COMMERCIAL REAL ESTATE TERMS

ABSORPTION The amount of inventory or units of a specific commercial property type that become occupied during a specified time period (usually a year) in a given market, typically reported as the absorption rate. ADA Americans With Disabilities Act passed by Congress in 1994 with intent to provide persons with disabilities accommodations and access equal to or similar to that of the general public.

AGENCY Any relationship in which one party (agent) acts for or represents another (principal) under the authority of the latter. Agency involving real property should be in writing, such as listings, trusts, powers of attorney, etc.

ALLOWANCE A set dollar amount provided by the Landlord under a lease to be used by the Tenant for a specific purpose. Examples include allowances for tenant improvements, moving expenses, design fees, etc.

AMORTIZATION The repayment of loan principal through equal payments over a designated period of time consisting of both principal and interest.

ANNUAL DEBT SERVICE (ADS) The total amount of principal and interest to be paid each year to satisfy the obligations of a loan contract.

ANNUAL PERCENTAGE RATE (APR) The true annual interest rate payable for a loan over a period of one year, taking account of all charges made to the borrower, including compound interest, discount points, commitment fees, mortgage insurance premiums and taking into account the time at which principal is repaid (especially when payments of principal are made by installments throughout the year, but interest is charged on the outstanding principal at the beginning of the year), but not the actual expenses incurred by the lender in making the loan and recharged to the borrower. Credit purchase agreements and bank personal loans are frequently made on the basis that a nominal interest rate is charged on the original principal as if the whole balance were outstanding throughout the term of the loan, but the loan and interest is made repayable by equal installments, usually monthly. Thus, the borrower is paying interest on capital he has effectively repaid. For example, on a loan of $100 at a nominal interest of 8% the borrower may pay 12 installments during the year of 108/12 = $9.00 per month, in arrears; on the basis the nominal or ‘add on’ interest rate of 8% produces an APR of 14.45%. The APR may be calculated by assessing an internal rate of return. *Encyclopedia of Real Estate Terms 3rd edition, Damien Abbott http://deltaalpha.com

ASSESSED VALUE The value of real property established by the tax assessor for the purpose of levying real estate taxes.

ASSIGNMENT A transfer to another of any property, real or personal, or any rights or estates in said property. Common assignments are of leases, mortgages, deeds of trust, but the general term encompasses all transfers of title.

AVERAGE ANNUAL EFFECTIVE RENT The tenant’s total effective rent divided by the lease term.

BALLOON PAYMENT The final payment of the balance due on a partially amortized loan.

BASE RENT The minimum rent due to the landlord. Typically, it is a fixed amount. This is a face, quoted, contract amount of periodic rent. The annual base rate is the amount upon which escalations are calculated.

BASIS The total amount paid for a property, including equity capital and the amount of debt incurred.

BOMA Building Owners and Management Association. BOMA publishes the definition of rentable and usable area, which is used to determine the square footage leased in most commercial office buildings.

BUILDING CLASSES – Buildings are often classified as follows:

Class “A” Office – A newly built, prestigious building competing for premier office users, with above-average rental rates for the area, having a high-quality standard of finishes, state of the art systems, exceptional accessibility and a definite market presence as well as on-site amenities that may include on-site property management, exceptional telecommunication capabilities, high-efficiency internal mechanical systems, electronic energy management, advanced safety and security systems, etc.

Class “B” Office Building – A relatively new property with some, but not all, of the amenities of a Class A property.

Class “C” Office Building – Typically an older properties with few of the amenities listed above. Often located in less desirable areas.

CAM CHARGES See Common Area Maintenance

CAP RATE See Capitalization Rate

CAPITAL EXPENDITURES 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—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.

CAPITAL GAIN Taxable income derived from the sale of a capital asset. It is equal to the sales price less the cost of sale, adjusted basis, suspended losses, excess cost recovery, and recapture of straight-line cost recovery.

CAPITAL MARKET The supply and demand for resources to invest in real estate and other investments.

CAPITALIZATION RATE A percentage that relates the value of an income-producing property to its future income, expressed as net operating income divided by purchase price. Also referred to as cap rate.

CASH FLOW The net cash received in any period, taking into account net operating income, debt service, capital expenses, loan proceeds, sale revenues, and any other sources and uses of cash.

CASH-ON-CASH RATE A return measure that is calculated as cash flow before taxes divided by the initial equity investment.

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

CERTIFICATE OF OCCUPANCY A statement issued by a local government verifying that a newly constructed building is in compliance with all codes and may be occupied.

CLOSE Third stage of four-stage transaction management process pertaining to bringing the parties together and consummating an agreement. The acronym CLOSE represents the contingencies, legal instruments, obstacles, signatures, and execution involved in the close stage.

