Commercial Real Estate Terms
In a lease, the elimination of rent for a period of time.
Depreciation methods that allow a taxpayer to take faster write-offs than with straight-line during the early part of an asset’s useful life.
The sum of annual depreciation deductions taken to date. Also, accrued depreciation.
Adjustable Rate Mortgage (ARM)
A mortgage loan in which the interest rate is not constant over the life of the loan, but is adjusted periodically according to a predetermined formula or index.
The original cost of an asset, such as real estate, plus capital improvements, less accumulated depreciation and costs of sale. The taxable gain at the time of sale is, in general, the selling price less the adjusted basis.
Adjusted Gross Income (AGI)
Gross income less certain adjustments, including IRA, alimony, and Keogh deductions. Used in determining the investor’s passive loss allowance.
a) The process through which a loan is retired over time through periodic repayment of the principal.
b) The process of taking a partial annual tax deduction for an item that cannot be expensed in a single year. For example, points paid to secure a loan must typically be deducted (amortized) over the life of that loan payment plan which enables the borrower to reduce his debt gradually through monthly payments of principal.
Tenants that are considered “credit worthy” and attract or generate traffic for a retail facility (e.g. a supermarket in a neighborhood shopping center, a major chain or department store in a regional mall).
Annual Avg Daily Traffic (AADT)
This is the total volume of vehicle traffic for a highway or road for a year divided by 365 days.
Annual Debt Service (ADS)
The total of all payments on a mortgage loan, including both interest and principal, for a year.
The increase over time in the value of an asset due to economic factors rather than to improvements or additions.
A mortgage in which the purchaser of a property assumes Liability of an existing mortgage loan. Typically the purchaser takes over the existing balance, terms and payment schedule. Many mortgage loans contain a “due on sale” clause which prohibits assumption by requiring the original borrower to pay off the loan if he or she transfers title of the mortgaged property to a third party.
A provision in a loan which requires the principal balance to be paid off in a lump sum before the loan would be retired through normal amortization.
The starting point for computing gain or loss on an investment; typically, the original purchase price. See also, Adjusted Basis.
An asset’s original basis less accumulated depreciation.
Improvements that have been constructed to the specific desires and specifications of a particular owner or tenant (Custom Building). Typically a developer owns the land; they will enter into contract with a buyer, build the building to the buyer’s specs, and then sell the buyer the land and building. Often the user is a tenant on a long-term lease and the leased fee position is sold to an investor. Renovations are not considered “Build to Suit”.
An addition to a piece of real estate having a useful life of more than one year, or an improvement that is likely to prolong the life of the property. A capital addition is different from a repair, which maintains rather than increases the life of a property.
Gain from the sale or disposition of a capital asset, such as real estate. May be long term or short term.
Capitalization Rate (Cap Rate)
The ratio between a property’s net operating income and the sum of its purchase price (or value) and capital additions.
Cash Flow After Taxes (CFAT)
The cash flow before taxes, reduced by the tax liability that the property generates for the owner, or increased by the tax savings.
Cash Flow Before Taxes (CFBT)
During a given period, all of a property’s cash inflows less all of its cash outflows. Inflows are counted whether or not they must be included as taxable income and outflows are counted regardless of deductibility. Cash flow is not affected by a depreciation deduction, which is not a cash item. “Cash flow before taxes” ignores the property’s effects on the owner’s income tax liability.
The rate of return on an investment measured as the ratio between the cash flow before taxes and the initial cash investment.
Costs paid, typically to an attorney, for documentation and representation in connection with the purchase or sale of a piece of real estate. Title insurance is usually considered a closing cost, but real estate commissions, loan fees, prepaid interest and fire or liability insurance are not considered closing costs.
A fee paid, typically to a real estate agent or broker, for negotiating a loan, lease or sale.
For purposes of valuation, properties that are similar to the subject property and that have been recently sold or leased.
Commercial Real Estate
A multifamily residential, office, industrial, or retail property that can be bought or sold in a real estate market.
For lease purposes, the areas of a building (and its site) that are available for the non-exclusive use of all its tenants, such as lobbies, corridors, and parking lots.
Consumer price index (CPI)
An index published by the U. S. Bureau of Labor Statistics and widely used as a measure of inflation. The index estimates the cost of buying a fixed group of goods and services and compares that cost to the base year (1982) which was assigned an index value of 100. The CPI is commonly used in escalation clauses of commercial real estate leases so that the rent generated by those leases will keep pace with inflation. Also, cost-of-living index.
Common Area Maintenance (CAM)
Charges paid for the upkeep of areas designated for the common use and benefit of all tenants.. Tenants are typically charged for parking lot maintenance, snow removal, and common utilities.
Debt Coverage Ratio
The ratio between an income property’s annual net operating income and its annual debt service.
The total loan payment, including both interest and principal.
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.
Decline in value of a house due to wear and tear, adverse changes in the neighborhood, or any other reason.
