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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.
1031-721 EXCHANGE:1031 EXCHANGE:
A 1031 exchange is an exchange of property in which capital gains tax deferral is available to real estate owners who sell their investment, rental, or business real estate, and reinvest the proceeds in qualified replacement properties. The replacement property must be similar in nature (to be used for investment, rental, or business) and therefore considered “like-kind.” Property owners may sell and replace like-kind properties and defer taxes on the profits by meeting the requirements of Internal Revenue Code (IRC) for 1031 exchange properties.
1031 REPLACEMENT PROPERTY:
A properly structured 1031 Exchange provides real estate investors with the opportunity to defer 100% of both Federal and State (if applicable) capital gains taxes on the sale of their existing properties. The replacement property must be similar in nature to the relinquished (sold) property (to be used for investment, rental, or business) and therefore considered “like-kind.”
1031 EXCHANGE COST RECOVERY:
One of the more significant benefits of investing in income-producing real estate is the ability to decrease the tax obligation on the income produced through depreciation. If an investment property is sold and no tax deferred exchange takes place there is tax owed on the amount deducted.
1031 EXCHANGE BOOT:
In a 1031 exchange boot refers to “in addition or profit” which is anything of value received by the investor which is not deemed “like kind” in the exchange. This can include personal property boot, cash boot and mortgage boot.
1033 EXCHANGE:
Section 1033 only defers gains resulting from compulsory or involuntary conversions of investment real estate. The conversion into money or other property must occur from circumstances beyond the taxpayer’s control. Section 1033(a)(2)(B)(i) generally requires you invest the proceeds from such sales in qualified replacement property within the period ending 2 years after the close of the taxable year in which sale took place. Generally, replacement property does not qualify as “similar or related in service or use” unless its physical characteristics and end uses are similar to those of the converted property. When an investor owns property that is involuntarily converted, however, the focus shifts primarily to the similarity in the relationship of the services or uses which the converted and replacement properties have to the owner-investor
ABATEMENT:
Free rent or early occupancy and may occur outside or in addition to the primary term of the lease.
ABSORPTION:
The rate at which rentable space is filled. Gross absorption is a measure of the total square feet leased over a specified period with no consideration given to space vacated in the same geographic area during the same time period. Net absorption is equal to the amount occupied at the end of a period minus the amount occupied at the beginning of a period and takes into consideration space vacated during the period.
ACCREDITED INVESTOR (INDIVIDUALS):
A natural person who has individual net worth, or joint net worth with the person’s spouse, that exceeds $1 million at the time of the purchase; a natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year.
ACRE:
A measure of land equal to 43,560 square feet, 4,840 square yards, 4,047 square meters, 160 square rods, or 0.4047 hectares.
ACTUAL RECEIPT:
Direct access to, or actual possession of, tax-deferred like-kind exchange funds or other property by an investor completing a tax-deferred like-kind exchange. Receipt of the tax-deferred like-kind exchange funds by an investor during the investor’s exchange period will disqualify the entire tax-deferred like-kind exchange transaction. (See also “Constructive Receipt”).
ADDED VALUE PROPTERY:
Investment properties that need some type of corrective action to fully realize their value. The needed corrective action can be as simple as better management to a major rehab. While these investments frequently offer the greatest potential for profit they also have a high level of risk because the outcome of the corrective action is unproven as in a fully stabilized property.
ADJUSTED COST BASIS:
The amount an investor uses to determine his capital gain or loss from a sale or disposition of property. To determine the adjusted cost basis for an investor’s property, you must start with the original purchase cost. You then add the closing costs, cost of capital improvements and principal payments of special assessments (sewer and streets) to the property’s cost basis, and then subtract any depreciation taken or were allowed to take, any casualty losses taken and/or any demolition losses taken to arrive at the adjusted cost basis.
ADMINISTRATIVE FEE:
Usually stated as a percentage of an assets under management or as a fixed annual dollar amount.
AFTER-TAX RETURN:
The return from an investment after the tax liabilities have been calculated and taken into consideration.
AMORTIZED:
Payments made incrementally over time.
ANCHOR:
The tenant that serves as the predominant draw to a commercial property, usually the largest tenant in a shopping center. See in line tenants.
ANNUAUL DEBT SERVIVE (ADS):
The total amount of principal and interest to be paid each year to satisfy the obligations of a loan contract.
APPRAISAL:
An estimate of a property’s fair market value that can be based on replacement cost, discounted cash flow analysis and/or comparable sales price.
APPRECIATION:
An increase in the value or price of an asset
ASSET CLASS:
A category of investments that contain similar characteristics such as commercial office, retail or industrial properties.
AVERAGE DAILY ROOM RATE (ADR):
Derived by dividing room revenue by the total number of rooms occupied by hotel and resort guests on a paid basis during the applicable period. Does not include revenue from food and beverage, telephone services or other guest services. See RevPAR.
BASE RENT:
The minimum monthly rent, usually computed on a per-square-foot-per-year basis, due under the lease.
BASIS:
The original purchase price or cost of investment property plus any out-of-pocket expenses or closing costs such as brokerage commissions, escrow costs, title insurance premiums, sales tax (if personal property), tax-deferred like-kind exchange fees and other closing costs directly related to the acquisition.
BENEFICIAL ACCESS:
Most tenants need a couple of weeks prior to officially taking occupancy to ready their new space with furniture/equipment, telephone systems, data and telephone cabling, etc. Most property owners will provide the tenant’s vendors with such early set-up access to the space under consideration at no rental charge.
BREAKPOINT:
The sales threshold over which percentage rent is due. It is calculated by dividing the annual base rent by the negotiated percentage applied to the tenant’s gross sales.
BROKER DEALER (BD):
Brokers dealers are licensed to sell securities. Registered Representatives or Reps are supervised by broker dealers. Tenant in common real estate structured as a security is sold as a security by broker dealers. Tenant in common structured as real estate is sold as real estate by real estate brokers.
BROKER, REAL ESTATE:
Licensed to be an intermediary on behalf of others for a fee or commission as it relates to real estate transactions. Can represent buyer, seller, both or act as a finder without representing either party. Licensed real estate sales people are supervised by real estate brokers.
BUILD-TO-SUIT:
Refers to a property that is constructed or finished-off or retrofitted to lessee or purchaser specifications.
BUMPS:
Periodic adjustments to the rental rate in a lease, usually as a fixed percentage or adjusted based CPI.
BUNDLE OF RIGHTS:
Legal concept that property ownership is comprised of separate rights. Examples are rights to ownership of the land, improvements, mineral rights, water rights and access easements.
BUSINESS RISK:
The uncertainty associated with the possible profit outcomes of a business venture.
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.
DEBT-COVERAGE RATIO:
Ratio of net operating income to annual debt service. Expressed as net operating income divided by annual debt service.
DEBT SERVICE:
payments on debt and principal payments to retire debt. For accounting purposes, interest payments are considered to be expenses while principal payments are treated as capital expenditures.
DEBT SERVICE COVERAGE RATIO (DSCR):
The annual net operating income (NOI) from a property divided by annual cost of debt service, including principal payments. DSCR below 1.0 means that there is insufficient cash flow generated by the property to cover debt payments. Also called Coverage Ratio.
DEED RESTRICTION:
Covenants, conditions, private agreements that affect the use of the land.