COMMON AREA The areas of a building (and its site) that are available for the nonexclusive use of all its tenants, such as lobbies, corridors, and parking lots.

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.

COMPOUND INTEREST Interest computed on the original principal and accumulated interest.

COST The actual dollar amount paid for a property or the amount needed to build or improve it at a specified time in the future.

COST APPROACH A method of determining the market value of a property by evaluating the costs of creating a property exactly like the subject.

DEBT-COVERAGE RATIO (DCR) Ratio of net operating income to annual debt service. Expressed as net operating income divided by annual debt service.

DEPRECIATION The loss of utility and value of a property.

DEMISED AREA The walled off and secured area of a leased space, separated from spaces leased to others (by a “demising” wall). Also measured as useable area.

DISCOUNT RATE The rate of interest used in a present value analysis representing the “time value of money”.

DIVERSIFICATION A method of reducing risk by investing in unrelated (uncorrelated) assets.

DUE DILIGENCE The process of examining a property, related documents, and procedures conducted by or for the potential lender or purchaser to reduce risk. Applying a consistent standard of inspection and investigation one can determine if the actual conditions do or do not reflect the information as represented.

EFFECTIVE An amount after a base amount has been adjusted for concessions, allowances, and costs.

ESCALATION A clause in a lease providing for an increased rental rate at a future time.

ESTOPPEL CERTIFICATE An instrument which itself prevents individuals from later asserting facts different from those contained in the document.

EXCLUSIVE LISTING An agreement signed by the owner of a property for a real estate broker to lease and/or sell their property.

EXCHANGE Under Section 1031 of the Internal Revenue Code, like-kind property used in a trade or business or held as an investment can be exchanged tax-deferred. Under a fully qualified Section 1031 exchange, real estate is traded for other like-kind property. All capital gains taxes are deferred until the newly acquired real estate is disposed of in a taxable transaction. The underlying philosophy behind the deferral of capital gains taxes is that taxation should not occur as long as the original investment remains intact in the form of (like-kind) real estate (like-kind refers to real property as such, rather than the quality or quantity of property).

FAIR VALUE OF AN ASSET (OR LIABILITY) The amount at which the asset (or liability) could be bought (or incurred) or sold (or settled) in a current transaction between willing parties, that is, other than in a forced or liquidation sale. (Real Estate Information Standards)

FEASIBILITY ANALYSIS The process of evaluating a proposed project to determine if that project will satisfy the objectives set forth by the agents involved (including owners, investors, developers, and lessees).

FIXED EXPENSES Costs that do not change with a building’s occupancy rate. They include property taxes, insurance, and some forms of building maintenance.

FIXED LEASE A lease in which the lessee pays a fixed rental amount for the duration of the lease.

FLEX SPACE Space that is flexible in terms of what it can be used for (for example, space that could be utilized for industrial or office activities).

FUTURE VALUE (FV) The amount to which money grows over a designated period of time at a specified rate of interest.

GEOGRAPHIC INFORMATION SYSTEM(S) (GIS) System(s) (usually computer-based) used for capturing, handling, storing, retrieving, managing, manipulating, and displaying geographic information or geo-coded data.

GROSS AREAThe entire floor area of a building or the total square footage of a floor.

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. Also see net lease.

GROSS OPERATING INCOME The total income generated by the operations of a property before payment of operating expenses. It is calculated from potential rental income, plus other income affected by vacancy, less vacancy and credit losses, plus other income not affected by vacancy. The Annual Property Operating Data form or the Cash Flow Analysis Worksheet can be used to calculate a property’s gross operating income.

GROSS RENT MULTIPLIER (GRM) A method investors may use to determine market value. This method calculates the market value of a property by using the gross rents an investor anticipates the property will produce at end of year 1 multiplied by a given factor (known as the gross rent multiplier extracted from the marketplace).

GROUND LEASE A lease of the land only. Usually the land is leased for a relatively long period of time to a tenant that constructs a building on the property. A land lease separates ownership of the land from ownership of buildings and improvements constructed on the land.

HIGH-TECH Economic sectors and activities oriented toward the creation and production of high technology products and the use of advanced designs, techniques, or devices in fields like electronics, optics, lasers, aerospace, computers, semiconductors, and telecommunications.

HIGHEST AND BEST USE The reasonably probable and legal use of vacant land or an improved property, which is physically possible, appropriately supported, financially feasible, and that results in the highest value.

HVAC Heating, Ventilation, Air Conditioning. A general term encompassing any system designed to heat and cool a building in its entirety, as opposed to a space heater.

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.

LANDLORD The lessor or owner of the leased property.