The amount of the tax deduction that a property owner may take each year until he or she has written off the entire depreciable asset. In real estate, the physical structures are considered depreciable assets, but the land is not. Therefore, there is no depreciation allowance for the value of the land.
The compound interest rate used to reduce expected future cash flows to their estimated present value.
Platforms, located either on the exterior or interior of a building that are level with a truck to allow for loading/unloading of inventory from a truck.
AKA Grade Level – A grade-level entrance to the building that allows trucks to drive into, through or back into the entrance of a building. The drive-in can be built up to a loading dock with a temporary or permanent ramp.
The ends of a strip center, whether the configuration is linear, L-shaped, U-shaped, or other.
A clause in a real estate lease that provides for an adjustment to the rent, usually based on some external event such as a rise in the Consumer Price Index (CPI).
The difference between a property’s value and the balance of the mortgages and other debts against it.
Fair Market Value
The price at which a property would change hands from a willing seller to a willing buyer, where neither party is under a compulsion to sell or buy and where both have reasonable knowledge of all pertinent facts. Also, Market Value.
The first, or senior claim against an asset, as security for repayment of a debt.
A lease in which the lessee pays a fixed rental amount for the duration of the lease.
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).
A sum of money put aside so that it will be available to handle an extraordinary expense or improvement. For example, an investor may anticipate the need for a new roof five years after acquisition of a property, and place money into a reserve account in advance so that funds are available when needed.
General Partner (GP)
The person or entity in a limited partnership that bears unlimited liability and all of the management responsibility of that partnership.
The 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 measure 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.
A lease in which all expenses associated with owning and operating the property are paid by the landlord.
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.
Gross Operating Income (GOI)
A property’s annual Gross Scheduled Income, less allowances for vacancy and credit loss. Also, Effective Gross Income.
Gross Rent Multiplier (GRM)
A method of estimating or expressing a property’s value as a multiple of its gross rental income.
Gross Scheduled Income
The annual income of a property if all rentable space were in fact rented and all rent collected; the total potential income.
Real property leased to tenants and held for the purpose of generating ongoing rental income.
A lease in which the rental amounts adjusts accordingly to changes and/or movements in a price index, commonly the consumer price index.
Commercial properties that are used for the purposes of production, manufacturing, or distribution.
The loss of a currency’s purchasing power over time.
The annual rate at which a currency loses purchasing power.
The amount of cash invested at the time a property is purchased.
A mortgage loan in which the borrower makes periodic payments of interest only and pays the full principal balance at the end of the loan term.
Internal Rate of Return (IRR)
The rate of return that discounts all anticipated future net cash flows (including the reversion) back to a present value that equals the initial investment.
The lessor or owner of the leased property.
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.
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.
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.
A sale in which the buyer had a lease with an option to purchase and is now exercising that option. The date the option price was established is important in relation to the date of sale. If the date the sale price was established is over three years it’s considered a non-market deal.
The person renting or leasing the property. Also known as a tenant.
The person who rents or leases a property to another. Also known as a landlord.
Limited Partner (LP)
An investor in a limited partnership who typically has none of the management responsibility and whose liability is limited to the amount of his or her investment.
A partnership having a General Partner who manages the partnership’s investments and bears unlimited liability, and Limited Partners who have no management control and whose liability typically is limited to the amount of their investment.
Long Term Capital Gain
The gain on an asset held more than 12 months.
Marginal Tax Bracket
The rate at which the investor’s next dollar of income will be taxed.
Buildings that incorporate multiple uses within a single structure. The range of uses may include two or more of the following: office, hotel, retail (a major retail center, not just an office building with first floor retail space), residential and recreational/cultural.
Modified Internal Rate of Return (MIRR)
An alternative to conventional Internal Rate of Return (IRR). IRR will usually will fail to yield a result in a situation where there are negative cash flows. The MIRR calculation takes any negative cash flows, zeroes them out and discounts them at a safe rate back to day one of the investment period. The discounted amount is treated as additional capital needed on day one. MIRR also takes positive cash flows and compounds them forward to the sale year, using the reinvestment rate (also known as the risk rate).
A lien against a property that secures a mortgage loan or note.
The lender in a mortgage agreement.
The borrower in a mortgage agreement.
Housing units that accommodate more than one family or household.
Any type of building designed to accommodate two or more tenants.
Multiple-Use Office Space
Office space that can be used for a variety of purposes.
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)
A property’s Gross Operating Income less the sum of all operating expenses. NOI represents a property’s profitability before consideration of taxes, financing or recovery of capital.
Net Present Value (NPV)
The discounted value of all of a property’s future cash flows (including the reversion) less the initial cash investment.
Real property that does not satisfy the definition of Residential Property; property not primarily intended for use as dwellings.
A commercial property type used to maintain or occupy professional or business offices. Such properties typically house management and staff operations. The term office can refer to whole buildings, floors, parts of floors, and office parks. Office space that can be used for a variety of purposes is sometimes referred to as generic office space. Office properties may be classified as Class A, B, or C. Class A properties are the most functionally modern. Properties Classes B and C in the same market typically command lower rents because they are older and in need of modernization. They may not be as efficient or desirable as Class A properties because their design and condition causes functional problems.
