Glossary - Commercial Real Estate Terms
-- A
Arbitrage
In economics and finance, arbitrage is the practice of taking advantage of a price difference between two or more markets: striking a combination of matching deals that capitalize upon the imbalance, the profit being the difference between the market prices. In simple terms, it is the possibility of a risk-free profit after transaction costs.
Active income
Income from salary, wages, tips, commissions, and activities in which the taxpayer materially participates. Also see passive income.
Add-on factor
The ratio of rentable to useable square meter. Also known as the load factor and the rentable-to-useable ratio.
Adjusted basis
The original cost basis of a property plus capital improvements, less total accumulated cost recovery deductions, and partial sales taken during the holding period.
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.
Annuity
Regular fixed payments or receipts over a designated period of time.
Appreciation
An investment’s increase in value.
Average annual effective rent
The tenant’s total effective rent divided by the lease term.
-- B
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.
Break-even point
The stage at which an investment produces an income that is just sufficient to cover recurring expenditure. For an investment in real property, the point at which gross income is equal to normal operating expenses, including debt service (the stage at which the next cash flow becomes positive). Also known as the default point.
Business risk
The uncertainty associated with the possible profit outcomes of a business venture.
Buy/rent threshold
The point at which there is a recognizable shift of expenditure allocations away from owneroccupied premises and to the rental housing market (or vice-versa) as a result of changing market conditions.
-- C
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.
Capital tax
Any tax on a change in capital value (including capital gains tax, estate tax, or inheritance tax); as distinguished from a tax on income.
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 proceeds from sale
The sales price less sales costs, mortgage balance, and tax liability on sale. Also known as sales proceeds after tax.
Commercial real estate
Any multifamily residential, office, industrial, or retail property that can be bought or sold in a real estate market.
Common area
For lease purposes, 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.
Comparative advantage
The principle that cities or regions tend to produce those items or support those activities for which they have the greatest advantage over other areas as defined by the factors of production, demand, supporting industries, and quality of life considerations, as defined in relation to human, financial, and physical resources, and opportunity costs.
Compound interest
Interest computed on the original principal and accumulated interest.
Contract rent
The total rental obligation, expressed in euros, as specified in a lease. Also known as base rent.
Cost of capital
See weighted average cost of capital.
Cost of occupancy
Expenditures that are required to assume and maintain occupancy of a space. Such expenditures include rent and/or mortgage payments, and recurring costs, such as real estate taxes, repairs, operating expenses, and other outgoings directly resulting from the use of the property.
-- D
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.
Demand
The volume or quantity of a product or service purchased, or willing to be purchased, in relation to price.
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.
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 see opportunity cost.
Discounted effective rent
The cash flows over the term of the lease, discounted to the present value.
Diversification
A method of reducing risk by investing in unrelated (uncorrelated) assets.
Downtown start-up-hubs
Districts with individual sites established in the city centre and which function as demonstrators for a wider platform of innovation.
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.
-- E
Economic characteristics
Attributes of the workforce, including production and employment activities.
Economic obsolescence
The reduction in a property’s value due to external circumstances such as legislation or changes in nearby property use.
Effective
An amount after a base amount has been adjusted for concessions, allowances, and costs.
Efficiency
A measure of the capacity or effectiveness of space to produce the desired results with a minimum expenditure of time, money, energy, and materials.
Environmental conditions
Features or state of the physical environment and the surroundings, factors, or forces which influence or modify that environment.
Environmental impacts
The repercussions of an activity or specific land use on the physical/social environment as a consequence of emissions, waste disposal, water and power useage, etc.
Equity lease
A type of joint venture arrangement in which an owner enters into a contract with a user who agrees to occupy a space and pay rent as a tenant, but at the same time, receives a share of the ownership benefits such as periodic cash flows, interest and cost recovery deductions, and perhaps a share of the sales proceeds.
Equity yield rate
The return on the portion of an investment financed by equity capital.
Expected value (EV)
The sum of the weighted averages of all possible outcomes of a probability distribution. Probability distribution is the collection of all possible outcomes for an event and their corresponding probabilities of occurrence. The probabilities of occurrence for each possible outcome are used as the weights. The sum of each possible value multiplied by its probability of occurrence equals the EV of the outcome. EVs can be calculated for any type of outcome the investor chooses to analyze: net operating incomes, after-tax cash flows and rates of return (IRRs).
-- F
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.
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).
Financial leverage
The use of borrowed funds to acquire an investment.
