130 plain-English definitions of the commercial real estate terms, abbreviations, and concepts professionals use every day. Search the list, or jump to a letter.
The total depreciation that has been taken for tax purposes each year. This depreciation impacts the capital gain tax on sale of the property. Example: A property has had $2,000 of depreciation every year for the past five years. If the property is sold at the end of year 5, the accumulated depreciation is 5 x $2,000 or $10,000.
A land measure equal to 43,560 square feet. It is also equivalent to 4,840 square yards, 4,047 square meters, 0.4047 hectare, 160 square rods, or 10 square chains. A square mile or section contains 640 acres.
A mortgage loan in which the interest rate is adjusted periodically based on a specified index or formula. ARMs may include a limit on the amount that the interest rate can rise or fall in a given year as well as a limit on the total amount the rate can rise or fall over the life of the loan. Adjustable rate mortgages often have an initial interest rate that is lower than fixed rate mortgages because the risk of interest rate change is partially borne by the borrower with an adjustable rate loan.
In income tax accounting, the amount used as the starting point for identifying capital gain on resale of a property. Adjusted basis can be calculated as the original cost plus any additional capital investment in the property minus accumulated depreciation or cost recovery. Also called basis. Example: A property is purchased for $800,000. An additional $50,000 is invested in the property, and accumulated depreciation equals $110,000. The adjusted basis = $800,000 + $50,000 - $110,000 = $740,000.
The estimated sales price of a comparable property after additions and/or subtractions have been made to the actual sales price to allow for differences between the comparable and the subject property transaction. This is what the comparable would have sold for if it had possessed all the characteristics of the subject property as of the effective date of the appraisal.
Additions and/or subtractions made to the actual sales price of a comparable property to allow for differences between the comparable and the subject property transaction, used in the direct sales comparison approach to appraisal.
The cash flow that remains from net operating income and net resale proceeds after deduction for annual debt service, loan repayment, and all ordinary income taxes. Example: NOI $20,000 - Debt Service $5,000 - Income Taxes $5,000 = ATCF $10,000.
The annualized rate of return that discounts all expected after-tax cash flows to a present value equal to the original equity investment. Represents the internal rate of return on equity after taxes.
The annualized rate of return calculated after income taxes are deducted. It is the rate that makes the present value of the after-tax cash flows from operations and resale equal to the initial equity investment.
The process of retiring a debt through repayment of principal. Occurs when the payment on the debt exceeds the required interest payment. Also refers to annual deductions allowed in the calculation of federal income taxes for items such as loan points paid on income property.
The length of time over which periodic principal repayments are made to pay off a loan in its entirety.
The total mortgage payments, including interest and principal, required in one year by a particular loan or for a particular property.
The value of a property according to tax rolls on which ad valorem taxes are based.
The minimum rent stipulated in a lease. Typically associated with leases that also allow for overage rent.
Income that remains from net operating income (NOI) after debt service is paid, but before ordinary income tax on operations is deducted. Also called equity dividend or pre-tax cash flow. Example: NOI $20,000 - Debt Service $5,000 = BTCF $15,000.
The annualized rate of return that discounts all expected before-tax cash flows to a present value equal to the original equity investment. Represents the internal rate of return on equity before taxes.
The annualized rate of return on capital that is generated or capable of being generated within an investment or portfolio, calculated before income taxes.
A broker's professional estimate of a property's market value, drawn from comparable sales, income, and market analysis. A BOV supports pricing and listing decisions and is less formal than a certified appraisal.
The cash outflow or creation of a liability used to invest in an asset such as land, buildings, machinery, and equipment; as opposed to daily operating expenses.
The taxable profit derived from the sale of a capital asset. Equals the sales price minus total sales costs and the adjusted basis; where adjusted basis equals original cost plus capital additions minus accumulated depreciation.
The tax rate applied to capital gains, usually referring to long-term gains for investments held more than one year. Typically lower than the ordinary income tax rate.
A ratio representing the relationship between a property's net operating income and its value. Example: A property produces NOI of $12,000 and is valued at $120,000. Cap rate = $12,000 / $120,000 = 10%. Also called cap rate.
Annual amounts available to an investor after subtracting debt service from Net Operating Income. Capital expenses, capital costs, and capital reserves are also deducted. Can be calculated on an after-tax basis by subtracting federal income taxes.
