Commercial Real Estate Glossary & Definitions
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
Annual debt service
The total amount of principal and interest to be paid each year to satisfy the obligations of a loan contract
Assignment
A transfer in which all of the tenant's leasehold interest in a property goes to another party. Nevertheless, the original tenant remains liable unless released from the future obligations by the owner.
Average annual effective rate
The average annual effective rent divided by the total square feet
Average annual effective rent
The tenant's total effective rent divided by the lease term
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. Escalations are calculated from the annual base rate.
Build-to-suit
A contract in which the owner agrees to develop or finish a property or space to the specifications of the tenant. The tenant may partly carry the cost in the form of increased rent.
Capital Gain
Taxable income derived from the sale of a capital asset. It equals the sale 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
Otherwise known as the cap rate, it is the percentage that relates the value of the income-producing property to its future income, expressed as net operating income divided by purchase price.
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 Flow After Taxes (CFAT)
For commercial properties, it is calculated by taking a number of steps. The calculation below shows all of the steps involved to determine a property's cash flow after taxes:
Net Operating Income (NOI)
- Interest
- Cost Recovery
- Amortization of loan points
= Real Estate Taxable Income
x Investor's Marginal Tax Rate
= Tax Liability (Savings)
then......
Net Operating Income (NOI)
- Annual Debt Service
= Cash Flow Before Taxes
- Tax Liability (Savings)
= Cash Flow After Taxes
Cash Flow Before Taxes (CFBT)
Derived by taking the property's net operating income (NOI) and subtracting the annual debt service (if any). See example above
Common Area
Areas within a building and its site, such as lobbies, hallways, grounds, and parking lots that are available for non-exclusive use by all tenants
Common Area Maintenance
Charges the tenant pays for the upkeep of areas designated for use and benefit of all tenants. Cam charges are common in most multi-tenant commercial properties.
Cost Recovery
An annual deduction based on the class life of an asset
Demographics
Characteristics of human populations as defined by population size and density of regions, population growth rates, migration, vital statistics, and their effect on socioeconomic conditions.
Discount Rate
The percentage rate at which money or cash flows are discounted. The discount rate reflects both the market risk-free rate of interest and a risk premium. Also referred to as the opportunity cost.
Discounting
The process of reducing the value of money received in the future to reflect the opportunity cost of waiting to receive the money.
Effective Rental Income
The resulting income a property produces after estimaed vacancy and credit losses have been deducted from potential rental income
Efficiency Percentage
The relationship of useable area to rentable area on a given property. It is calculated by dividing useable square feet by rentable square feet.
Expense Stop
The level (or maximum amount) up to which the landlord will pay certain operating expenses. Amounts above the expense stop are the tenant's responsibility
Freestanding
A term used to describe industrial and commercial properties. The property type often is developed in an industrial park setting or as a build-to-suit on a selected piece of property. Freestanding properties usually are designed for manufacturing, distribution, assembly, packaging and similar uses. In commercial establishments providing goods and services in single and multiple-use buildings of various sizes, the larger, newer freestanding stores are also referred to as big boxes.
Fully amortized mortgage loan
A method of loan amortization in which equal periodic payments completely repay the loan
Gross Leasable Area (GLA)
The total floor area designed for tenant occupancy and exclusive use, including basements, mezzanines, and upper floors, is measured from the center line of joint partitions and from outside wall faces. GLA is that area on which a tenant pays rent and is the area that produces income
Gross Lease
A lease in which the landlord pays all expenses associated with owning and operating the property. This is in contract to a net lease.
Gross Operating Income (GOI)
The total income generated by property operations before payment of operating expenses. It is calculated from the potential rental income, less vacancy and collections, plus other income not affected by vacancy.
Ground Lease
A lease of the land only and usually for a relatively long period of time. The tenant builds the building on the leases property but owns only the improved property and not the land that it sits on.
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.
Inventory
The supply or stock of a given commodity or a listing thereof
Landlord
The owner of a leased property
Lease
A contract stating the relationship between landlord and tenant that grants a right to exclusive possession or use of property, usually in return for a periodic payment called rent
Lessee
The party renting or leasing a property
Lessor
The party who rents or leases a property to another
Leverage
The use of borrowed funds to finance a portion of the cost of an investment
Liquidity
The ability to convert an investment into cash quickly without loss of principal
Metropolitan Statistical Area (MSA)
Generally, the area in and around a major city. The Office of Management and Budget defines and MSA as city with a population of at least 50,000, or an urbanized area with a population of at least 50,000 within a total metropolitan population of 100,000
Mortgage
The legal document that secures property for the repayment of funds borrowed to purchase real estate
Neighborhood Center
A center designed to provide convenience shopping for the day-to-day needs of consumers in the immediate neighborhood. Supermarkets and drug stores anchor many of these centers. Stores supporting these anchors offer pharmaceuticals and health related products, sundries, snacks, and personal services. A neighborhood center usually is configured as a straight-line strip with no enclosed walkway or mall area, although a canopy may connect the storefronts
Net Lease
A lease in which the tenant pays, in addition to the base rent, all operating expenses such as real estate taxes, insurance premiums, and maintenance costs.
Net operating income (NOI)
The potential rental income plus other income, less vacancy, credit losses, and operating expenses
Obsolescence
The inadequacy, disuse, out-datedness, or non-functionality of facilities, infrastructure, products, or production technologies due to the effects or time, changing market conditions, or decay. This factor is considered in depreciation to cover the decline in value of fixed assets due to the invention and adoption of new production technologies or changing consumer demand
Operating Expense Stop
A negotiable amount at which the owner’s contribution to operating expenses stop. It also can be stated as the amount above which the tenant is responsible for its pro-rata share of operating expenses.
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
Opportunity Cost
The cost of selecting one alternative represented as the benefit foregone from the next best alternative
Partially Amortized Mortgage Loan
A loan in which the payments do not repay the loan over its term, so a lump sum (balloon) is required to repay the loan at the end of the term
Points
Charges prepaid by the borrower upon origination of the loan. One point equals one percent of the loan amount. Also known as a loan point
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
The sum 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
Principal
The portion of a loan payment used towards reducing the original loan amount
Promissory Note
The written promise to repay the mortgage loan that accompanies the mortgage
Rent Concession
A period of free rent or other allowance that the owner gives to the tenant
Rentable Area
The computed area of a building defined by the Building Owners and Managers Association guidelines and typically measured in square feet, including both core/structure and useable area. The actual square footage area for which the tenant will pay rent, it is the gross area of an office building, less uninterrupted vertical space (such as stairways and elevators). Unlike useable area, rentable area includes common areas such as lobbies, restrooms and hallways, as well as the measurement of structural columns and architectural projections
Retail Property
Property used to market and sell consumer goods and services. Types of retail properties include: community centers, fashion/specialty centers, neighborhood centers, outlet centers, power centers, regional center, superregional center and them/festival center
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