period of free rent given to the tenant by the lessor. Rentable Area - The computed area of a building as defined by the guidelines of Building Owners and Managers Association (BOMA) and typically measured in square feet, including both core/structure and useable area. The actual square footage area for which the tenant will pay rent. It is the gross area of an office building, less uninterrupted vertical space (such as stairways and elevators). Unlike useable area, rentable area includes common areas such as lobbies, restrooms, and hallways as well as the measurement of structural columns and architectural projections. Rentable-To-Useable Ratio - Defined as rentable area divided by useable area. Also known as the add-on factor or load factor. Rent Escalators - Items specified in a lease such as base rent, operating expenses, and taxes that may increase by predetermined amounts at stated intervals or by a constant annual percentage. Replacement Cost - The estimated cost to construct, at current prices, a building with utility equivalent to the building being appraised, using modern materials and current standards, design, and layout. Retail Property - Properties used exclusively to market and sell consumer goods and services. Risk - The probability that actual cash flows form an investment will vary from the forecasted cash flow. S Safe Rate - The rate a low risk, liquid investment achieves. Sale Cost - The brokerage commissions and fees, and any additional transaction costs that are incurred during the sale of the property. Sale-Leaseback - A leasing and financing strategy in which a property owner sells its property to an investor, then leases it back. This strategy frees capital that otherwise would be frozen in equity. Sale(s) Proceeds Before Tax - The sale price minus the sale costs and the mortgage loan balance. Sales Comparison Approach - A way to determine market value by comparing a subject property to properties with the same or similar characteristics. Step-Up Lease - A lease in which the rental amount paid by the lessee increases by a preset rate or set dollar amount at predetermined intervals. A step lease is a means for the lessor to hedge against inflation and future maintenance or operational expenses. Sublease - A lease in which the original tenant (lessee) sublets all or part of the leasehold interest to another tenant (known as a subtenant) while still retaining a leasehold interest in the property. Also known as a sandwich lease due to the sandwiching of the original lessee between the lessor and the subtenant. T Tenant - A person or entity who has possession of the property through a lease. A tenant also may be referred to as a lessee. Tenant Improvements (TI) - Defines any improvements to the leased space either by, or for, a tenant. If you expect to make lots of improvements to the space, it’s worth negotiating these with your landlord and trying to get as much of these costs covered as you can. The Tenant Improvement (TI) Allowance or Work Letter defines the fixed amount that the landlord will contribute towards these improvements, and costs over this amount are then covered by the tenant (also known as the Tenant Finish Allowance). Time Value of Money (TVM) - An economic principle recognizing that a dollar today has greater value than a dollar in the future because of its earning power. Triple Net - Also referred to as NNN or Pure Net. This type of lease includes a base rent as well as additional rent that includes a pro rata share of all the property expenses. This usually includes real estate taxes, property insurance and CAM, it could also include reserves for replacing roofs, HVAC units, parking re-surfacing, administration, etc. Triple net usually does not include foundations, basic structure of walls and roof structure. A landlord can include any expenses relative to the property in a triple net lease. Think of it as leasing the space as if you owned it for the term that you're occupying the space. A budget is completed by the landlord for the following year and you pay based on that budget. After the year has been completed, you are reimbursed for any overages or billed for any items in excess of the budget. U Usable Square Footage - This is the square footage rented and used exclusively by the tenant. It includes footage for private rest rooms, storage, and any other areas used only by the tenant. In contrast, Rentable Square Footage combines usable square feet, plus a portion of the common area and typically encompasses 10-15 percent more space. V Vacancy - The number of units or space (of a specific commercial type) that are vacant and available for occupancy at a particular point in time within a given market (usually expressed as a vacancy rate). Vacancy Rate - The percentage of the total supply of units or space of a specific commercial type that is vacant and available for occupancy at a particular point in time within a given market. W No terms available X No terms available Y Yield - A measure of investment performance that gauges the percentage return on each dollar invested. Also known as rate of return. Z Zoning - The designation of specific areas by a local planning authority within a given jurisdiction for the purpose of legally defining land use or land use categories. |
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