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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.


Accumulated cost recovery

Total cost recovery deductions taken throughout the holding period of a property.


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 feet. Also known as the load factor and the
rentable-to-useable ratio. Also see efficiency percentage. Formula:
Add-on factor =Rentable square feet
Useable square feet


Add value

Fourth stage of four-stage transaction management process pertaining to a transaction
manager’s planning, effort, and continual contact with key decision-makers, investors, and
users, as well as contact with ancillary professionals. This ongoing process allows for
feedback, establishes a network for problem solving, provides a means to offer additional
services to the client, and enhances the transaction manager’s preparedness for the next


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.


Agglomeration economies

Cost reductions or savings that come about from efficiency gains associated with the
concentration or clustering of firms/producers or economic activities and the formation of a
localized production network.



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.


Annual percentage rate (APR)

The true annual interest rate payable for a loan in one year taking account of all charges
made to the borrower, including compound interest, discount points, commitment fees,
mortgage insurance premiums. It also takes into account the time at which the principal is
repaid (especially when payments of principal are made in installments throughout the year, but interest is charged at the beginning of the year), but not the actual expenses incurred
by the lender in making the loan and recharged to the borrower.



Regular fixed payments or receipts over a designated period of time.


Assessed value

The value of real property established by the tax assessor for the purpose of levying real
estate taxes.


Average annual effective rate

The average annual effective rent divided by the square footage.


Average annual effective rent

The tenant’s total effective rent divided by the lease term.


Averaging method

A simple technique used to forecast next period's/year's vacancy rate by averaging previous
years' vacancy rates; especially effective where vacancy rates have remained relatively flat
or show little variability over time.


Balloon payment

The final payment of the balance due on a partially amortized loan.



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


Before-tax investment value

The sum of the present values of the mortgagor and mortgagee of property.


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.



The sales threshold over which percentage rent is due. It is calculated by dividing the
annual base rent by the negotiated percentage applied to the tenant’s gross sales.


Buy/rent threshold

The point at which there is a recognizable shift of expenditure allocations away from owneroccupied
housing and to the rental housing market (or vice-versa) as a result of changing
market conditions.


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. Also see operating


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.


Capitalization rate

A percentage that relates the value of an income-producing property to its future income,
expressed as net operating income divided by purchase price.


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 after tax/es (CFAT)

For properties, it is the result of first calculating the net operating income, less mortgage
and construction loan interest, less cost recovery for improvements and personal property,
less amortization of loan points and leasing commissions to arrive at real estate taxable
income. Next, real estate taxable income is multiplied by the applicable marginal tax rate
to result in the tax liability (savings). Then, from the net operating income, annual debt
service is subtracted to equal the cash flow before taxes (CFBT). Finally, the cash flow after
taxes (CFAT) is calculated from the CFBT, less the tax liability (savings), plus investment
tax credit. The Cash Flow Analysis Worksheet can be used to calculate a property’s gross
operating income, net operating income, real estate taxable income and tax liability or
(savings), CFBT, and CFAT.


Cash flow before tax/es (CFBT)

For properties, it is the result of calculating the effective rental income, plus other income
not affected by vacancy, less total operating expenses, less annual debt service, funded
reserves, leasing commissions, and capital additions. The Annual Property Operating Data
form can be used to calculate a property’s effective rental income, gross operating income,
total operating expenses, net operating income, and cash flow before taxes.


Cash flow model

The framework used to determine the cash flow from operations and the cash proceeds
from sale.


Cash-on-cash rate

A return measure that is calculated as cash flow before taxes divided by the initial equity


Cash proceeds from sale

The sales price less sales costs, mortgage balance, and tax liability on sale. Also known as
sales proceeds after tax.


Central place theory

A location theory that accounts for the size, distribution, and organization of settlements,
places, market areas, and establishments in a competitive and interdependent urban
system, to explain differences in the locational tendencies and preferences of businesses as
they seek to maximize market accessibility, sales, and profits.


Class life

The useful economic life of an asset set by the Internal Revenue Service.



Third stage of four-stage transaction management process pertaining to bringing the parties
together and consummating an agreement. The acronym CLOSE represents the
contingencies, legal instruments, obstacles, signatures, and execution involved in the close


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.


Common area maintenance (CAM)

Charges paid by the tenant for the upkeep of areas designated for use and benefit of all
tenants. CAM charges are common in shopping centers. Tenants are charged for parking
lot maintenance, snow removal, and utilities.


