Commercial Real Estate
Commercial Real Estate
Commercial Real Estate
GLOSSARY OF TERMS  

GLOSSARY OF TERMS - C

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CAM CAP:

The maximum amount for which the tenant pays its share of common area maintenance costs. The owner pays for any CAM expenses exceeding that amount.


CAPITAL APPRECIATION:

The change in market value of a property or portfolio over the period of time adjusted for capital improvements and partial sales for the period.


CASH AVAILABLE FOR DISTRIBUTION (CAD):

Also called Funds Available for Distribution (FAD). Cash distributed as a result of financing and investment activities such as a sale of a property or change in capital structure.


CAPITAL EXPENDITURES (CapEx):

Property improvements that cannot be expensed as a current operating expense for tax purposes. Examples include a new roof, tenant improvements, or a parking lot-the costs of such items are added to the basis of the property and then can be depreciated over the holding period. Distinguished from cash outflows for expense items such as new paint or plumbing repairs (operating expenses) that can be expensed in the year they occur. See operating expenses.


CAPITAL EXPENDITURES, CRITICAL:

Any nonleasing capital expenditure deemed absolutely necessary for the ongoing operation and leasing of the property. Opposite of Non Critical Capital.


CAPITAL EXPENDITURES, NON-CRITICAL:

Any non-leasing capital expenditure which is desirable but not deemed absolutely necessary for the ongoing operation and leasing of the property. Can reasonably be deferred in the short term. Opposite of Critical Capital Expenditures.


CASH FLOW:

Cash remaining after expenses are deducted from income. Can be defined in varying ways depending upon which expenses and expenditure are deducted. In general, the unqualified term usually means Net Cash Flow. See: Cash Flow from Operations; Cash Flow before Tax.


CASH FLOW BEFORE TAX:

Cash remaining after deduction of all expenses and expenditures with the exception of income taxes.


CASH FLOW FROM OPERATIONS:

Cash remaining from net operating income after deduction of debt service and ground lease payments but not capital expenditures or income taxes.


CAPITAL GAIN OR LOSS:

The difference between the selling price of an investment property and its original cost basis. Investors should be careful not to confuse capital gains with depreciation recapture. See also depreciation and cost recapture.


CAPITAL GAIN TAX:

Income tax levied by Federal and state governments on investments that are held long enough to qualify for capital gain income tax rates. Investments may include real estate, stocks, bonds, collectibles and tangible depreciable personal property. (See "Income Tax").


CAPITAL IMPROVEMENT:

For land or buildings, improvements (also known as capital improvements) are the expenses of permanently upgrading your property rather than maintaining or repairing it. Instead of taking a deduction for the cost of improvements in the year paid, you add the cost of the improvements to the basis of the property. If the property you improved is a building that is being depreciated, you must depreciate the improvements over the same useful life as the building.


CAPITAL MARKETS:

Public and/or private markets where businesses or individuals can raise or borrow capital.


CAPITALIZATION RATE:

The rate of return a property will produce on the owner's investment. (Income / rate = value). Safe rate + risk + inflation + recapture premiums. Unlike Cash on Cash the capitalization rate does not take into account any debt services.


CAPITAL RESERVES:

A funded or non-funded account, usually computed as a percentage of Gross Income, for the purpose of anticipated but nonspecific future capital expenditures.


CASH ON CASH:

A property's annual net cash flow divided by net investment, expressed as a percentage. For example if the net cash flow from a property is $10,000, and the cash invested in the property is $100,000, then the Cash on Cash return is calculated to be 10% ($10,000/$100,000). Cash on Cash does not include property appreciation which is a non-cash flow item until the year of sale.


CASH PROCEED FROM SALE:

The sales price less sales costs, mortgage balance, and tax liability on sale. Also known as sales proceeds after tax.


CASH RESERVES:

All cash and cash equivalents held in short term accounts. Cash reserves may be held to cover timing differences between the receipt of rent and the due date of debt service payments, for anticipated future capital or operating expenditures, or in anticipation of distribution to investors. Capital Reserves need not be funded as Cash Reserves; Cash Reserves may or may not relate to future capital expenditures.


CASH SPENDABLE (INCOME):

Net cash spendable, or cash remaining, after all operating costs, including loan payments, capital costs and income taxes attributable to the particular investment, have been paid. Net operating income less loan payments less capital costs equals net spendable income.


CENTRAL BUSINESS DISTRICT (CBD):

The downtown area of a city, usually the location of a concentration of commercial activity.


CERTIFIED PROPERTY MANAGER (C.P.M.):

A designation conferred by the Institute of Real Property Management upon one who has completed certain required courses and has been active in property management.


CLASS A OFFICE BUILDING:

Buildings generally not older than 15 years; well located investment grade properties commanding the highest rents. ADA compliant and boasting most/all of the "bells and whistles" required by today's tenants such as wi-fi, fiber or T1-T3 connections; high-speed interactive elevators; demonstrated life safety and security programs; on-site management; energy management systems on sophisticated HVAC equipment, etc.


CLASS B OFFICE BUILDING:

Buildings which were the "A's" of yesterday; now prone to some obsolescence but still utilitarian; i.e., older, slower elevators; large columns; older HVAC systems; smaller floor-plates; etc. Some "B" property owners are wisely making upgrades to their facades, intelligence systems and public/common areas to better compete with the "A" product for usually substantially lower rental dollars.


CLASS C OFFICE BUILDING:

Older buildings; lacking prestige; some wood-frame structures; command generally lower rents.


CLOSING COST EXPENSES:

Incidental to a sale of real estate, such as loan fees, title fees, appraisal fees, etc.


CLOSING STATEMENT:

The statement that lists the financial settlement between buyer and seller, and also the costs each must pay. A separate statement for buyer and seller is sometimes prepared.


