Helpful Definitions

Absorption - The amount of inventory or units of a specific commercial property type that becomes occupied during a specified time period (usually a year) in a given market, typically reported as the absorption rate.

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.

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 effective rent - The total net cash flow in each period of a lease, including the tenant’s share of operating expenses and any rental concessions.

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

Base (in lease terminology) - A face, quoted, dollar amount representing the rate or rent in dollars per square foot per year and typically referred to as the "base rate."

Base rent - The minimum monthly payment due to the owner that can be stated as a rent or a rate. It typically is expressed as dollars per square foot per year or annual base rate. The base rate is the amount on which escalations are calculated.

Basis - The total amount paid for a property, including equity capital and the amount of debt incurred.

CAM cap - A dollar limit above which the owner pays for common area maintenance. The tenant pays for CAM up to a specified amount; the owner pays for any CAM expenses exceeding that amount.

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. Also referred to as cap rate.

Cash-on-cash rate - A return measure that is calculated as cash flow before taxes divided by the initial equity investment.

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, where tenants are charged for services such as parking lot maintenance, snow removal, and utilities.

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 of occupancy - Actual out-of-pocket costs paid by a user to take or maintain occupancy of a space-effective rent or rate plus or minus additional costs or allowances that are not attributable to the lease, such as telephone hook-up, moving expenses, and stationery. When such adjustments are treated in the lease or in the transaction between the landlord and the tenant, they may be included in the calculation of effective rent or rate.

Debt-coverage ratio (DCR) - Ratio of net operating income to annual debt service. Expressed as net operating income divided by annual debt service.

Economic obsolescence - The reduction in a property's value due to external circumstances such as legislation or changes in nearby property use.

Efficiency - The relationship of useable area to rentable area, usually expressed as a percentage.  Formula:  Efficiency % = Useable square feet Rentable square feet.

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

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.

Fixed expenses - Costs that do not change with a building's occupancy rate, including property taxes, insurance, and some forms of building maintenance.

Fixed lease - A lease in which the lessee pays a fixed rental amount for the duration of the lease. Also may be referred to as a gross lease.

Flex space - Space that is "flexible" in terms of its usage.

Functional obsolescence - The reduced capacity of a property or improvements to perform their intended functions due to new technology, poor design, or changes in market standards.

Gross area - The entire floor area of a building or the total square footage of a floor.

Gross lease - A lease in which the lessee pays a fixed rental amount for the duration of the lease and the lessor pays the expenses associated with owning the property (such as taxes and insurance).

Gross operating income - The total amount of cash generated by the operations of a property before payment of operating expenses.

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. Aland lease separates ownership of the land from ownership of buildings and improvements constructed on the land.

Highest and best use (HABU) - A "use" that fully exploits the potential or maximizes the value (or profitability) of a site or property (also regarded as the "efficient use").

Income capitalization approach - A method to determine the market value of an income-producing property by converting one year's income stream into a single capital value. The cap rate is divided into the net operating income to obtain the estimated market value.

Industrial property - Commercial properties that are used for the purposes of production or manufacturing.

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.

Leasehold estate - In exchange for rent, the tenant's right to occupy and use the property for the duration of the lease.

Lessee - The person renting or leasing the property. Also may be referred to as a tenant. Lessor - The person who rents or leases a property to another. Also may be referred to
as an owner.

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 percentage amount that represents the difference (in square feet) between rentable area and useable area. The load factor is a gauge by which a tenant can evaluate different sites with comparable rents. It is also known as the add-on factor. Formula: Load factor = (Rentable Square Feet/Useable Square Feet) -1 

Loan-to-value ratio (LTVR) - 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.

Market analysis - The process of examining market supply and demand conditions, demographic characteristics, and opportunities; identifying alternative locations/sites that meet specific objectives or satisfy various criteria; and assessing the financial feasibility of those locations/sites to facilitate decision making regarding the commercial potential or suitability of various locations/sites to support a given activity or use.