DEFEASANCE:
Is a substitution of collateral to remove liability by pairing financial assets sufficient to ensure that all debt service payments are met. Nearly every fixed-rate conduit/CMBS loan originated since 1998 requires the borrower to defease their loan before selling or refinancing. The borrower uses proceeds from the refinance or sale to purchase a portfolio of U.S. government securities that is sufficient to make all of the remaining debt service payments
DEFERRED EXCHANGE:
The sale or disposition of real estate or personal property (relinquished property) and the acquisition of like-kind real estate or personal property (replacement property) structured as a tax-deferred, like-kind exchange transaction pursuant to Section 1031 of the Internal Revenue Code and Section 1.1031 of the Treasury Regulations in order to defer Federal, and in most cases state, capital gain and depreciation recapture taxes.
DELAWARE STATUTORY TRUST (DST):
The Delaware Statutory Trust, or DST, is a separate legal entity created as a trust under Delaware statutory law. The law permits a very flexible approach to the design and operation of these entities. The Internal Revenue Service issued a revenue procedure on July 20, 2004 regarding the use of DST’s for the purchase of fractional interests in real property that would qualify as like-kind replacement property in conjunction with a tax-deferred like-kind exchange transaction. Unlike a Tenant in Common investors has no control and must be sold as a security. Lenders frequently prefer because they are dealing with only one entity, not a number of tenant in common owners.
DEMOGRAPHICS:
Characteristics of human populations as defined by population size and density of regions, population growth rates, migration, vital statistics, and their effect on socio-economic conditions which can have a direct impact on the success or failure of an investment property.
DEPRECIATION RECAPTURE:
One of the more significant benefits of investing in income-producing real estate is the ability to decrease the tax obligation on the income produced through depreciation. If an investment property is sold and no tax deferred exchange takes place there is tax owed on the amount deducted.
DESIGNATED MARKET AREA (DMA):
Television or broadcast market areas as defined by Nielsen Media Research.
DIRECT DEEDING:
A practice authorized by Treasury Revenue Ruling 90-34 whereby either the relinquished property or the replacement property can be deeded directly from seller to buyer without deeding the property to the Qualified Intermediary.
DISAGGREGATING DEMAND:
The process of separating and identifying the various forces and factors which affect the demand for a given property type in a given market or the differentiation of demand by category. See demographics.
DISAGGREGATING SUPPLY:
The process of separating and identifying the various forces and factors which affect the supply of a given property type in a given market or the differentiation of supply by category (including leased versus owned, unit type, price, and geographic submarket). See demographics.
DISCOUNTED CASH FLOW ANALYSIS:
Estimates the present value of future cash flows projected to be generated by a given asset.
DISCOUNT RATE:
Used to determine the present value of future payments or expenditures. 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. Used when comparing various investments. Also see opportunity cost.
DISCOUNTED CASH FLOW (DCF):
Discounted cash flow (DCF) uses future free cash flow projections and discounts them (most often using the weighted average cost of capital) to arrive at a present value to evaluate the potential for investment. To use properly quality of cash flow must be carefully understood.
DIVERSIFICATION:
A method of reducing risk by investing in unrelated (uncorrelated) assets. For example investing in different asset classes, in different locations with varying degrees of risk would provide diversification for an investment portfolio.
DOWNREIT:
When a REIT uses property units to acquire properties from owners who would like to defer taxes that would come due if the property(ies) were sold or swapped for stock. See UPREIT.
DRIVE-TIME APPROACH:
An approach to estimating the trade area (and sales/revenue potential) for a given retail establishment or center based on the central place theory concept of range and how far people are willing to travel to obtain retail goods as defined by drive time or mileage.
DROP AND SWAP:
Used to change the form of ownership. An example would be ownership wanting to change from a partnership to a tenant in common. Done frequently for tax planning purposes.
DUAL AGENCY:
(Limited agency) the agent represents two principals in the same transaction.
DUE DILIGENCE (DD):
An investigation or audit of a potential investment. Due diligence serves to confirm all material facts in regarding a transaction.
EARNING BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION (EBITDA):
Calculated by taking revenues less expenses (excluding interest, taxes, depreciation and amortization). EBITDA reflects profitability, not cash flow. EBITDA leaves out the cash required to fund working capital and the replacement of old equipment, which can be significant. It is important to look at other measurements to fully understand investment performance.
EASEMENT:
Right to use the land of another for a particular purpose.
EAT:
Acronym for Exchange Accommodation Titleholder.
ECONOMIC CONSTRAINT:
Any outside constraint which limits the development of a property. Examples are oversupply of competing vacant space, failure of the market to support a rental rate sufficient to justify construction costs, or lack of available financing. Also called Development Constraint
ECONOMIC OBSOLESCENCE:
The reduction in a property’s value due to external circumstances such as legislation or changes in nearby property use.
EFFECTIVE GROSS INCOME (EGI):
Gross income of a property less an allowance for vacancy.
EFFECTIVE GROSS RENT (EGR):
Net rent generated, after adjusting for tenant improvements and other capital costs, and for lease commissions and other sales expenses.
EFFECTIVE NET RENT:
Computed in the same manner as Effective Rent with the rental amount reduced by operating expenses included in the quoted lease rental rate. Effective Rent is representative of the tenant’s actual cost. Effective Net Rent is representative of the landlord’s return to the capital investment in the property.
EFFECTIVE RENT:
Rental income from a lease over the life of the lease and expressed as an annual dollar. Rent less any abated rent and allowances, divided by the term of the lease. Sometimes calculated with the time value of money factored in, call Equivalent Level Rent or Level Rent.
EGRESS:
A term concerning a right to go out or go across the land (public or private) of another.
EMINENT DOMAIN:
The right of a governmental entity to acquire property for public purpose by the exercise of condemnation powers. Under the Constitution, property may not be so acquired without the payment of appropriate compensation to the owner.
ENTITLEMENT:
Uses, densities, heights, setbacks, and other development rights which are allowable without further governmental action or conditional approval. Does not constitute a building permit.
ENVIROMENTAL IMPACT REPORT:
A report of the probable effect of a development on the surrounding area (environment). The report is prepared by an independent company to federal, state, or local guide lines.
EXPENSE STOP:
The level (or maximum amount) up to which the landlord will pay certain operating expenses. Amounts above the stop are the responsibility of the tenant.
EMINENT DOMAIN:
The right of the government to acquire privately owned real estate for public use.
ENTITLEMENTS:
The right to develop or improve a property with government approvals for zoning, density, utility installations, occupancy, use and street permits.
EQUILIBRIUM:
When a property is considered leased at market without excessive leasing concessions. Can also be side of markets when demand for space and supply are equal (less nominal space for normal turnover).
ESCALATIONS RENT:
Rent in addition to the base rent. Examples are: fixed increases on specific dates and CPI adjustments. Pass-throughs are not escalation rents but rather recoveries of expenses that don’t result in an increase in cash flow to the owner. Also called Bumps.
ESTOPPEL CERTIFICAT:
Document executed by a tenant where tenant reaffirms that the existing lease is in full force and effect and that no defaults exist unless noted. Buyer and lender require making sure leases are a binding document as represented.
EXCLUSIVE-AGENCY LISTING:
A listing contract under which the owner appoints real estate broker as his or her exclusive agent for a designated period of time to sell the property, on the owner’s stated terms for a commission. The owner reserves the right to sell without paying anyone a commission if he or she sells to a prospect who has not been introduced or claimed by the broker.
EXCLUSIVE-RIGHT-TO-SELL LISTING:
A listing contract under which the owner appoints real estate broker as his or her exclusive agent for a designated period of time, to sell the property, on the owner’s stated terms and agrees to pay the broker a commission when the property is sold, whether by the broker, the owner or another broker.