A rate of return defined as cash flow after taxes divided by total dollars of equity investment.
A rate of return defined as cash flow before taxes divided by total dollars of equity investment. Assumed to be before taxes unless otherwise specified.
Properties that have been recently sold or leased and are similar to a subject property. Used to estimate a value for the subject property. Also called comparable sales or comparable properties.
An adjustment used in leases where the rent payment is periodically adjusted by a percentage of the increase in the consumer price index (CPI), protecting the lessor from unexpected inflation increases.
The periodic payment specified in a loan contract that covers the repayment needed to amortize the outstanding debt, including both principal and interest.
The ratio of annual net operating income divided by annual debt service. Lenders typically require a minimum DCR (e.g., 1.2). Example: NOI $12,000 / Debt Service $10,000 = DCR of 1.2.
Information about the human population, especially in reference to changes in size, density, distribution, and characteristics of the population in a specific area.
The total time period over which the depreciation of an asset may be allocated for tax purposes. May differ from actual estimated service life.
When a property is sold, the amount of gain resulting from prior year depreciation. Often taxed at a higher rate than the portion of gain due to an increase in value.
The cost to create a project including direct costs of labor and materials, contractor's overhead and profit, plus indirect costs such as taxes and development loan interest.
A loan to cover some or all of the costs of developing a new project, including possibly land acquisition. Usually repaid by permanent financing received after project completion.
Expenditures necessary for the labor and materials used in the construction of a new improvement, including contractor's overhead and profit. Also called hard costs.
A compound interest rate used to convert expected future cash flow into a present value estimate. Represents the competitive rate of return applicable to the interest and cash flows being analyzed.
A method whereby an analyst prepares a cash flow forecast for a property, selects a discount rate reflecting the expected return, and calculates the present value of each cash flow. The total present value becomes the value estimate.
An initial sum of money paid by a buyer as equity capital to purchase a property. The remaining cost is typically financed through debt.
The anticipated income from operation of a project after adjustment for vacancy and credit loss. Example: 100,000 sq ft × $12.00/sq ft = $1,200,000 × (1 - 15% vacancy) - $20,000 collection loss = $1,000,000 EGI.
The ratio of the sale price divided by the projected first-year effective gross income. Used to estimate property value in the direct sales comparison approach.
The amount of periodic rent equivalent to the present value of the amount specified in a lease after considering concessions such as free rent. Used to compare leases with different terms.
The owner's capital investment in a property; the property value less the balance of any debt at a particular point in time. Example: $100,000 property - $70,000 loan = $30,000 equity.
The periodic addition to equity caused by gradual reduction in the mortgage balance through principal repayment plus any increase in property value.
The rate of return required on equity capital; the equity investor's internal rate of return based on expected before-tax cash flows and original equity investment.
In a lease, a dollar amount (usually per square foot) above which the tenant agrees to pay certain operating expenses. Helps protect the lessor from unexpected expense increases.
The amount that a debtor could reasonably expect to receive for assets in a current sale between a willing buyer and seller, other than in a forced or liquidation sale.
Taxes issued by the federal government on ordinary income. Cash flows from operating and selling a property may be taxable at the federal income tax rate.
Absolute ownership of real estate that is unencumbered by any other interest or estate and is subject to the limitations of eminent domain, escheat, police power, and taxation.
A rent concession granting occupancy for a certain amount of time with no cost to the tenant. Used to initially sign a new tenant on a lease.
A minimum vacancy rate used in income projections regardless of other vacancy sources such as lease-up or tenant turnover vacancy.
The overall capitalization rate found by dividing first year's net operating income by the present value of the property. Example: NOI $10,000 / Value $100,000 = 10% going-in cap rate.
See Gross Rent Multiplier. A ratio between property value and gross scheduled rent used to estimate the value of an income-producing property.
The total floor area of a building designed for tenant occupancy. Does not include common areas but includes basements.
A lease in which the landlord is responsible for payment of all operating expenses. May contain expense increase pass-through provisions.
Income collected from operation of a property after accounting for vacancy and credit losses, but before deductions for operating expenses.
A ratio between property value and gross scheduled rent, often used to estimate the value of an income-producing property. Also referred to as Gross Income Multiplier.