Confidence range method (95%)

A statistical method of estimating a range of vacancy rates with a 95% confidence such that
the expected vacancy rate for the next time period falls within that range (using the sample
mean vacancy rate and corresponding standard deviation as input).


Cost approach

A method of determining the market value of a property by evaluating the costs of creating
a property exactly like the subject.


Cost approach improvement value

The current cost to construct a reproduction of, or replacement for, the existing structure
less an estimate for accrued depreciation from all causes.


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.


Cost recovery

An annual deduction based on the class life of an asset.


Cost recovery recapture

According to the Taxpayer Relief Act of 1997, for properties sold after May 6, 1997, a
noncorporate taxpayer will have to recapture, or pay taxes on, any straight-line cost
recovery taken during the holding period, to the extent there is any gain.


Cross-over chart

A visual representation of the relationship between the costs of leasing and owning at
varying discount rates.


Cross-over (office use) demand

Industrial space that is used as office space in order to lower the rental rate of a property.
Also known as flex space.


Customer-spotting approach

An approach to estimating the retail trade area (and sales/revenue potential) for a given
establishment or center based on the location of existing customers via point-of-sale
information (by obtaining customer address or zip code data) or customer surveys (by
interviewing customers as they enter the store); data which can later be mapped to
determine the extent of the trade area.


Debt-coverage ratio (DCR)

Ratio of net operating income to annual debt service. Expressed as net operating income
divided by annual debt service.



The loss of utility and value of a property.


Differential cash flow

The difference that results when the cash flows from one alternative are subtracted from the
cash flows from another alternative.


Direct survey method

The use of personal interviews with key personnel in all major firms within a given
community to determine the percentage of a firm’s revenues obtained from sales made
outside the local economy for the purpose of estimating firm-specific basic employment and,
by aggregation, the total basic employment in that community; a method that is known to
be costly and time consuming.


Disaggregating demand

The process of separating and identifying the various forces and factors which affect the
demand for a given property type in a given market or the differentiation of demand by
category (in reference to tenure, household income, and geographic submarket).


Disaggregating supply

The process of separating and identifying the various forces and factors which affect the
supply of a given property type in a given market or the differentiation of supply by
category (including leased versus owned, unit type, price, and geographic submarket).


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


Discounted effective rent

The cash flows over the term of the lease, discounted to the present value.



The process of reducing the value of money received in the future to reflect the opportunity
cost of waiting to receive the money.


Displaced sales

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).


Drain information

Information (substantiated and rumored) regarding inventory that is to be removed from
the market by the forecast period.


Drive-time approach

An approach to estimating the trade area (and sales/revenue potential) for a given retail
establishment or center based on the central place theory concept of range and how far
people are willing to travel to obtain retail goods as defined by drive time or mileage.


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.


Dynamic system

A complex and ever-changing or evolving set of diverse and interrelated entities and agents
which are organized into a coherent and working totality which serves multiple and/or
common purposes or objectives. Also see system and market dynamics.


Economic base analysis

Inquiries that focus on the extent to which changes in basic employment (export-oriented
activities and associated wage-income) affect the economic, employment, and population
growth of a local or regional economy.


Economic base multiplier

A measure that provides a rough estimate of how changes in basic employment will affect
total employment in a given region (all other things being equal); defined as the ratio of
total employment to basic employment.


Economic obsolescence

The reduction in a property’s value due to external circumstances such as legislation or
changes in nearby property use.


Efficiency percentage

The relationship of useable area to rentable area on a given property. Also see add-on
factor, load factor, and rentable-to-useable ratio. Formula:
Efficiency % = Useable square feet / Rentable square feet


Equilibrium point

The price at which the quantity supplied equals the quantity demanded.


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.



Under Section 1031 of the Internal Revenue Code, like-kind property used in a trade or
business or held as an investment can be exchanged tax-deferred. Under a fully qualified
Section 1031 exchange, real estate is traded for other like-kind property. All capital gains
taxes are deferred until the newly acquired real estate is disposed of in a taxable
transaction. The underlying philosophy behind the deferral of capital gains taxes is that
taxation should not occur as long as the original investment remains intact in the form of
(like-kind) real estate (like-kind refers to real property as such, rather than the quality or
quantity of property).



A phase of the real estate or business cycle characterized by the dramatic short-term
increase in the supply of available units in a given market (due to economic growth and
increasing construction activity) as a response to increasing and/or pent-up demand and
rising price levels.