EXIT CAP RATE:
The estimated or actual cap rate of a property on date of disposition or sale. Also called Terminal Cap Rate.
EXPENSE STOP:
The maximum amount of building operating expenses which will be borne by the owner prior to passing additional expenses through to the tenant.
EXIT STRATEGY:
Way in which investor plans to liquidate all or part of their investment.
EXTERNAL OBSOLESCENCE:
Incurable – caused by negative factors not on the subject property such as environmental, social or economic forces.
FASHION/SPECIALITY CENTERS:
This type of retail center is composed mainly of upscale apparel shops, boutiques, and craft shops carrying selected fashion or unique merchandise of high quality and price. These centers need not be anchored, although sometimes restaurants or entertainment can provide the draw of anchors.
FEE SIMPLE INTEREST:
Maximum real property interest one can hold. 100% ownership of bundle of rights held in real property. See Bundle of Rights.
FINANCIAL LEVERAGE:
The use of borrowed funds to acquire an investment.
FINANCIAL INDUSTRY REGULATORY AUTHORITY (FINRA):
Is the largest non-governmental regulator for securities firms doing business in the United States. FINRA is funded by its broker dealer members.
FINANCIAL RISK:
The possible change in an investment’s ability to return principal and income.
FIRST-LOSS POSITION:
The position in a security that will suffer the first economic loss if the underlying asset(s) lose value or are foreclosed on. The first-loss position carries a higher risk and thus a higher yield.
FIXTURE:
Item of personal property that has been converted to real property by being permanently affixed to the realty.
FLAGGED HOTEL:
Hotel that belongs to a nationwide franchise, such as a Hilton or a Holiday Inn. Flagged (franchised) hotels have the advantage of a national reservation system, a uniform standard of appearance, cleanliness, layout, room sizes, group buying power, national advertising. There are also more lenders willing to finance a flagged hotel than an independent or non flagged property. Franchises typically cost between 8% to 10% of room rents.
FLEX-TYPE BUILDING:
Generally single-story, versatile buildings found in research & development areas/parks or within industrial/distribution settings. Varying blends of both office and warehouse/distribution spaces are found within flex buildings.
FLOOR AREA RATIO (FAR):
Also know as a Floor Space Index (FSI) is the ratio of the total floor area of buildings to the size of the land of that location, or the limit imposed on such a ratio.
FUNCTIONAL OBSOLESCENCE:
1. Curable: out moded or unacceptable physical or design features that are no longer considered desirable by purchasers. 2. Incurable: not easy to remediate. Cost of cure would be greater than resulting increase in value.
GAP ANALYSIS:
An evaluation of the difference in the demand and supply of space (measured in terms of square footage) for a particular type of commercial property in a given market area where gaps are expressed as the amount of square footage demanded less the amount of square footage available in a given time period. Note that if demand exceeds supply, the gap will be positive. A positive gap indicates that potential opportunities exist for successful commercial real estate transactions. However, transactions might be avoided when supply exceeds demand (or when a negative gap occurs), as there is an oversupply of available space in the market.
GENERAL AGENT:
Represents the principal in a broad range of matters related to a particular business or activity, i.e. property manager for the owner.
GENERAL MARKET AREA GAP ANALYSIS:
A gap analysis that is carried out for a city or several cities (simultaneously) to identity one or more general market areas where a gap exists for a particular type of commercial real estate.
GENERAL MARKET FACTORS:
Factors influenced by the demographic, economic, and location characteristics of a market.
GRANTEE:
The person who acquires the title.
GRANTOR:
The owner who transfers the title. Must have legal capacity.
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 lease in which all expenses associated with owning and operating the property are paid by the landlord.
GROSS OPERATING INCOME:
The total income generated by the operations of a property before payment of operating expenses.
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 divided by the price for the property. Frequently used in small apartment building and hotels.
GROSS RENTAL RATES:
The terms “gross” and “full-service” indicate that both the base rental charge and the availability of the basic services necessary to comfortably occupy space are included in the rental rate. Generally provides for inclusion of: all utilities (except telephone and internet/cable/fiber service) including heat and air-conditioning in season; electricity for power, plugs and illumination; water for drinking and lavatory purposes; service for tenant interiors and building common areas; landscaping and snow removal, base property taxes, building insurance and building security, if any. The tenant remits one (rent) check every month, which covers the cost of occupying space within the building; except as mutually agreed.
GROUND LEASE:
A lease of land only, on which the tenant usually owns a building or is required to build as specified in the lease. Such leases are usually long-term net leases; the tenant’s right and obligations continue until the lease expires or is terminated through default.
GROWTH PATTERN:
In reference to the patterns of urban or population growth in a geographic market, an important consideration in retail trade area analyses as growth patterns are known to affect sales/revenue potential within a market given the tendency of retail to follow population movement and income concentrations over time.
GUARANTEE:
Agreement where the guarantor assures satisfaction of another if certain acts occur or fail to occur. Need to define the nature of the guarantee and the source of the funds if a repayment is needed. A guarantee or master lease won’t fix a poorly performing property. In real estate it is best to look at the quality of the property and deal structure for security.
HARD MONEY LOAN:
A loan made in cash by a non-institutional lender.
HEDGING:
Protecting against negative outcomes.
HIGHEST AND BEST USE:
Most profitable single use to which a property may be put; most likely to be in demand in the future.
IMBALANCES:
Unstable conditions which arise out of a market disequilibrium or the lack of balance between the forces of supply and demand in any or all subcategories of commercial properties in one or more geographic submarkets over a given time period.
IMPAIRED ASSET:
Any property with an unrealized capital loss such that current equity value is less than book value. Can be temporary, such as due to changes in market conditions, or permanent if such value decline is considered irreversible over the holding period.
IMPAIRED VALUE:
diminution in value from the value which a comparable asset would enjoy were it not for circumstances unique to the specific asset or specific market.
IMPERFECT MARKET:
A market in which product differentiation exists and is not fully adjusted for risk. Frequently caused by a lack of relevant information on the part of both buyers and sellers. Well informed investors have the advantage in such markets. Commercial real estate is bought and sold in an imperfect market.
IMPROVEMENT EXCHANGE:
A tax-deferred, like-kind exchange whereby the Qualified Intermediary and/or Exchange Accommodation Titleholder acquires title and holds title to the replacement property on behalf of Investor, during which time new or additional structures or improvements are constructed or installed on or within the replacement property. Also known as a build-to-suit exchange.
INDEX LEASE:
A lease in which the rental amount adjusts accordingly to changes and/or movements in a price index, commonly the consumer price index.
INDUSTRIAL PROPERTY:
Commercial properties that are used for the purposes of production, manufacturing, or distribution.
INFLATION:
The economic phenomenon by which all nominal prices tend to rise over time. In modeling the economics of a property, inflation affects the growth rates of all income, expense and capital items. See: CPI Adjustment; CPI Index.
INFLATION ADJUSTMENT:
An escalation provision which provides for periodic adjustments.
INFLATION HEDGE:
Investment that tends to increase in value at a rate greater than inflation.
IN-LINE TENANTS:
Any non-anchor tenant located within or along a mall or strip center.
INSTALLMENT SALE:
Covered in IRC Section 453. Taxpayer may defer capital gains income tax liabilities when carrying back a promissory note on the sale of an investment property. Taxes are deferred until principal payments are received over the term of the promissory note or note is sold at a discount on the secondary market and made part of exchange or assigned to the seller as a down payment on the replacement property. Depreciation recapture can not be deferred with an installment sale and would be recognized in the year of sale.