Expense necessary for the maintenance of a piece of real property and to insure its continued ability to produce income. Loan payments, depreciation and capital expenditures are not considered operating expenses.
A property owner who occupies part or all of his or her property.
An operating expense that is passed on, in whole or in part, to a tenant.
A business or rental activity that the taxpayer does not materially participate in managing or running. See also, Passive Loss Allowance.
Passive Loss Allowance
The dollar amount of losses from passive-activity investments that an individual taxpayer may deduct against ordinary income. In general, losses from passive activities can only be used to offset income from other passive activities. As of this writing an exception exists for owners of rental real estate, who may deduct up to $25,000 of net losses from rental real estate investments in which they actively participate. This allowance is reduced for taxpayers with Adjusted Gross Income over $100,000.
Property that is movable, not permanently attached to the real estate. Appliances are personal property.
A fee paid to a lender for the lender’s service in making the loan. Typically a point is equal to one percent of the amount of the loan. Points are not deductible as an expense, but must be written off over the life of the loan.
Present Value (PV)
The discounted value of a series of future cash flows.
The amount of a loan, exclusive of any interest.
A statement or report of projections about the possible future performance of an income property. A pro forma uses assumptions as to future revenues, expenses, interest rates, tax considerations, etc.
The classification of commercial real estate based on its primary use. The four primary property types are: retail, industrial, office, and multifamily residential.
The process of retiring all existing loans against a property and replacing them with a new loan. In a cash-out refinance, the new loan is greater than the sum of the loans being retired and the borrower receives the difference in cash.
In reference to land use, they are restriction 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.
Rehabilitation Tax Credit
A credit that may be taken against one’s total tax liability for improvements made to certain properties. Credits of up to 20% of the improvements made to historic properties and up to 10% of the improvements made to non-historic properties are available as of this writing. A variety of conditions and limitations apply, including the dollar value of the improvements in relation to the property’s basis, the amount of time allowed for the project, certification requirements, passive loss limitations, alternative minimum tax considerations and others.
Rentable Square Feet
The portion of a rental property that may be leased to tenants.
Real estate designed and intended as dwellings, including single- and multi-family homes but not hotels or motels. A property that combines both residential and non-residential uses must derive at least 80% of its gross rental income from dwelling units to be considered residential for purposes of depreciation. If a mixed-use property is owner-occupied, then the fair-market value of the owner’s unit must be taken into account when determining the residential or non-residential status of the property.
A period of free rent given to the tenant by the lessor.
Properties used exclusively to market and sell consumer goods and services.
The value of an investment at the time of its resale.
An analysis where one or more independent variables is altered to determine the effect on a particular dependant variable. For example, one might test how different rental rates affect the cash flow before taxes or how different purchase prices affect the Internal Rate of Return. Also, What-If Analysis.
Short-term Capital Gain
The gain on an asset held 12 months or less.
The identification and evaluation of a site or sites to satisfy a given use or objective.
Site-specific factors, features, conditions, and 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).
The process of determining the best site for a specific use.
A depreciation method that allows the owner to write off an asset’s basis in equal amounts over its useful life. For example, if an asset were to have a 10-year useful life, the straight-line depreciation allowance each year would be 10 percent of the basis. Note that in the tax code as of this writing there exists a so-called half-month convention for real estate, where the taxpayer is allowed only one-half month depreciation in the month of acquisition and one-half month in the month of resale.
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.
An investment vehicle that can shield a part of an investor’s ordinary income from taxation.
A provision of the tax code (sec. 1031) that permits property owners to exchange like properties. If certain criteria are met, the parties can defer recognition of gain or loss and therefore also defer the tax that might have occurred in an outright sale.
A person or entity who has possession of the property through a lease. A tenant also many be referred to as a lessee.
Tenant Improvements (TI)
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.
Tenant-Paid Tenant Improvements (TPTI)
The total cost (outlay) of necessary tenant improvements paid by the tenant netted against any allowance provided by the landlord.
The number of periodic payments over which a loan is amortized.
A government obligation representing a virtually risk-free investment.
Total Effective Rate
The rate per square foot paid by the tenant over the entire period analyzed.
Total Effective Rent
The total dollar amount (cash flow) that the tenant actually will pay out of the entire period analyzed.
Triple Net (NNN)
A lease in which a tenant is responsible for all expenses associated with their proportional share of occupancy of the building.
The length of time, as specified in the tax code, over which an asset may be depreciated. The Useful Life for tax purposes is not necessarily the same as the actual physical life expectancy of a particular asset.
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 vacancy rate).
Vacancy and Credit Allowance
A deduction from the Gross Scheduled Income for losses due to unoccupied space and uncollected rent. The result is the Gross Operating Income, also called Effective Gross Income.
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.
Definitions provided by CoStar, REALTORS Commercial Alliance & MHCREAL