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).


Expenditure patterns

The tendencies or propensities of individuals/households to spend disposable income on a
given good or service in comparison to other goods and services (typically defined as a
percentage of disposable income) in relation to income level or range and/or other
demographic or socio-economic characteristics.


Expense stop

The level (or maximum amount) up to which the landlord will pay certain operating
expenses. Amounts above the stop are the responsibility of the tenant.


External economies

Savings or cost-cutting allowances realized by firms or industries within a given city that are
primarily due to the advantages of sharing production inputs, information, and
infrastructure and/or possibly linked to a city's comparative advantage to support a given


External obsolescence

A form or source of accrued depreciation considered in the cost approach to market value.
The loss of value is because of external forces and change. For example, a new mall causes
traffic and congestion, negatively affecting residential property values nearby, or a motel is
no longer viable because a highway is rerouted, or another example would be depressed
market conditions.


Factors of production

The rudimentary components of any production process or system consisting of: land and
land-based resources (including raw materials); capital, which includes real capital such as
machinery, facilities, and infrastructure and financial capital to start or expand businesses;
labor or human input (as defined in terms of labor hours or quality/productivity); and
technology which includes production know-how and methods, as well as management and
operations skills.


Financial leverage

The use of borrowed funds to acquire an investment.


Fixed expenses

Costs that do not change with a building’s occupancy rate. They include property taxes,
insurance, and some forms of building maintenance.


Fully amortized mortgage loan

A method of loan amortization in which equal periodic payments completely repay the loan.


Functional obsolescence

A form or source of accrued depreciation considered in the cost approach to market value.
The reduced capacity of a property or improvements to perform their intended functions due
to new technology, poor design, or changes in market standards.


Gap analysis

An evaluation of the difference in the demand and supply of space (measured in terms of
square footage) for a particular type of commercial property in a given market area where
gaps are expressed as the amount of square footage demanded less the amount of square
footage available in a given time period. Note that if demand exceeds supply, the gap will
be positive. A positive gap indicates that potential opportunities exist for successful
commercial real estate transactions. However, transactions might be avoided when supply
exceeds demand (or when a negative gap occurs), as there is an oversupply of available
space in the market.


General market area gap analysis

A gap analysis that is carried out for a city or several cities (simultaneously) to identity one
or more general market areas where a positive gap exists for a particular type of
commercial real estate.


Gravity model

A model that is used to account for a wide variety of flow patterns in human/economic
systems, based on Newton's gravity equation which defines gravity or the flow potential
(between two sites or locations) as directly proportional to the product of their masses (or
size) and inversely proportional to the square of the distance between them: gravity =
(mass × mass) ÷ distance2.


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, and it is measured 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.


Gross operating income

The total income generated by the operations of a property before payment of operating
expenses. It is calculated from potential rental income, plus other income affected by
vacancy, less vacancy and credit losses, plus other income not affected by vacancy. The
Annual Property Operating Data form or the Cash Flow Analysis Worksheet can be used to
calculate a property’s gross operating income.


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).


Ground lease

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.


Heavy utility needs

In reference to location-decision considerations made in relation to the energy or power
requirements of a firm/user in the assessment of the feasibility of a location to support a
given activity.


High order good

A good or service requiring a high threshold population before it is offered to a market.
Such a good or service requires a large number of consumers to support its business and
requires a larger trade area than a low order good.


Highest and best use

The reasonably probable and legal use of vacant land or an improved property, which is
physically possible, appropriately supported, financially feasible, and that results in the
highest value.


Highest and best use (financial) analysis

A determination of the highest and best use of one or more sites (either vacant or as
though vacant) or properties as improved by examining the profitability of all possible use
scenarios (including renovation, rehabilitation, demolition, and replacement).


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 (where
demand is affected by the rate at which new households are being added to the market,
allowing for a normal level of vacancy).


Imperfect market

A market in which product differentiation exists, there is a lack of important product
information, and certain buyers or sellers may influence the market. Commercial real estate
is bought and sold in an imperfect market.


In-the-door approach

An approach to estimating the trade area (and sales/revenue potential) for a given retail
establishment or center based on observed flow patterns or traffic counts, where estimates
are obtained for both the percentage of traffic that stops or patronizes that
establishment/center and the percentage of people coming in-the-door who make a


Income capitalization 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. Value = net operating income ÷ capitalization rate


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 gap

The difference between the demand for an industrial property and the supply of that
property in a given market or area.