INSTITUTIONAL GRADE PROPERTY:
Various types of real estate properties generally owned or financed by tax-exempt institutional investors. Some institutions may be constrained by property age, geographic location and construction quality, and other factors. Term commonly applied to tax exempt entities such as corporate pension and profit sharing plans, endowments, foundations, union-sponsored benefit plans, and state and municipal employee retirement plans.
INSTITUTE OF REAL ESTATE MANAGEMENT (IREM):
national organization for professional property managers and property management companies. Part of the National Association of Realtors and grants the professional credentials of Certified Property Manager (CPM), accredited Residential Manager (ARM), and Accredited Management Organization (AMO).
INSURABLE VALUE:
The value of the portions of the property that are physically destructible.
INTANGIBLE CHARACTERISTICS:
Attributes that are not directly measurable or quantifiable, and therefore must be expressed in a qualitative or abstract manner.
INTEREST ONLY LOAN (I/O):
Loan payments are interest only, no payment on principal amount of loan. Can be used to increase cash flow because of lower monthly payments as compared to an amortized loan. Negative is that 100% debt remains.
INTERNATIONAL COUNCIL OF SHOPPING CENTERS (ICSC):
National trade organization of property owners, tenants and professionals involved in the operation of retail properties.
I.R.C.:
Abbreviation for the Internal Revenue Code.
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. A measure of the cash out of your pocket and back in measured over time for a given investment for cash flow and potential residual value.
JOINT AND SEVERAL LIABILITY:
Liability enforceable against either or both parties.
JOINT TENANCY:
Ownership of real estate by two or more individuals with right of survivorship. In a joint tenancy, the death of one of the owners does not change the ownership unit other than to reduce the number of persons who jointly own the property. The last survivor in a joint tenancy takes title in “severalty” which is fully inheritable.
KICK THE DIRT:
To make a field inspection or site visit.
KICKER:
Signifying some form of equity participation, often related to debt obligations. Can be called participating debt or convertible debt.
KICK-OUT PROVISION:
Provision in a lease which allows a landlord to terminate the lease upon the occurrence of some specified event. Examples would be certain sales figures need to be met or termination for expansion for a preferred tenant.
LAND CONTRACT:
A contract used in a sale of real property where the seller retains title to the property until all or part of the purchase price has been paid. Also commonly called a conditional sales contract, installment sales contract or real property sales contract.
LANDLORD-PAID TENANT IMPROVEMENTS (LPTI):
The total cost (outlay) of necessary tenant improvements paid by the landlord netted against any contribution made by the tenant.
LAND SALE-LEASEBACK:
The same concept as a sale-leaseback, but only the land is sold and leased back using a ground lease.
LEAKAGE (RETAIL):
Purchases made in other service areas by consumers located within the subject area (representing a loss of revenue for retailers located within the trade area in which those consumers reside).
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.
LEASEBACK:
Property is sold to an investor and the seller becomes a tenant. Used to free cash tied up in real estate while retaining the use of the property. Under the tax laws, a sale-leaseback can give rise to Unrelated Business Income for ERISA qualified pension plans who act as buyers.
LEASE BUYOUT:
The process by which a landlord, tenant, or third party pays to extinguish the tenant’s remaining lease obligation and rights under its existing lease agreement.
LEASED FEE:
In exchange for permitting a tenant to use the property, the owner/lessor has the right to receive rental income and the right to repossess the property upon termination of the lease.
LEASED FEE INTEREST:
The value (to the owner) of the rental payments plus the value of the property at the end of the lease term (reversionary interest).
LEASEHOLD ESTATE:
In exchange for rent, the tenant has the right to occupy and use the property for the duration of the lease.
LEASEHOLD IMPROVEMENTS:
Construction or improvements for the purpose of preparing the premises for the conduct of tenant’s business. Improvements permanently attach to the premises unless they are trade fixtures, and they remain with the premises after the end of the term of the lease.
LEASEHOLD INTEREST:
The value (to the tenant) of the lease. The value of the leasehold interest is determined by calculating the present value of the difference between the current market rent and the contract rent. Tenants who hold long term leases with no or minimal built in rent increase can realize substantial profits by subleasing their leased space at market.
LEGAL DESCRIPTION:
One that is sufficiently specific that an independent surveyor could locate the exact dimensions of the property being described.
LEGAL INTERESTS:
There are several types of legal interest in a property including possessory vs. non possessory, fee simple, leasehold and easements.
LESEE:
The person renting or leasing the property. Also known as a tenant.
LESSOR:
The person who rents or leases a property to another. Also known as a landlord
LIKE-KIND EXCHANGE:
The sale or disposition of real estate or personal property (relinquished property) and the acquisition of like-kind real estate or personal property (replacement property) structured as a tax-deferred, like-kind exchange transaction pursuant to Section 1031 of the Internal Revenue Code and Section 1.1031 of the Treasury Regulations in order to defer the payment of Federal, and in most cases state, capital gain and depreciation recapture taxes.
LIKE-KIND PROPERTY:
Property that is exchangeable with another property. Refers to the nature or character of the property and not to its grade or quality.
LIMITED LIABILITY COMPANY (LLC):
Members of Limited Liability companies enjoy the limited liability offered by corporations and the minimum requirements of an S corporation. Limited Liability Companies typically contain two or more members and must file articles of organization with the secretary of state, although single member LLC’s are allowed in certain states.
LIMITED PARTNERSHIP:
Investors who pool their money to develop or purchase income-producing properties. Income from these properties is distributed as dividend payments. In a limited partnership, each limited partner’s liability is limited to the amount of his or her investment. A limited partner only contributes money and is not actively involved in the business. A limited partnership must have one general partner, who is personally liable for all debts.
LIS PENDENS:
A recorded legal document giving constructive notice that an action affecting a particular property has been filed in either a state or a federal court.
LOAD FACTOR:
Amount of a tenant’s useable space that accounts for the tenant’s proportionate share of the common area (restrooms, elevator lobby, mechanical rooms, etc.). The load factor is usually expressed as a percentage and ranges from a low of 5% to as high as 15%.
LOAN TO VALUE (LTV):
The ratio of the amount of the loan to the value of the property. For example if an investor put $200,000 down and placed a $800,000 loan on a $1,000,000 property the LTV would be 80% ($800,000/$100,000).
LOYALTY:
The duty of loyalty requires the agent to place the principal’s interests above those of all others, including the agent’s own self-interest. The agent must be particularly sensitive to any possible conflicts of interest. Confidentiality about the principal’s personal affairs is a key element of loyalty.
MACRO-ECONOMICS:
Generally used in reference to matters of economy or economic factors and forces portrayed or operating at the macro-level (as opposed to micro-level), used synonymously with national economy.
MARKET ADJUSTMENTS:
A change in market parameters or conditions brought about in response to one or more market signals (including price changes from shifts in supply and demand); typically characterized as cycles, fluctuations, or trends (categories that differ in terms of cause, duration, and impact on commercial real estate markets).
MARKET ANALYSIS:
The process of examining market supply and demand conditions, demographic characteristics, and opportunities; identifying alternative locations/sites that meet specific objectives or satisfy various criteria; and assessing the financial feasibility of those locations/sites to facilitate decision making regarding the commercial potential or suitability of various locations/sites to support a given activity or use.
MARKET AREA:
A geographical area in which supply and demand operate to influence the course of industrial and commercial activities, for example, a Metropolitan Statistical Area (MSA).
MARKET COMPARABLE:
Example of a recent sale or lease of a property which is similar to another property.
