CRE Terminology

Question 1

abatement

Answer 1

Free rent or early occupancy. May occur outside or in addition to the primary term of the lease.

Question 2

absorption

Answer 2

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.

Question 3

add-on factor

load factor

Answer 3

= rentable sq. ft./ useable sq. ft.

Question 4

adjusted basis

Answer 4

= original cost of property + capital improvements - total accumulated cost recovery deductions - partial sales taken during the holding period

Question 5

annual debt service (ADS)

Answer 5

the total amount of principal and interest to be paid each year to satisfy the obligations of a loan contract

Question 6

attorn

Answer 6

to agree to recognize a new owner of a property and to pay him/her rent

Question 7

basis

Answer 7

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

Question 8

basis point

Answer 8

1/100 of 1%

i.e. 1 bp = .0001, 100 bp = .01

Question 9

breakpoint

Answer 9

sales threshold over which percentage rent is due

= annual base rent / negotiated % applied to tenant’s gross sales

Question 10

CAM cap

common area maintenance

Answer 10

max amount for which a tenant pays its share of common area maintenance costs. the owner pays for any CAM expenses exceeding that amount.

Question 11

CAP rate

Answer 11

= NOI / property value (price)

Question 12

CFTA

Answer 12

cash flow after taxes

Question 13

CFBT

Answer 13

cash flow before taxes

Question 14

class life

Answer 14

useful economic life of an asset set by the IRS

Question 15

debt-service-coverage ratio (DSRC)

Answer 15

= NOI / annual debt service

ratio of < 1 means negative cash flow

Question 16

discounted effective rent

Answer 16

present values of future cash flows over the term of the lease

Question 17

displaced sales

Answer 17

sales that result from purchases made by customers who are not located in the subject service area

represents a revenue gain for retail establishments as sales are generated from consumers who reside outside the local trade area

Question 18

economic base multiplier

Answer 18

measure that provides an estimate of how changes in basic employment will affect total employment in a given region

= total employment / basic employment

Question 19

basic employment

Question 20

total employment

Question 21

equilibrium point

Answer 21

price at which the quality supplied equals the quantity demanded

Question 22

equity lease

Answer 22

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 sales proceeds

Question 23

expected value (EV)

Answer 23

the sum of the weighted average of all possible outcomes of a probability distribution

can be applied to any outcome an investor choses; i.e. NOI, after tax cash flow, IRRs

= outcome value x probability weight + outcome value x probability weight + etc…

Question 24

probability distribution

Answer 24

collection of all possible outcomes for an event and their corresponding probabilities of occurrence

Question 25

expense stop

Answer 25

max amount to which a landlord will pay certain operating expenses. amounts above the stop are paid by the tenant.

Question 26

floor area ratio (FAR)

Answer 26

ratio of gross square footage of a building to the land on which it's situated

Question 27

flex space

Answer 27

space that is flexible in terms of what it can be used for (i.e. industrial or office activities)

Question 28

future value (FV)

Answer 28

amount to which money grows over a designated period of time at a specified rate of interest

Question 29

gap analysis

Answer 29

evaluation of difference in the demand and supply of space (in sq. ft.) for a particular type of commercial property in a given market area = sq. ft. demanded - sq. ft. available positive gap indicates opportunity

Question 30

gross leasable area (GLA)

Answer 30

total floor area designed for tenant occupancy. the area on which tenants pay rent. the area that produces income.

Question 31

gross rent multiplier (GRM)

Answer 31

used by investors to determine market value. extracted from the marketplace.

Question 32

market value

Answer 32

= gross rent an investor anticipates the property will produce at the end of year 1 x GRM

Question 33

hard cost

Answer 33

cost of constructing property improvements

Question 34

soft costs

Answer 34

portion of an equity investment other than the actual cost of the improvements themselves, that may be tax-deductible in the first year

Question 35

internal rate of return (IRR)

Answer 35

percentage earned on each dollar that remains in an investment each year the discount rate at which the sum of the PV of FCF equals the initial capital investment

Question 36

letter of intent (LOI)

Answer 36

informal, usually non-binding, agreement among parties indicating their desire to move forward with negotiations

Question 37

landlord paid tenant improvements (LPTI)

Answer 37

= total cost (outlay) of necessary tenant improvements paid by the landlord - any contribution maid by the tenant

Question 38

leakage (retail)

Answer 38

purchases made in other service areas by consumers located within the subject area represents loss of revenue for retailers located within the trade area in which those consumers reside

Question 39

loan to value ratio (LTV)

Answer 39

the amount of money borrowed in relation to the total market value of a property = loan amount / property value

Question 40

metropolitan statistical area (MSA)

Answer 40

area around a major city

Question 41

triple net lease (NNN)

Answer 41

lease in which the tenant pays, in addition to rent, all operating expenses (pass throughs) such as real estate taxes, insurance premiums, and maintenance costs

Question 42

net present value (NPV)

Answer 42

= discounted future cash flows - initial investment

Question 43

sublease sandwich lease

Answer 43

lease in which the original tenant (lessee) sublets all or part of the leasehold interest to another tenant (subtenant) while still retaining a leasehold interest in the property

Question 44

standard industrial classification (SIC)

Answer 44

classification scheme used for general recording purposes by government and industry to categorize and account for economic employment activity by sector using a series of standardized and universally accepted codes

Question 45

subrogate

Answer 45

substitute one creditor for another

Question 46

substitute basis

Answer 46

basis in a property acquired in a qualified section 1031 exchange is reduced by deferred gain and becomes the substitute basis example if the market value of a property given up is $200, and the basis of that property was $75, then realized gain equals $125. Assume the market value of property acquired through a tax deferred exchange is $350, then the substitute basis equals $225 (substracting the unrecognized gain of $125). the effect of this adjustment to basis is to build in the deferred $125 gain into the property acquired. if the new property were sold the next day for $350, a $125 gain would be reported.

Question 47

sunk costs

Answer 47

investment costs that are committed and cannot be recovered

Question 48

tenant improvements (TI)

Answer 48

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

Question 49

total effective rent

Answer 49

total cash flow that the tenant actually will pay out over the period analyzed