Industrial location decision-making

A decision-making process that involves the examination and evaluation of alternative
locations or sites for a particular industrial activity based on location/site feasibility
characteristics; great importance is placed on the national or regional location decision
(usually narrowing the location decision to a handful of cities or localities), with less
importance given to the local site selection process.


Industrial property

Commercial properties that are used for the purposes of production, manufacturing, or


Input-output modeling

A mathematical approach to the description of a local or national economy, which takes
explicit account of the flows and linkages within and between economic sectors.
Recognizing that output (products and services) from one sector may require production
inputs for other sectors, used to estimate sector- and region-specific multipliers for the
purpose of analyzing the direct and indirect impacts of a given change in a particular sector
or region.


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.


Key federal laws

With respect to the handling of hazardous materials, they are important laws or statutes
enacted to enforce the responsible handling of materials to minimize the danger to human
beings and/or the environment.


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.


Land sale-leaseback

The same concept as a sale-leaseback, but only the land is sold and leased back using a
ground lease.


Leakage (retail)

Purchases made in other service areas by consumers located within the subject area
(representing a loss of revenue for retailers located within the trade area in which those
consumers reside).


Leased fee

In exchange for permitting a tenant to use the property, the owner/lessor has the right to
receive rental income and the right to repossess the property upon termination of the lease.


Leasehold estate

In exchange for rent, the tenant has the right to occupy and use the property for the
duration of the lease.


Leasehold interest

The value (to the tenant) of the lease. The value of the leasehold interest is determined by
present value of the difference between market rent and the contract rent.


Liquidation value

The likely price that a property would bring in a forced sale (foreclosure or tax sale). Used
when a sale must occur with limited exposure time to the market or with restrictive
conditions of sale.


Load factor

The ratio of rentable area to useable area. The load factor is a gauge by which a user can
evaluate different sites with comparable rents. It is also known as the add-on factor.
Load factor = Rentable square feet / Useable square feet


Loan point

A charge prepaid by the borrower upon the origination of a loan. One point equals one
percent of the loan amount.


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 quotient

An index, defined in ratio form that compares the proportion of a local activity to the
proportion of that activity found at some larger geographic scale, such as the nation.


Lower order good

A good or service requiring a low threshold population to be offered. A good or
service is considered to have a low threshold if it does not require a large number of
consumers to support its business and thus requires a small trade area. Also see high order good.


Market gap

The demand for space minus the supply of space for a specific type of commercial property
in a given real estate market



Second stage of four-stage transaction management process pertaining to gathering and
evaluating property information to unite the investor and user. The acronym MATCH
represents the activities to market, analyze, target, compare, and highlight during the
match stage.


Metropolitan Statistical Area (MSA)

Generally, the area in and around a major city. The Office of Management and Budget
(OMB) defines an MSA as having one of the following characteristics: a city with a
population of at least 50,000, or an urbanized area with a population of at least 50,000 with
a total metropolitan population of 100,000.


Mid-month convention

A requirement of the Tax Reform Act of 1984 that taxpayers use the 15th of the month to
establish the date of acquisition and date of disposition when calculating cost recovery
deductions. This act applies to real estate placed in service after June 22, 1984 (with the
exception of low-income housing).


Minimum requirement

The observed minimum proportion of employment in a given economic sector for
communities within a given size range, assumed to be that employment/activity level that is
necessary to serve the needs of a community that falls within a predetermined size range
(the minimum amount of nonbasic employment necessary to support a typical mix of
industry for a population base of a given size range).


Negative leverage

Borrowed funds are invested at a rate of return lower than the cost of funds to the


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


Net present value (NPV)

The sum of all future cash flows discounted to present value and netted against the initial


Neutral leverage

An investment situation in which the cost of borrowed funds is exactly equal to the yield
provided by the investment.


Non-household population

That portion of the total population that is not considered to be part of the local residential
housing market; composed of individuals living in dormitory-like facilities (including military
bases) or institutional settings (such as students in residence halls).


Office (Low-rise)

Fewer than seven stories high above ground level.


Office (mid-rise)

Between seven and twenty-five stories above ground level


Office (high-rise)

Higher than twenty-five stories above ground level.


Office property

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 Classed 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 or condition causes functional problems.


Operating expense stop

A negotiable amount at which the owner’s contribution to operating expenses stops. 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.