MARKET GAP:
The demand for space minus the supply of space for a specific type of commercial property in a given real estate market.
MARKET LEASE RATE:
Current rental rate in a given market.
MARKET RISK:
The possibility that downward market trends will reduce an investment’s market value.
MARKET VALUE:
Reasonable opinion of a property’s value based on an analysis of data; the most probable price a property would bring in an arm’s-length transaction under normal conditions in an open market.
MASTER LEASE:
Used in Tenant in Common properties to provide even cash flows. Similar to triple net lease property in that sponsor or master lessee takes on the role of the tenant. Designed for investors looking for study income and are willing to forgo some or all of the benefit of appreciation over the hold period. Issues with master leases can be a lack of transparency, misaligned interest and lack of downside protection. Investor needs to pay close attention to how well reserves and master lessee are capitalized. Capitalization can range for a Hollow Master Lease with an unsecured IOU to a fully funded reserve accounts.
MASTER SERVICER:
Institution that acts on behalf of the trustee for the benefit of security holders in managing funds and assets.
MEAN:
A measure of central tendency (for a distribution of values) defined as the average value of a variable in a sample and calculated by adding together all the values observed in a data set and dividing by the number of values observed.
MEDIAN:
Defined as the middle value of a data set when the values are arranged in order (by size ranking, in ascending or descending order).
METES-AND-BOUNDS:
Oldest type of legal description relies on a property’s physical description to determine boundaries, starts at POB and ends at POB.
METROPOLITAN STATISTICAL AREA (MSA):
Generally, the area in and around a major city. The Office of Management and Budget (OMB) defines an MSA as having one of the following characteristics: a city with a population of at least 50,000, or an urbanized area with a population of at least 50,000 with a total metropolitan population of 100,000.
MEZZANINE FINANCING:
Debt or equity capital structure that has senior debt (or a first mortgage), above it and equity below it . Can be at the asset level, entity or company level, or it could be unrated tranch ( a part of a deal or structured financing) of a CMBS.
MILL:
Tax rates expressed as mills. 1/1,000 of a dollar or $.001. (.03 = 3% = 30 mills or $3 per $100)
NATIONAL ASSOCIATION OF CORPORATE REAL ESATE EXECUTIVES (NACORE):
Trade association of real estate professionals who manage the real estate assets of corporations, retailers, and other commercial users.
NATIONAL ASSOCIATION OF INDUSTRIAL AND OFFICE PARKS (NAIOP):
Trade association of companies and individuals engaged in the development and management of planned suburban business parks.
NATIONAL ASSOCIATION OF REAL ESTATE INVESTMENT MANAGERS (NAREIM):
Trade association of organizations involved in the management of real estate for institutional investors.
NATIONAL ASSOCIATION OF REAL ESTATE INVESTMENT TRUSTS (NAREIT):
Trade association representing publicly traded and privately placed real estate investment trusts (REITs).
NATIONAL COUNCIL OF REAL ESTATE INVESTMENT FIDUCIARIES (NCREIF):
Association of real estate professionals who serve on working committees, sponsor research articles, seminars and symposiums, and produce the NCREIF Property Index. Property index reports quarterly and annual returns consisting of income and appreciation components. The index is based on data collected from the voting members of NCREIF. Specific property-type indices include apartment, office, retail, R&D/Office and Warehouse.
NEGATIVE CASH FLOW:
Cash income is insufficient to cover current operating expenses, debt service, and cash needs for critical capital replacements.
NEGATIVE LEVERAGE:
Borrowed funds are invested at a rate of return lower than the cost of funds to the borrower.
NEIGHBORHOOD CENTER:
Designed to provide convenience shopping for the day-to-day needs of consumers in the immediate neighborhood.
NET AFTER TAX CASH FLOW (NBTCF):
Net Before Tax Cash Flow (minus) taxable income (times) tax rate tax income (equals) Net Operating Income (minus) interest expense (minus) owner’s deposit.
NET CASH FLOW:
Cash remaining from net operating income after deduction of all expenses and expenditures.
NET INCOME:
Total revenue minus total expense, what’s left of the monies received after all debts have been paid, the bottom line. If Net Income is positive it is also called Net Profit. A negative Net Income is a Net Loss.
NET LEASE INVESTMENTS:
Net Lease Properties are the traditional real estate investment with no management obligation for the owner. In its purest form (called a triple net lease) the tenant manages the property, doing everything from paying the taxes and insurance to sweeping out the driveway and repairing the roof if needed.
NET OPERATING INCOME (NOI):
Effective gross income less all operating expenses and vacancy, but before debt service and capital expenditures.
NEUTRAL LEVERAGE:
An investment situation in which the cost of borrowed funds is exactly equal to the yield provided by the investment.
NNN LEASE INVESTMENTS:
In its purest form (called a triple net lease or NNN lease), the tenant is responsible for all property management and repairs – including everything from paying the taxes to sweeping out the driveway to repairing the roof if needed. The only responsibility of the owner is to pay the mortgage on the property.
NNN RENTAL RATES:
Rates quoted as NNN or “modified net” indicate that none or some of the services normally provided under a gross/full-service arrangement are included as part of the base rate. The tenant might be responsible for directly contracting with the applicable service providers for those desired services/utilities not provided through ownership. Property owners allow tenants to receive those services through the owner’s base building equipment infrastructure. Under this arrangement, the tenant generally sends several checks out each month; i.e., one to the property owner for the base rent and other checks as required to the providing service/utility vendors. Generally Class “A, B & C” office rental expenses are quoted on a gross/full service basis while flex or industrial/manufacturing/warehouse space leases are quoted on a NNN or modified net basis.
NON RECOURSE LOAN (NON RECOURSE DEBT):
A loan in which the lender cannot claim more than the collateral or property as repayment in the event that payments on the loan are stopped. The unpaid balance on the loan will be absorbed by the lender except in the case of fraud. The IRS requires a non-recourse loan for all real estate purchases that use leverage with a self-directed IRA. Most commercial real estate in the United States is financed long term by non-recourse debt. Most real estate in other parts of the world is financed with full or partial recourse to the borrower.
NONCONFORMING USE:
A use of a property that is permitted to continue after a zoning ordinance prohibiting it has been established in the area.
NOVATION:
The substitution by agreement of a new obligation for an existing one or substituting new parties to an existing obligation.
OBEDIENCE:
The fiduciary relationship obligates an broker/agent to act in good faith at all times, obeying the principal’s instructions in accordance with the contract. However, that obedience is not absolute. The agent may not obey instructions that are unlawful or unethical. Because illegal acts do not serve the principal’s best interests, obeying such instructions violates the broker/agent’s duty of loyalty. On the other hand, an agent who exceeds the authority assigned in the contract will be liable for any losses that the principal suffers as a result.
OE&T:
Operating Expenses and Taxes
OFFER AND ACCEPTANCE:
Two essential components of a valid contract; a “meeting of the minds.”
OFFICE GAP:
The difference between the demand for office space and the supply of office space by property type, submarket, sector, or user classification in a given geographic market.
OFFSET:
Amount deducted by the tenant to equal to costs incurred by the tenant in performing an obligation of the landlord under the lease. Most commercial leases unequivocally prohibit the tenant from having a right to offset. Such right would relinquish control of the property to the tenant and could render the property unfinancable.
OPEN LISTING:
Multiple agents allowed to market a property. Only selling agent (the one that was the procuring cause of sale or lease) is entitled to a commission. Seller retains right to sell independently.
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.