LEASE A contract that creates the relationship of landlord and tenant. A contractually binding agreement that grants a right to exclusive possession or use of property, usually in return for a periodic payment called rent. *Encyclopedia of Real Estate Terms 3rd edition, Damien Abbott http://deltaalpha.com

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.

LESSEE 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.

LIQUIDITY The ability to convert an investment into cash quickly without loss of principal.

LOAD FACTOR The ratio of  rentable area to useable area. The load factor is a gauge by which a user can evaluate different sites with comparable rents.

LOAN-TO-VALUE RATIO (L/V) The amount of money borrowed in relation to the total market value of a property. Expressed as the loan amount divided by the property value.

MARKET VALUE The most probable price that a property would bring in a competitive and open market under fair sale conditions.

NET LEASE A lease in which the tenant pays, in addition to rent, all operating expenses such as real estate taxes, insurance premiums, and maintenance costs. Also see gross lease.

NET OPERATING INCOME (NOI) The potential rental income plus other income, less vacancy, credit losses, and operating expenses.

NET PRESENT VALUE (NPV) The sum of all future cash flows discounted to present value and netted against the initial investment.

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.

PERCENTAGE LEASE A lease in which the rent amount is based on a percentage of gross sales (monthly or annually) made by the tenant.

POTENTIAL RENTAL INCOME The total amount of rental income for a property if it were 100 percent occupied and rented at competitive market rates.

PRESENT VALUE (PV) The sum of all future benefits or costs accruing to the owner of an asset when such benefits or costs are discounted to the present by an appropriate discount rate.

PRICE The dollar amount that was offered, asked, or actually paid for a property.

PRINCIPAL The portion of a loan payment used toward reducing the original loan amount.

RATE OF RETURN The percentage return on each dollar invested. Also known as yield.

REAL ESTATE INVESTMENT TRUST (REIT) A corporation, business trust, or association that is (i) managed by one or more trustees or directors, and pools the funds of a large number of investors in order to place money exclusively in real estate, whether by direct investment, by financing, by leasing arrangements, or by a combination of such methods; and (ii) has a tax status that enables the beneficial owners to be subject to only one level of taxation. *Encyclopedia of Real Estate Terms 3rd edition, Damien Abbott http://deltaalpha.com

RENT CONCESSION A period of free rent given to the tenant by the lessor.

RENTABLE AREA The computed area of a building as defined by the guidelines of  BOMA and typically measured in square feet, including both core/structure and useable area. The actual square foot area for which the tenant will pay rent. It is the gross area of an office building, less uninterrupted vertical space (such as stairways and elevators). Unlike useable area, rentable area includes common areas such as lobbies, restrooms, and hallways as well as the measurement of structural columns and architectural projections.

RENT ESCALATORS Items specified in a lease such as base rent, operating expenses, and taxes that may increase by predetermined amounts at stated intervals or by a constant annual percentage.

REPLACEMENT COST The estimated cost to construct, at current prices, a building with utility equivalent to the building being appraised, using modern materials and current standards, design, and layout. [Appraisal Institute]

SERVICE AREA The geographical area that encompasses/delineates the principal share of clients or customers served by the tenants of the property (a concept that becomes less applicable as the service area of the customer base increases).

SITE ANALYSIS The identification and evaluation of a site or sites to satisfy a given use or objective.

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.

SUBLEASE A lease in which the original tenant (lessee) sublets all or part of the leasehold interest to another tenant (known as a subtenant) while still retaining a leasehold interest in the property. Also known as a sandwich lease due to the sandwiching of the original lessee between the lessor and the subtenant.

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 Preparation of leased premises prior to or during a tenant’s occupancy, which may be paid for by either the landlord, the tenant, or both.

TIME VALUE OF MONEY (TVM) An economic principle recognizing that a dollar today has greater value than a dollar in the future because of its earning power.

USEABLE AREA  Rentable area, less certain common areas that are shared by all tenants of the office building (such as corridors, storage facilities, and bathrooms). Also defined in office buildings as the area that is available for the exclusive use of the tenant. Useable area = rentable area — building efficiency percentage.

VACANCY The number of units or space (of a specific commercial type) that are vacant and available for occupancy at a particular point in time within a given market (usually expressed as a vacancy rate).

VACANCY RATE The percentage of the total supply of units or space of a specific commercial type that is vacant and available for occupancy at a particular point in time within a given market.

VARIABLE EXPENSES Costs, such as utilities, that vary with a building’s occupancy rate.

YIELD A measure of investment performance that gauges the percentage return on each dollar invested. Also known as rate of return.

ZONING The designation of specific areas by a local planning authority within a given jurisdiction for the purpose of legally defining land use or land use categories.