Partially amortized mortgage loan

The payments do not repay the loan over its term and thus a lump sum (balloon) is required
to repay the loan.
Participation mort


Participation mortgage

A loan secured by real property, with a stated interest rate that also provides for a share to


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 dollar amount. It is frequently found in retail leases. Also known as
overage rent.


Population/expenditure approach

An approach to estimating the trade area (and sales/revenue potential) for a given retail
establishment or center based on the minimum area (or threshold population) that would be
required to sustain a business, by calculating the population necessary to support total
square footage of both existing and proposed space for a specific-use and
determining/mapping the extent of the trade area based on population density.


Positive leverage

Borrowed funds are invested at a rate of return higher than the cost of the funds to the


Power center

This retail center is dominated by several large anchors, including discount department
stores, off-price stores, warehouse clubs, or category killers—stores that offer tremendous
selection in a particular merchandise category at low prices. The center typically consists of
several freestanding (unconnected) anchors and only a minimum amount of small specialty


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.


Present value method

A comparison technique that compares the present values of the cash flows for any two real
estate alternatives. The best user alternative is based on the lower present value amount.
It is not the same as net present value.


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.


Purchasing power risk

The variability in the future purchasing power of income received from an investment.



First stage of four-stage transaction management process pertaining to the process of
gathering and evaluating information to measure a client’s readiness, willingness, and ability
to consummate a transaction. The acronym QUALIFY represents the considerations of
quantify, usage, authority, latitude, intention, financial, and yield involved in the qualify



The maximum distance consumers are willing to travel to purchase a good or service from a
given establishment or location. Hence, the boundary or outer limits of the market area
circumscribed about a location at which a good or service may be purchased can be easily
identified having knowledge of the range.


Rate of return

The percentage return on each dollar invested. Also known as yield.


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. Shareholders must include their share of the REIT’s income in
their personal tax returns



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.



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 as a direct result of an external shock (for example, a favorable tax
code revision) or an increase in demand for commercial real estate which, in turn, leads to
the absorption of excess space. 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.


Regional center

This center type provides general merchandise (a large percentage of which is apparel) and
services in full depth and variety. Its main attractions are its anchors: traditional, mass
merchant, discount department stores, or fashion specialty stores. A typical regional center
is usually enclosed with an inward orientation of the stores connected by a common
walkway and parking surrounds the outside perimeter.


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.


Rent concession

A period of free rent given to the tenant by the lessor.


Rentable area

The computed area of a building as defined by the guidelines of Building Owners and
Managers Association (BOMA) and typically measured in square feet, including both
core/structure and useable area. The actual square foot 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.


Rentable-to-useable ratio

Defined as rentable area divided by useable area. Also known as the add-on factor or load
factor. Also see efficiency percentage.


Rent escalators

Items specified in a lease such as base rent, operating expenses, and taxes that may
increase by predetermined amounts at stated intervals or by a constant annual percentage.
Also see index lease and expense stop.


Retail gravity model

A gravity model used to estimate dollar flows to or the sale/revenue potential of competing
retail establishments in a given geographic market.


Reversion value

A lump-sum cash benefit that an investor receives or expects to receive upon the sale of an


Sale cost

The brokerage commissions and fees, and any additional transaction costs that are incurred
during the sale of the property



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 comparison approach

A way to determine market value by comparing a subject property to properties with the
same or similar characteristics.


Sales comparison value

An estimate of value derived by comparing the property being appraised to similar
properties that have been sold recently, applying appropriate units of comparison, and
making adjustments to the sales prices of the comparable based on the elements of


Scale economies

Cost reductions, savings, or advantages that come about from efficiency gains associated
with increasing levels of production output or the increased size of an operation or system
(as the average cost of production falls with increasing output or size).



The phenomenon of indirectly investing in real estate markets in ways that minimize risk
(for example, investments made collectively with pooled money or the use of investment
packages/funds, such as mortgage backed securities sold on the secondary financial
market) as opposed to direct investments where investors own property or hold mortgages;
a long-term trend that has had significant impact on real estate values.


Sinking fund

A fund designed to accumulate a designated amount of money over a specified period of
time. The periodic amount of money deposited plus compound interest will accumulate to
the designated amount of money over the specified period of time.


Site factors

Site-specific factors, features, conditions, or 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).


Standard Industrial Classification (SIC)

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


Step-up lease

Step-up lease
A lease in which the rental amount paid by the lessee increases by a preset rate or set
dollar amount at predetermined intervals. A step lease is a means for the lessor to hedge
against inflation and future maintenance or operational expenses.