OPTIONS TO RENEW AND EXPAND:
Most property owners will provide a new (to the building) tenant with at least one (1) extension option similar in length to the initial term. To exercise, tenants must provide advance notice of intent and not be in default. Some property owners will try to pre-set future term rates; others will agree to define it as market value for like-kind properties at the time of extension. Options always favor the tenant. Guaranteed expansion options are rare even to the largest of tenants. Rights of first refusal subject to (other) existing tenant(s) lease options are more commonplace. Owners might give the option to expand if a tenant guarantees to take it; sometimes called a “put”.
OUTLET CENTER:
A retail property type usually located in rural or occasionally in tourist locations, outlet centers consist mostly of manufacturers’ outlet stores selling their own brands at a discount. These centers are typically not anchored. A strip configuration is most common, although some are enclosed malls, and others can be arranged in a village cluster.
OVERSUPPLY:
In reference to commercial real estate, oversupply is a stock or supply of a given commercial property type that is greater than that which can be cleared under prevailing prices levels and market conditions (excess supply). Also, a phase of the real estate market cycle denoting that period of time in which commercial real estate markets become saturated due to overbuilding.
PARKING RATIO:
Ratio of number of parking space to square feet rented. The parking ratio allowance generally ranging from 3 spaces per every one thousand square feet rented, (3/1,000) up to 5.5 spaces (5.5/1,000). The average is an allowance of four (4) spaces for every 1,000 SF of rented space. Good indicator of how many people could/should occupy 1,000 SF.
PARTIAL EXCHANGE:
When a tax-deferred like-kind exchange entails receiving cash, excluded property and/or non-like-kind property and/or any net reduction in debt (mortgage relief) on the replacement property as well as an exchange of qualified, like-kind property. In the case of a partial exchange, income tax liability would be incurred on the non-qualifying portion and capital gain deferred on the qualifying portion under Section 1031 of the Internal Revenue Code and Section 1.1031 of the Treasury Regulations.
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.
PERCENTAGE LEASE:
A lease in which the rent amount is based on a percentage of gross sales (monthly or annually) made by the tenant.
PERCENTAGE RENT:
The additional rent (over a base amount) that is paid by tenants to owners on tenant sales over a specified dollar amount. It is frequently found in retail leases. Also known as overage rent.
PERFECT MARKET:
A market in which the products are homogenous, there is complete information, and no buyers or sellers may influence the market.
POPULATION/EXPENDITURE APPROACH:
An approach to estimating the trade area (and sales/revenue potential) for a given retail establishment or center based on the minimum area (or threshold population) that would be required to sustain a business, by calculating the population necessary to support total square footage of both existing and proposed space for a specific-use
POPULATION GROWTH:
The rate at which a given population base in a given geographic area is growing (positive or negative) in relation to the forces of internal growth, in-migration, and out-migration; a factor that is widely acknowledged as having the greatest impact on the demand for housing.
POSITIVE LEVERAGE:
Borrowed funds are invested at a rate of return higher than the cost of the funds to the borrower.
POTENTIAL RENTAL INCOME:
The total amount of rental income for a property if it were 100 percent occupied and rented at competitive market rates.
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.
PRIMARY SOURCE DATA:
Information obtained directly from field observations and survey instruments (by observing or monitoring a phenomenon or site firsthand), typically involving quantitative measurement and/or qualitative assessment of that which is observed or monitored.
PRINCIPAL RESIDENCE EXEMPTION:
Exclusion from capital gain tax on the sale of principal residence of $250,000 for individual Investors and $500,000 for couples, filing jointly, under Internal Revenue Code Section 121. Property must have been the investor’s principal residence for 24 of the last 60 months (two out of the last five years). In the case of a dual use property, such as ranch, retail store, duplex or triplex, the Investor can defer taxes on the portion of the property used for business or investment under Section 1031 of the Internal Revenue Code and exclude capital gain on the portion used as the primary residence under Section 121 of the Internal Revenue Code.
PROBABILITIES AND EXPECTED VALUE:
A quantifiable method of risk analysis. This method assigns probabilities to specific, possible investment outcomes, calculates an expected outcome for the investment based on these probabilities, and measures the likelihood that actual results will differ from the expected outcome.
PROFORMA:
Financial statement with one or more assumptions built into the data. Actual financial statements have no such assumptions.
PROPERTY-SPECIFIC FACTORS:
Factors influenced by the site-specific and technical characteristics of a property or parcel including its layout, limitations, orientation, physical features, and ability to comply with government imposed zoning and land-use restrictions.
PURCHASING POWER RISK:
The variability in the future purchasing power of income received from an investment.
QUALIFIED EXCHANGE ACCOMMODATION AGREEMENT (QEAA):
The actual contract or agreement between an investor and the Exchange Accommodator Titleholder that outlines the terms for parking property pursuant to Revenue Procedure 2000-37.
QUALIFIED INTERMEDIARY:
The IRS requires the owner (the exchanger) of the relinquished property not be permitted to have control of the proceeds from the sale of their property (constructive receipt). To comply with this requirement it is necessary to contract a Qualified Intermediary (QI), or a similarly qualified party, to hold the proceeds and to 1) acquire the relinquished property from the taxpayer and transfer the property to the new buyer and 2) acquire the replacement property and transfers the replacement property to the taxpayer.
QUALIFIED USE:
An investor must intend to use the property in their trade or business, to hold the property for investment or to hold the property for income production in order to satisfy the qualified use test.
RATE OF RETURN:
The percentage return on each dollar invested. Also known as yield.
REAL ESTATE CYCLES:
The regularly repeating sequence of economic downturns and upturns and associated changes in real estate market transactions tied to market dynamics and changing macroeconomic 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) or boosts or shocks to the local economy (such as the entry or exit of major employers).
REAL ESTATE INVESTMENT TRUST (REIT):
A trust or association that invests in a variety of real estate investment assets. REITs are managed by one or more trustees, like a mutual fund, and trade like a stock. No federal income tax is paid by the trust if at least 75% of the income is real-estate related and 95% of the income is distributed to investors. Created in 1960 (act of Congress) and was part of an Act regarding excise tax on cigars. See 1031-721 Exchange for exchanges involving REITs.
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.
REAL PROPERTY:
Land and buildings (improvements), including but not limited to homes, apartment buildings, shopping centers, commercial buildings, factories, condominiums, leases of 30-years or more, quarries and oil fields. All types of real property are exchangeable for all other types of real property. In general, state law determines what constitutes real property.
RECESSION:
A period of reduced economic activity or a general economic downturn 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 in most real estate markets.
RECOURSE LOAN:
A loan obligation where the borrower is liable for the full amount of the remaining balance of the loan, even if the collateral value is less than the amount of the loan.
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.
RED HERRING:
Information meant to distract. Fallacy in which an irrelevant topic is presented in order to divert attention from the relevant issues. Also used to refer to preliminary prospectus issued to gauge interest in a prospective offering.
REGIONAL CENTER:
This center type provides general merchandise (a large percentage of which is apparel) and services in full depth and variety. Its main attractions are its anchors: traditional, mass merchant, discount department stores, or fashion specialty 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.
REGULATORY REQUIREMENTS:
In reference to land use, they are restrictions or guidelines on development or use of land, properties, or facilities as defined in accordance with design standards, building construction requirements, land use plans, occupancy codes, and zoning classifications as determined by the controlling or governing parties at the municipal or county levels.