The maximum income for a property assuming 100% occupancy with no vacancies or credit losses and all miscellaneous income collected.
The term of ownership or expected ownership of an investment. In appraisal, reflects the typical expected holding period for a particular property type. Also called projection period.
A non-amortizing loan in which payments of interest are made throughout the life of the loan and the principal is paid in a lump sum at maturity.
A rate of return that discounts all expected future cash flows to a present value equal to the original investment. Can be calculated for the whole property or just the equity position.
The value of a property to a particular investor. May differ from market value, which is based on a typical or most likely investor.
The ratio of the land value to the building value.
A liability that the lessee must record on their balance sheet to reflect the obligation to make future lease payments. Declines over time as lease payments are made.
An ownership interest in real estate held by a landlord who has transferred the right of occupancy through a lease. The landlord retains the right to receive rental payment throughout the lease term and to possess the property at its termination.
Vacancy that occurs from the time a space is available until a new lease begins.
An entity granted the right to use and occupy a property through execution of a lease agreement; a tenant.
The use of borrowed funds in the purchase of an investment. Positive leverage occurs when the mortgage increases the return to equity; negative leverage occurs when it decreases the return.
A passive investor in a limited partnership whose liability is limited to the initial contribution of capital plus any unpaid contributions required in the future.
An ownership arrangement in which general and limited partners are equity investors in a real estate project. General partners manage the partnership with unlimited liability; limited partners' liability is limited to their capital contributions.
The asking price at which a property is listed for sale. Does not necessarily equal the market value or sale price.
The amount of principal left to be paid on a loan at a specified time. Equals the present value of future payments discounted at the contract rate of the loan.
The length of time over which a loan must be paid off as specified in a loan contract. May be shorter than the amortization period (e.g., amortized over 25 years but balloon payment due after 10).
A ratio between the remaining debt and the current value of the underlying real estate property.
A fee paid for the administration and supervision of a property. Typically considered a variable operating expense.
The ordinary income tax rate charged on the last dollar of income; the tax rate used when making investment decisions.
A geographic area or political jurisdiction in which similar property types compete on an economic basis for potential buyers, users, or patrons.
The amount actually paid, or to be paid, for a property in a particular transaction. An accomplished historical fact, as opposed to market value which remains an estimate.
The rental income that a property would command if exposed for lease in a competitive market.
The most probable price a property should bring in a competitive and open market under fair sale conditions, with buyer and seller each acting prudently and knowledgeably, and the price not affected by undue stimulus.
A return that assumes cash flows each year are reinvested at a specified reinvestment rate, typically lower than the IRR, representing reinvestment at minimal risk until the property is sold.
A legal document in which real estate is named as the security or collateral for the repayment of a loan.
The ratio of a property's price or value divided by its net operating income; the reciprocal of the overall rate. Example: $12,000,000 / $1,000,000 NOI = 12 NIM.
The floor space that may be rented to tenants in a building. Rental payments are typically based on the net leasable area of the leased premises.
A lease in which the tenant pays expenses such as property taxes, insurance, and maintenance. Sometimes referred to as a net-net-net or triple-net lease.
The income from a property after operating expenses have been deducted but before deducting debt service and taxes.
The discounted value of all future cash flows minus the initial cash outlay. An NPV greater than zero indicates the return exceeds the discount rate used.
A lease in which the tenant pays property taxes, insurance, and maintenance. Also referred to as a triple-net lease.
A marketing document that presents an investment property to prospective buyers, typically covering property details, financials, tenant and lease information, and market data, used to solicit offers in a sale.
The relationship between total operating expenses and gross operating income.
Expenditures necessary to maintain real property and continue production of income. Includes fixed and variable expenses but not debt service, depreciation, or capital expenditures.
The actual cost of a property to its present owner. May differ from construction cost if the current owner did not construct the property.
The discount rate applied to NOI and estimated resale price before considering financing and taxes to calculate present value. Sometimes called the free and clear yield.
The amount of parking in relation to the size of the property, typically shown as spaces per 1,000 sq ft. Example: 150 spaces / 50,000 sf = 3 per 1,000 (3:1,000).
Tax rules determining whether an investor can deduct tax losses from other income or must carry losses forward to offset future income or gains from property sale.