Financial risk
The possible change in an investment’s ability to return principal and income.
Flex space
Space that is flexible in terms of what it can be used for (for example, space that could be utilised for industrial or office activities).
Forecast
An estimate or prediction of a future condition or outcome.
Future value (FV)
The amount to which money grows over a designated period of time at a specified rate of interest.
-- G
Gap analysis
An evaluation of the difference in the demand and supply of space for a particular type of commercial property in a given market area.
Generic space
Commercial space that can be used for a variety of purposes.
Globalization
The condition of being or becoming globalized. A concept used to recognize cross-jurisdictional interdependencies and the continuing integration of local, regional, and national economies.
Government incentives
Concession given or measures taken by local or regional government to attract firms or investment to a given locality for the purposes of promoting economic growth and encouraging development.
Gross area
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. GLA is that area on which tenants pay rent; it is the area that produces income.
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 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).
-- H
Hedging
Protecting oneself against negative outcomes.
Household
A housing unit or residence at a given location that is occupied by one or more persons.
Housing demand
The total number of housing units demanded in a given market, defined as occupied household units divided by one minus the vacancy allowance for that market.
-- I
Imbalances
Unstable or non-sustainable 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.
Income capitalisation approach
A method to estimate the value of an income-producing property by converting net operating income into a value. The cap rate is divided into the net operating income to obtain the estimated value.
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.
Initial investment
The outlay of cash needed to acquire an investment.
Innovation district
The district where companies of different sizes cluster and connect with other start-ups, incubators and accelarators. Some innovation districts are heavily planned and scripted, whereas others have emerged organically.
Insurable value
The value of the portions of the property that are physically destructible.
Interest-only loan
A method of loan amortization in which interest is paid periodically over the term of the loan and the entire original loan amount is paid at maturity.
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.
Investment value
The value to a specific investor, based on that investor’s requirements, tax rate, or financing.
-- L
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.
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.
Leasing
A means of obtaining the physical and partial economic use of a property for a specified period without obtaining an ownership interest.
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.
Leverage
The use of borrowed funds to finance a portion of the cost of an investment.
Lifestyle characteristics
Intangible characteristics of a local economy that define and shape the quality of life element and the social and cultural identity of the local population.
Liquidation value
The likely price that a property would bring in a forced sale (foreclosure or tax sale).
Liquidity
The ability to convert an investment into cash quickly without loss of principal.
Load factor
The ratio of rentable area to useable area.
Loan balance
The amount of money remaining to be paid on an amortizing loan at a given time.
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.
Location analysis
The process of evaluating whether a general location meets the requirements of being both possible and practical as defined on the basis of technical and functional components.
-- M
Macroeconomy
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).
Management
The ability to monitor the performance of an investment and make changes as needed.
Managing risk
The steps taken by an investor or manager to control or reduce investment risk.
Marketability
The ability to sell or lease a property quickly. Marketability deals with the appeal and demand for a property, good, or service.
Market pricing
The pricing of commodities (including rental rates of various types of commercial properties) as determined by the forces and factors of influence operating in a market.
Market risk
The possibility that downward market trends will reduce an investment’s market value.
Market value
The most probable price that a property would bring in a competitive and open market under fair sale conditions. Market value also refers to an estimate of this price.
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 (or sample) when the values are arranged in order (by size ranking, in ascending or descending order).
Moving expenses
The cost incurred by the tenant to move into the new space. The landlord may pay a portion or all, depending on what is negotiated in the lease.
-- N
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.
-- O
Obsolescence
In reference to the inadequacy, disuse, outdated or non-functionality of assets, facilities, infrastructure or technologies due to effects of time, changing market conditions or decay.
Occupancy cost
The actual amount paid out by the tenant to occupy the space.
Office property
A commercial property type used to maintain or occupy professional or business offices. Office properties may be classified as Class A, B, or C. Class A properties are the most functionally modern.
Operating expenses
Cash necessary to operate and maintain a property. Examples of operating expenses in commercial real estate include taxes, insurance, property management, 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 is the benefit foregone from the next best alternative.
Outlet centre
A retail property type usually located in rural or occasionally in tourist locations. Outlet centres consist mostly of manufacturers’ outlet stores selling their own brands at a discount.
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 (for example, excess supply).
Owning
A means of obtaining the full economic use of a property for an unspecified period by obtaining an ownership interest.
-- P
Passive income
Income from rental activity, limited business interests, or other activities in which the investor does not materially participate.