RELATED PERSON:
Any person bearing a relationship to the Investor as described in Section 267(b) of the Internal Revenue Code. Related parties include family members (spouses, children, siblings, parents or grandparents but not aunts, uncles, cousins or ex-spouses) and a corporation in which you have more than a 50% ownership; or a partnership or two partnership in which you directly or indirectly own more a 50% share of the capital or profits.
RELINQUISHED PROPERTY:
The property to be sold or disposed of by the Investor in the tax-deferred, like-kind exchange transaction.
RENTABLE SQUARE FOOTAGE:
Is the usable amount plus share of the common areas of the building that utilize; i.e., lobbies, restrooms, hallways, etc. The common area space is generally between 12-15% of the total building area.
RENT CONCESSION:
A period of free rent given to the tenant by the lessor.
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. Also see index lease and expense stop.
REPLACEMENT PROPERTY:
The like-kind property to be acquired or received by an investor in the tax-deferred, like-kind exchange transaction.
RETAIL GAP ANALYSIS:
A gap analysis performed specifically on retail floor space in a given market or trade area.
RETAIL TRADE AREA:
Also referred to as service area, is generally defined as the geographic or formal area from which a sustained patronage is attracted to support a retail center or establishment; the extent to which is determined by numerous factors including the site characteristics of the center or establishment, its accessibility, the presence or absence of physical barriers to movement, and general limitations imposed by driving time, congestion, and distance/separation.
RETURN ON INVESTMENTS (ROI):
Performance measure used to compare different investments expressed as a percentage. Calculated by dividing the investment gain less its cost by the cost of the investment. See Yield.
REVENUE PROCEDURE 2002-22 (REV PROC 2002 22):
Set of guidelines published by the IRS in February of 2002 that if complied with would classify a tenant-in-common (TIC) interest as real estate, not a partnership. Important because it made TICs a viable 1031 Exchange Replacement Property option (partnerships do not qualify as 1031 Replacement Property). Some of the key elements are that TIC properties are not to exceed 35 investors, must not do business as a separate entity, limited TIC agreement, unanimous consent to hire manager/encumber property or lease, no restriction on alienation, proportionate sharing of profits and losses, limitation on options to purchase, limited business activity, management agreement with annual renewal, bona fide leases, limitation on advancing money and limitation on payments to sponsors. To help make the TIC structure workable the IRS issued Private Letter Rulings 200327003 and 200513010 that provides for the unanimous consent to renew management through an annual notice of right to cancel and unanimous consent for leases through approved leasing criteria.
REVERSE 1031 EXCHANGE:
In a typical 1031 Exchange, the investor sells a property (relinquished property) and then purchases a replacement property. A Reverse 1031 Exchange works in the opposite direction, allowing the investor to first purchase a replacement property and later sell the relinquished property. A Reverse 1031 Exchange can also be used when the investor wants to acquire a property and construct improvements on this “replacement” property before taking title.
REVERSION VALUE:
A lump-sum cash benefit that an investor receives or expects to receive upon the sale of an investment.
REVPAR:
For hotels the average daily room rate, or ADR, charged, multiplied by the average daily occupancy rate for a given period of time.
RISK:
The probability that actual cash flows from an investment will vary from the forecasted cash flows.
RISK PREMIUM:
The return in excess of the risk-free rate of return that an investment is expected to yield. An asset’s risk premium is a form of compensation for investors who tolerate the extra risk – compared to that of a risk-free asset – in a given investment.
RISK vs. REWARD:
The basic premise that the greater the risk the greater the return needed to attract investors. In a perfect market all investments would reflect their correct risk vs. reward ratio. Commercial real estate is an imperfect market meaning that just because an investment has a lower return does not necessarily mean that has a lower risk.
SAFE HARBORS:
The Treasury Regulations provide certain safe harbors that assist Qualified Intermediaries and investors in structuring tax-deferred, like-kind exchange transactions so they can be assured that no constructive receipt issues will be encountered during the exchange cycle.
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.
SALES COMPARISON APPROACH:
A way to determine market value by comparing a subject property to properties with the same or similar characteristics
SALES COMPARISON VALUE:
An estimate of value derived by comparing the property to similar properties that have been sold recently, applying appropriate units of comparison, and making adjustments to the sales prices of the comparable based on the elements of comparison.
SALE LEASEBACK:
A transaction in which an owner sells an improved property and as part of the same transaction signs a long-term lease to remain in possession of the property.
SALES PROCEEDS AFTER TAX:
The sale proceeds before tax minus the tax liability on the sale.
SECTION 121:
Part of IRS Code that deals with exclusion of capital gain on the sale of primary residence. Generally, a Taxpayer can sell real property held (owned) and used (lived in) as a primary residence and exclude from gross income up to $250,000 in capital gains if the Taxpayer is single and up to $500,000 in capital gain taxes if the Taxpayer is married and filing a joint income tax return. The Taxpayer is required to have (1) owned and (2) lived in the real property as his or her primary residence for at least 24 months out of the last 60 months (two out of the last five years). The 24 months do not need to be consecutive and there are certain exceptions to the 24 month requirement when a change of employment, health, or other unforeseen circumstances has occurred. Taxpayers can complete a 121 exclusion once every two (2) years.
SECTION 453:
Part of IRS Code that deals with installment sales of investment property. Taxpayer may defer capital gains income tax liabilities when carrying back a promissory note on the sale of an investment property. Taxes are deferred until principal payments are received over the term of the promissory note or note is sold and made part of exchange or note is assigned to the seller as a down payment on the replacement property. Depreciation recapture can not be deferred with an installment sale and would be recognized in the year of sale.
SECURITIZATION:
Indirectly investing in real estate markets (for example, investments made collectively with pooled money or the use of investment packages/funds, such as mortgage backed securities sold on the secondary financial market) as opposed to direct investments where investors own property or hold mortgages; a long-term trend that has had significant impact on real estate values. Nature of investment can create major risk if assets improperly categorized and bundled.
SELLER CARRY-BACK FINANCING:
When the buyer of a property gives the seller of the property a note, secured by a deed of trust or mortgage. In a Section 1031 Exchange, seller carry-back financing is treated as boot, unless it is sold at a discount on the secondary market or assigned to the seller as a down payment on the replacement property.
SENSITIVITY ANALYSIS:
The process of recalculating outcomes under alternative assumptions to determine the impact of the variable under analysis.
SEQUENTIAL DEEDING:
The former practice of transferring or deeding title to an investor’s relinquished property to the Qualified Intermediary first and then sequentially and immediately transferring or deeding title from the Qualified Intermediary to the buyer in order to properly structure a tax-deferred, like-kind exchange prior to the issuance of Treasury Revenue Ruling 90-34. See “Direct Deeding” for the current-day practice. Sequential deeding is used only in special tax-deferred, like-kind exchange transactions today that require special structuring.
SIMULTANEOUS 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 simultaneous exchange is also referred to as a concurrent exchange.
SITE ANALYSIS:
The identification and evaluation of a site or sites to satisfy a given purpose. Included in the analysis are competition for the given use, median household income and population growth.
SITE FACTORS:
Site-specific factors, features, conditions, or attributes which are important in the analysis or evaluation of a location/site (including relative location, visibility, aesthetics, landscaping, condition of existing structures, regulatory mechanisms, and lot size).
SOURCES OF EQUITY CAPITAL FOR COMMERCIAL REAL ESTATE:
Pension funds, REIT equity funds, Life Companies, Foreign Investors, Individuals, Syndications and Partnerships.
SPECIAL AGENT:
Limited agent. Authorized to represent the principal in one specific act or business transaction only, under detailed instructions, i.e. real estate agent.