CLOUD ON TITLE:

An invalid encumbrance on real property, which, if valid, would affect the rights of the owner.


COLLATERALIZED MORTGAGE OBLIGATION (CMO):

Debt obligations issued by a special purpose entity that are collateralized and payments linked to a pool of mortgages (whole loans or MBS). The special purpose entity is set up by the holder of the loans (i.e., a bank or thrift). The new entity purchases a group of mortgages using the proceeds of an offering of securities collateralized by the mortgages (CMOs). The trust uses the underlying cash flow of the collateral to fund the debt service on the CMOs. The CMOs are priced based on their own maturity and rate of return rather than that of the underlying mortgages.


COMMERCIAL MORTGAGE-BACKED SECURITIES (CMBS):

Securities collateralized by loans on commercial real estate. Yield on the mortgages is passed through to the investors, less a service charge by the issuing organization.


COMMERCIAL REAL ESTATE:

Commercial Real Estate is commonly defined as real estate with the potential to generate income for the owner of the property. Commercial real estate investments can be broken down into basic asset classes, each with unique set characteristics that address a wide range of investor needs. Commercial properties are generally classified by type of use, such as Residential Rental, Office, Industrial, Hospitality, Land, and Retail.


COMMISSION:

Payment to a broker for services rendered, usually a percentage of the selling price of a property. Sales price x Commission rate = Commission; Sales price x (100% - Commission rate) = Net to seller


COMMON AREA MAINTENANCE (CAM):

Charges paid by the tenant for the upkeep of areas designated for use and benefit of all tenants. CAM charges are common in shopping centers. Tenants are charged for parking lot maintenance, snow removal, and utilities.


COMMUNITY CENTER:

A community center is a retail property type that typically offers a wider range of apparel and other soft goods than the neighborhood center does. Among the more common anchors are supermarkets, super drugstores, and discount department stores. Community center tenants sometimes contain off-price retailers selling such items as apparel, home furnishing, toys, electronics, or sporting goods


COMPARABLES (COMPS):

Properties similar to the one being sold or appraised.


CONCURRENT EXCHANGE:

A tax-deferred, like-kind exchange transaction whereby the disposition of the relinquished property and the acquisition of the replacement property close or transfer at the same time. A concurrent exchange is also referred to as a simultaneous exchange.


CONDEMNATION:

Process by which the government exercises the right to seize property (eminent domain).


CONDOMINIUM:

A form of real estate ownership, usually residential property, in which the owners own their proportionate share of a fee interest as well as an undivided proportionate share of all common areas.


CONDUIT:

Alliance between mortgage originators and an unaffiliated organization that agrees, in advance, to act as a funding source by regularly purchasing the loans, normally with a view toward pooling and securitizing them.


CONSTRUCTIVE RECEIPT:

Exercising control over your exchange funds or other property. Control over your exchange funds includes having money or property from the exchange credited to your bank account or property or funds reserved for you. Being in constructive receipt of exchange funds or property may result in the disallowance of the tax-deferred, like-kind exchange transaction thereby creating a taxable sale. (See also "Actual Receipt").


CONSUMER PRICE INDEX (CPI):

Indices published regularly by the United Stated Department of Labor, Bureau of Labor Statistics (BLS). The broadest of which is called the "CPI-U" and is published monthly aggregating all urban consumers in the country. BLS publishes several other national CPI indices monthly, as well as CPI indices for specific metropolitan areas on a bimonthly basis. In specifying a CPI index for purposes of rental adjustments, it is important to clearly identify which index is to be used.


CONTINGENCY:

Additional conditions that must be satisfied before a sales contract is fully enforceable.


CONTRACT RENT:

The total rental obligation, expressed in dollars, as specified in a lease. Also known as base rent.


COOPERATION CLAUSE:

Language to be included in the purchase and sale contracts for both relinquished and replacement property that indicates and discloses that the transaction is part of an intended tax-deferred, like-kind exchange transaction and requires that all parties cooperate in completing said exchange.


CO-OWNERSHIP (CORE):

An undivided fractional interest or partial interest in property. See also "Fractional Interests" or "Tenancy-In-Common Interests."


CORE FACTOR:

The portion of an office building which is not rentable area, such as elevators, mechanical rooms and restrooms, expressed as a percentage of the total area of the building.


COST RECOVERY:

Recouping of the purchase price of a capital or qualified asset through depreciation over a specific period of time.


COVERAGE RATIO:

The ratio of available net operating income to the debt service payment. Also called Debt Service Coverage.


CREDIT ENHANCEMENT:

In mortgage-backed-securities the credit support in addition to the collateral mortgage to achieve a desired credit rating. The forms of credit enhancement most often employed are subordination, over collateralization, reserve funds, corporate guarantees and letters of credit.


CREDIT TENANT:

Used to denote a tenant who is financially strong and whose lease obligation to pay rent may be viewed by a lender as sufficient security with less regard for the intrinsic value of a property. Some investors and lenders use S&P or Moody's corporate bond ratings as a minimum standard for defining a credit tenant; others use a much broader and subjective definition of financial stability. A tenant that has a credit rating of BBB- or better.


CROSS-COLLATERALIZATION:

A grouping of mortgages or properties that serves to jointly secure one debt obligation. Any deficiency in income or loss on the sale of one property can be made up by the income, or sale of another property.


CUSTODIAN:

A bank or other fiduciary entity entrusted with holding securities, receiving distributions, and keep records for clients.




This Glossary of Commercial Real Estate Terms is provided for general understanding purposes. Readers should consult with their legal and/or accounting professionals for specific situations and questions. TM 1031 Exchange Inc. and its employees provide neither legal nor accounting services or advice.