A type of rent based on a percent of sales from the property, usually associated with a guaranteed base minimum rent.
A situation in which the rate paid on a mortgage is less than the rate generated by an investment on an unlevered basis, increasing equity returns.
In a joint venture, the return that limited partners are entitled to receive — usually based on an IRR — before the general partner receives a promoted interest.
The current value of a payment or series of future payments, found by discounting expected payments at a desired rate of return to account for the time value of money.
In a joint venture, the higher proportion of cash flow distributions the general partner receives after limited partners achieve their preferred return, exceeding their pro-rata equity share.
An ad valorem tax issued by the government based on the assessed value of property. Example: $0.60 per $100 of value on a $50,000 property = $300 annual tax.
Those operating expenses that the tenant must reimburse the landlord for once they exceed a specified amount in the lease.
The rate at which cash flows received during the operating years of an investment can be reinvested until the project is sold. Usually a relatively risk-free rate.
A report listing units occupied, the tenant in each space, rent paid, and other lease terms. Sometimes required by lenders.
The time period during which an income property is expected to lease up to stabilized occupancy at market rental rates.
The area used to calculate rent, generally including a pro-rata share of common areas, lobbies, stairwells, elevators, public corridors, and washrooms.
The cost to create a building with the same utility as the original, plus the cost of acquiring the land at market value.
An account set aside from cash flow each year to cover future capital expenditures such as roof replacement, HVAC, or other major repairs.
Sale of a property at the termination of the holding period. Resale price can be estimated by a growth rate or terminal cap rate applied to NOI one year after the holding period. Also called reversion.
The amount the selling owner receives upon sale of a property after paying all transaction costs, remaining debt, and applicable income taxes.
An asset the lessee records on their balance sheet under ASC 842, generally equal to the present value of future contract lease payments, amortized over the lease term.
The rate of return that can be obtained on a risk-free or relatively risk-free investment such as U.S. Treasury bills. Sometimes used when calculating a modified rate of return.
A financing technique by which an owner sells a property and subsequently rents it from the buyer for continued use.
The process of determining how a change in one input variable (e.g., market rents on renewals) impacts a key calculation (e.g., after-tax IRR), isolating the impact of a single factor.
Construction expenses for items other than labor and materials, including financing costs, taxes, administrative costs, legal fees, interest, insurance during construction, and lease-up costs.
The amount of rent if total contract rent under a lease were spread in equal monthly payments. Under ASC 842, tenants may need to recognize lease expense on a straight-line basis.
Vacancy that normally occurs in a market because of the natural turnover of tenants, representing a baseline vacancy level in stable market conditions.
In appraisal, the property being appraised.
The loss in value of a building due to wear and tear allowed to be subtracted from income and sale proceeds under tax law. Generally unrelated to actual physical wear and tear.
The dollar amount of taxes owed for a specific period. From operations: taxable income × marginal tax rate. From sale: capital gain × appropriate capital gains tax rate.
The portion of income subject to tax from operations and resale. May differ significantly from cash flow due to depreciation and interest deductions.
The occupant of a building given the right to possess the space through execution of a lease; the lessee.
The interior finished components of a tenant space that may be installed by either the lessor or lessee.
A capitalization rate used to estimate the resale price of a property at the end of the holding period, applied to NOI one year after the holding period. Usually slightly higher than the going-in cap rate due to age and uncertainty.
The total amount required to maintain and operate a property, including insurance, property taxes, maintenance, utilities, and management fees. Excludes debt service and depreciation.
Vacancy that occurs when an existing lease expires and continues until a new lease starts on the space.
The analysis used to assess the risk and expected return of a real estate investment or loan, reviewing income, expenses, financing, and market assumptions to decide whether, and on what terms, to proceed.
The area that the tenant can actually use, excluding common areas, lobbies, stairwells, elevators, public corridors, washrooms, and maintenance rooms.
In the income approach, a deduction from potential income for space not rented due to initial lease-up time or tenant turnover.
The ratio of vacant space to total leasable area, or the ratio of rent from vacant space to total potential rent. Can be calculated on a physical or financial basis.
The process of estimating the current worth of a property, using approaches such as the income, sales comparison, and cost methods. Valuation underlies pricing, financing, and investment decisions.
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