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 money amount. It is frequently found in retail leases.
Perfect market
A market in which the products are homogenous, there is complete information, and no buyers or sellers may influence the market.
Physical limitations
Limitations imposed by the physical size, shape, or characteristics of a property or its level of development.
Pipeline
New property assets in the process of being added to the market by a specified forecast period.
Portfolio income
Income from interest, dividends, royalties, or the disposition of property held for investment.
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 money 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.
Property type
The classification of commercial real estate based on its primary use. The four primary property types are: retail, industrial, office, and multi-family residential.
Proprietary data
Information obtained (usually at a cost) from private sources or firms that hold the exclusive rights to manufacture and distribute information to a targeted audience.
-- R
Range
The maximum distance consumers are willing to travel to purchase a good or service from a given establishment or location.
Rate of return
The percentage return on each dollar invested. Also known as yield.
Real estate
See commercial real estate.
Real estate cycles (phases)
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 investment trust (REIT)
An investment vehicle in which investors purchase certificates of ownership in the trust, which in turn invests the money in real property and then distributes any profits to the investors. The trust is not subject to corporate income tax as long as it complies with the tax requirements for a REIT.
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 of units in most real estate markets.
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 or an increase in demand for commercial real estate. 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.
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.
Re-imagined urban areas
Districts with looser collectives of opportunist small businesses and sometimes larger companies, either in de-industrialising waterfronts or low-to-medium cost inner-city areas.
Rent concession
A period of free rent given to the tenant by the lessor.
Rentable area
The actual area of a building for which the tenant will pay rent. It is the gross area 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.
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.
Residential property
Single- or multifamily housing units that are used, serve, or are designed as a place of residence.
Retail property
Properties used exclusively to market and sell consumer goods and services.
Risk
The probability that actual cash flows from an investment will vary from the forecasted cash flows.
-- S
Sale cost
The brokerage commissions and fees, and any additional transaction costs that are incurred during the sale of the property.
Sale-leaseback
A leasing and financing strategy in which a property owner sells its property to an investor, then leases it back. This strategy frees capital that otherwise would be frozen in equity.
Sales volume
The total amount of sales/revenue generated by a retail outlet or facility in a given time period.
Securitization
The phenomenon of indirectly investing in real estate markets in ways that minimize risk. Investments made collectively with pooled money or the use of investment funds, such as mortgage backed securities sold on the secondary financial market. The opposite to direct investments where investors own property or hold mortgages.
Sensitivity analysis
The process of recalculating outcomes under alternative assumptions to determine the impact of the variable under analysis.
Service area
The geographical area that encompasses the principal share of clients or customers served by the tenants of the property.
Sinking fund
A fund designed to accumulate a designated amount of money over a specified period of time.
Site selection
The process of determining the best site for a specific use.
Standard deviation
A measure of the amount of dispersion or variation of data points or values about the mean.
Sublease
A lease in which the original tenant (lessee) sublets all or part of the leasehold interest to another tenant while still retaining a leasehold interest in the property.
Sunk costs
Investment costs that are committed and cannot be recovered.
Supply
The amount of property that will be made available for sale or rent at a given price or rental rate.
-- T
Target market
Likely users or investors whose needs match the property’s features.
Taxation
How an investment is affected by tax laws and codes.
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 (TI)
The cost to prepare and fit out leased premises prior to or during a tenant’s occupancy, which is paid by either the landlord or the tenant or both if an allowance is provided by the landlord.
Time value of money (TVM)
An economic principle recognizing that a currency unit today has greater value than the same currency unit in the future because of its earning power.
Transaction management process
A continuous, cyclical four-stage process in which a transaction manager is involved with qualifying, matching, closing, and adding value for clients.
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.
-- U
Urban system (city as a system)
A complex and structured urban environment or system composed of highly diverse, interacting and interdependent parts and activities aggregated or organized in such a way as to serve a common purpose.
Urbanising science parks
Districts in suburban or out-of-town areas, through enhanced density, housing, transport links and new amenities.
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). The area that is available for the exclusive use of the tenant.
-- V
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).
Variable
A measurable attribute of a person, place, property, location, or other phenomenon of interest, whose value may vary from observation to observation.
-- W
Weighted average cost of capital (WACC)
The average cost of capital (whether equity or debt), taking into account the relative proportions of each source of capital.
-- Y
Yield
A measure of investment performance that gauges the percentage return on each dollar invested. Also known as rate of return.
-- Z
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.