Market area - A domain or geographical area in which the price-making forces of supply and demand operate to influence the course of industrial and commercial activities.

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.

Negative leverage - Borrowed funds are invested at a rate of return lower than the cost of funds to the borrower.

Net lease - A lease in which, in addition to rent, the tenant pays maintenance and operating expenses such as real estate taxes and insurance premiums. Since net leases are defined differently in different states and localities, it is important that each lease is reviewed to determine for which expenses the tenant is responsible.

Net-net-net lease (NNN) - See triple-net lease.

Net operating income (NOI) - The potential rental income plus other income, less vacancy, credit losses, and operating expenses.

Occupancy cost - The actual dollars paid out by the tenant to occupy the space. It can be expressed in either before-tax or after-tax dollars.

Operating expenses - Cash outlays necessary to operate and maintain a property, not including capital expenditures.

Original basis - The total amount paid for a property, including equity capital and the amount of debt incurred.

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 frequently is found in retail leases.

Positive leverage - Borrowed funds are invested at a rate of return higher than the cost of the funds to the borrower.

Potential rental income - The total amount of rental income for a property if it were
100 percent occupied and rented at competitive market rates.

Prestige and property classes - In reference to the recognition that various levels of status may be assigned to commercial properties as defined by user needs, the quality of a property and its amenities in relation to site factors and general location, suggesting the division of properties into distinct classes.

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

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 macro-economic conditions whose phases include (in order) recession, recovery, expansion, and oversupply.

Real estate expense stop - A negotiable amount at which the owner's contribution to real estate taxes stops. For example, if real estate taxes were $5 per square foot and the owner had a stop of $4 per square foot, the owner would pay $4 per square foot and the tenant would pay $1 per square foot.

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

Rentable Area - Actual square foot area for which the tenant will pay rent. It is the gross area of an office building, less vertical penetrations (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 (office area) ratio - Defined as rentable area divided by useable area.

Retail trade area - Also referred to as service area, generally defined as the geographic or formal area from which a sustained patronage is attracted to support a retail center or establishment, the extent to which is determined by numerous factors including the site characteristics of the center or establishment, its accessibility, the presence or absence of physical barriers to movement, and the general limitations imposed by driving time, congestion, and distance/separation.

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

Site factors - Site-specific factors, features, conditions, or attributes that are important in the analysis or evaluation of a location/site, such as relative location, visibility, aesthetics, landscaping, condition of existing structures, regulatory mechanisms, and lot size.

Step-up lease - A lease in which the rental amount paid by the lessee increases by a preset rate at predetermined intervals. A step lease is a means for the lessor to hedge against inflation.

Sublease - 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.

Submarket - A segment or portion of a larger geographic market defined and identified on the basis of one or more attributes that distinguish it from other submarkets or locations.

Tenant improvements - A lease provision that obligates the owner to incur a prespecified dollar amount to prepare the space for the lessee's occupancy.

TI allowance from owner - Entry on the Tenant's Cash Flow Form. A specified amount of money the owner will pay for tenant improvements.

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 (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.

Triple-net lease - A lease in which the tenant pays, in addition to rent, all expenses related to the operation of the property, including both fixed and operating expenses. As with net leases, it is important that each lease is reviewed to determine the expenses for which the tenant is responsible. It also may be referred to as a net-net-net or NNN lease.

Useable area - Rentable area, less certain common areas that are shared by all tenants of the office building (corridors, storage facilities, and bathrooms). Also defined in office buildings as the area bounded by the partitions that separate the tenant's space from others, which is available for the exclusive use of the tenant.
Useable area = Rentable area - All common areas.

Vacancy rate - The percentage of the total supply of units or space of a specific commercial type that is vacant and available for occupancy at a particular point in time within a given market.

Zoning - The act or process of zoning (the creation of zones for the purpose of promoting compatibility among competing land uses) and the resulting land-use restrictions imposed on users within a given jurisdiction by the local planning authority as defined through a series of ordinances.

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