STABALIZED PROPERTY:
Property where all renovations have been completed, occupancy and rental rates are in line with current market conditions and expenses are normalized. See added value properties.
STANDARD DEVIATION:
A measure of the amount of dispersion or variation of data points or values about the mean.
STANDARD INDUSTRIAL CLASSIFICATION (SIC):
A classification scheme used for general recording purposes by government and industry to categorize and account for economic and employment activity by sector using a series of standardized and universally accepted codes.
STARKER EXCHANGE:
Another common name for the tax-deferred, like-kind exchange transaction based on a court decision that was handed down (Starker vs. Commissioner) in 1979. The Ninth Circuit Court of Appeals eventually agreed with Starker that its delayed tax-deferred, like-kind exchange transaction did in fact constitute a valid exchange pursuant to Section 1031 of the Internal Revenue Code. This ruling set the precedent for our current day delayed exchange structures.
STATISTICAL DESCRIPTIONS:
Drawing a reasonable conclusion or deduction from statistical evidence based on sample statistics, while attaching a statement as to the likelihood that an assertion made about a given statistical population is true (in probabilistic terms).
STEP-UP IN BASIS:
The adjustment of the value of an appreciated asset for tax purposes upon inheritance. The step-up reflects value of the asset at time of inheritance, not when property was originally purchased.
STRIP CENTER:
Any shopping area comprised of a row of stores but smaller than a neighborhood center anchored by a grocery store.
SUPPLY:
The amount of property made available for sale or rent at a given price or rental rate.
TAX SHELTER:
Any method to reduce an investor’s tax liability. An example would be cost recovery or depreciation used to shelter current income.
TAXABLE INCOME:
Adjusted gross income less personal deductions and exemptions.
TENANCY IN COMMON (TIC):
A form of co-ownership by which each owner holds an undivided fractional interest in real property as if they were sole owner. Each individual owner has the right to partition. Unlike joint tenants, tenants in common have right of inheritance. Often used in a 1031 Exchange. When structured as a security TICs are sold by broker dealers, when structured as real estate TICs are sold by licensed real estate brokers. Billions of dollars have been invested in both security and real estate structured TICs. See Revenue Procedure 2002-22.
TENANCY IN SEVERALTY:
Separate ownership of property by one person.
TENANT:
A person or entity who has possession of the property though a lease. A tenant also may be referred to as a lessee.
TENANT IMPROVEMENTS (T.I.’s):
Standard building materials and quantities identified by the landlord which are to be provided at no cost to the tenant to improve tenant premises usually stated as $ per sq. ft.
TENANT IMPROVEMENT ALLOWANCE:
Portion of tenant improvements paid for by the landlord. Some property owners prefer not to quote improvement allowances; i.e., preferring first to determine what the tenant really needs and then building the space out turnkey (using building standard materials) for the rate quoted. This avoids potentially uncomfortable discussions about disposition of allowance overages/credits.
TENANT IN COMMON SPONSOR:
The companies that package and market TIC properties. They find suitable property, perform the necessary due diligence, arrange financing, oversee sales of TIC interest either as a security or real estate, arranging for property management services, send monthly disbursements to TIC owners, provide periodic summary property reports to owners, manage the disposition of the property and distribution of proceeds.
TENANT-PAID TENANT IMPROVEMENT (TPTI):
The total cost (outlay) of necessary tenant improvements paid by the tenant netted against any allowance provided by the landlord.
THRESHOLD POPULATION:
The minimum number of people or minimum market area or sales volume necessary to sustain a business or make it economically viable.
TIME VALUE OF MONEY (TVM):
The principal that a dollar today has greater value than a dollar in the future because of its earning power. See discounted cash flow.
TITLEHOLDER:
The entity that owns/holds title to property. In an Internal Revenue Code Section 1031 Exchange, the titleholder of the relinquished property must generally be the same as the titleholder of the replacement property. If a Investor dies prior to the acquisition of the replacement property, his or her estate may complete the exchange. When the acquisition and disposition entities bear the same Investor identification numbers, such as disregarded entities (single-member LLC’s and Revocable Living Trusts), the exchange usually qualifies.
TRADE FIXTURE:
An article installed by a tenant under the terms of the lease and removable by the tenant before lease expires.
UNIVERSAL AGENT:
Empowered to do anything the principal could do personally.
UNLIMITED AUTHORITY:
Created by Power of Attorney.
UPREIT:
Stands for Umbrella Partnership REIT. Allows exchange of investment property for shares of a Real Estate Trust (REIT). Investment property is contributed into a REIT in exchange for shares of stock pursuant to Section 721 of the Internal Revenue Code. Taxes paid on sale of stock with no further tax deferred 1031 exchanges allowed. Non institutional investors can do a 1031 Exchange into tenant-in-common institutional grade property that may later be traded for REIT stock. Advantages can be greater liquidity and diversification; disadvantages include being subject to stock-market whims, not just property performance.
USABLE SQUARE FOOTAGE:
Leased space you can “reach out and touch”. The space that you are renting from a landlord not including the common areas. See Rentable Square Footage and Load Factor.
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 ALLOWANCE:
A desirable level of vacancy that is known to facilitate transactions and turnover in a housing market (for example, a vacancy rate that allows the market to operate smoothly and efficiently by enhancing household mobility); an index used for estimating housing demand.
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.
WORKING CAPITAL:
In a financial statement, the difference between current assets and current liabilities (CA -CL = working capital).
WORKING DRAWINGS:
Drawings necessary to obtain a building permit and the construction of tenant improvements.
WORKLETTER:
That part of the lease, usually attached to the back as an exhibit, which delineates all work that is to be done for the tenant by the landlord (sometimes called a construction rider).
WORKOUT:
The various ways to offset a foreclosure or other problems with the property.
WRAPAROUND MORTGAGE:
A method of financing in which the new mortgage is placed in a secondary or subordinate position; the new mortgage includes both the unpaid principal balance of the first mortgage and whatever additional sums are advanced by the lender. Sometimes called an all-inclusive loan, an overriding loan or an overlapping loan.
WRIT OF EXECUTION:
A court order authorizing and directing an officer of the court to levy and sell property of the defendant to satisfy a judgment.
WRIT OF POSSESSION:
A court order directing the sheriff to remove the tenant and his or her possessions within five days.
No Glossary Terms
YIELD:
The return on an investment or the amount of profit, stated as a percentage of the amount invested; the rate of return. Yield refers to the effective annual amount of income that is being accrued on an investment. The yield on income property is the ratio of the annual net income from the property to the cost or market value of the property. There are going-in, free and clear, cash on cash and in place vs. stabilized yields.
ZERO COUPON BONDS:
A single-payment bond that grows to its face value over a prescribed time period at a specific interest rate. All compound interest is tax-deferred until the bond is cashed.
ZEROS:
Refers to properties that have maximum debt placed on them after completing a 1031 exchange. The purpose of the zero is to free cash after completing a 1031 exchange for other uses.
ZONE:
A portion of a building controlled by one thermostat. In air conditioning design, zones are created to maximize environmental comfort by grouping together area with similar conditions, i.e. all exterior offices with a western exposure would constitute a zone.
ZONING:
The regulation of structures and uses of property within designated districts or zone. Zoning regulates and affects such things as use of the land, lot sizes, types of structure permitted, building heights, setbacks and density (the ratio of land area to improvement area).
ZONING ORDINANCE:
An exercise of police power by a municipality to regulate and control the character and use of property.
ZONING VARIANCE:
A zoning variance permits a change in the specifications required by the zoning ordinance.