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. Also known as a sandwich lease due to the sandwiching of the original lessee
between the lessor and the subtenant.


Substitute basis

The basis in a property acquired in a qualified Section 1031 Exchange is reduced by
deferred gain and becomes the substitute basis. For example, if the market value of
property given up is $200,000, and the basis in that property was $75,000, then realized
gain equals $125,000. Assume the market value of property acquired through a taxdeferred
exchange is $350,000, then subtracting the unrecognized gain of $125,000 equals
the substitute basis of $225,000. The effect of this adjustment to basis is to build in the
deferred $125,000 gain into the property acquired. If the new property were sold the next
day for $350,000, a $125,000 gain would be reported.


Superregional center

A retail property type similar to regional centers, but because of its larger size, a
superregional center has more anchors, a deeper selection of merchandise, and draws from
a larger population base. As with regional centers, the typical configuration is as an
enclosed mall, frequently with multilevels.


Suspended losses

Passive losses that cannot be used in the current year are suspended for use in future years
or at the time of sale.


Synthetic lease

A leasing and financing strategy whereby the terms of the lease under specific Financial
Accounting Standard Board guidelines change the lease obligation from a capital lease
(long-term lease on the company’s balance sheet) to an operating lease (short-term lease
on the company’s balance sheet).


Tax savings (annual expense)

Entry on the tenant’s Cash Flow Form. All annual expenses incurred by the tenant are tax
deductible. The tax savings are calculated by multiplying the annual deduction by the
tenant’s tax rate.


Tax savings (capital expenditure)

Entry on the tenant’s Cash Flow Form. It refers to any tax savings associated with any
capital expenditure by the tenant in terms of the site or major, unusual business expenses
incurred to make the new office efficient for the business. The amount of tax savings is
calculated by multiplying the annual deduction amount by the tenant’s tax rate.


Tax shelter

The ability of real estate investments to reduce an investor’s tax liability through the use of
cost recovery.


Taxable income

Adjusted gross income less personal deductions and exemptions.


Technical feasibility

In the case of site selection, it is an evaluation of multiple sites to determine which sites
should be considered further based upon their physical limitations, regulatory requirements,
and environmental and legal considerations; whereas in the case of highest and best use, it
refers to the determination of the possible uses of a particular site as based upon technical


Tenant improvements

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.


Theme/festival center

These retail centers typically employ a unifying theme that is carried out by the individual
shops in their architectural design and, to an extent, in their merchandise. The biggest
appeal of these centers is to tourists; restaurants and entertainment facilities can anchor
them. These centers, generally located in urban areas, tend to be adapted from older,
sometimes historic, buildings and can be part of mixed-use projects. [


TI allowance from owner

Entry on the tenant’s Cash Flow Form. A specified amount of money the owner will pay for
tenant improvement.


Time value of money (TVM)

An economic principle recognizing that a dollar today has greater value than a dollar in the
future because of its earning power.


Total effective rate

The rate per square foot paid by the tenant over the entire period analyzed. Formula:
Total effective rate = Total effective
rent / Square footage


Total effective rent

The total dollar amount (cash flow) that the tenant actually will pay out over the entire
period analyzed.


Trade area

An area delineated about a central or dominant location, comprising a zone that is
dependent upon production output from that location to meet internal demand, whose
outermost boundaries are defined in terms of the presence or absence of interactions with
that central or dominant location (for example, a localized area over which some specific
activity or transaction takes place). Note that in central place theory context, the terms
trade area and range are used interchangeably


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. Also see qualify, match, close,
and add value.


Transfer income

Money that is transferred to a local economy from outside sources without the exchange of
any good or service (including social security, welfare and retirement benefits, interest
dividends and rent on investments).


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). Also defined in office
buildings as the area that is available for the exclusive use of the tenant. Useable area =
rentable area × building efficiency percentage.


User criteria

In reference to the identification and classification of properties and the evaluation of
feasibility characteristics of various locations/sites in accordance with the specific needs of
the user as defined by its business requirements, and the use and zoning restrictions in any
given jurisdiction or municipality.


Vacancy allowance

A desirable level of vacancy that is known to facilitate transactions and turnover in a
housing market (for example, a vacancy rate that allows the market to operate smoothly
and efficiently by enhancing household mobility); an index used for estimating housing


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.



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.