Reference

Commercial real estate glossary

The terms that come up on every income property deal, in plain English.

Leasing and Tenants

Absorption: The pace at which available space is leased or sold in a market over a given period.
Anchor Tenant: A major tenant, usually a large retailer, that drives traffic and helps lease the rest of a center.
Build to Suit: A building the landlord constructs to a specific tenant's requirements, usually tied to a long lease.
Common Area Maintenance (CAM): Charges passed to tenants for the upkeep of shared areas like parking lots, lobbies and landscaping.
Concessions: Incentives a landlord offers to sign a lease, such as free rent, reduced rent or improvement money.
Contract Rent: The rent actually written into the lease, which can differ from market rent.
Escalation Clause: A lease provision that raises rent on a schedule or by an index such as CPI.
Gross Lease: A lease where the landlord pays most operating costs and the tenant pays a single rent figure.
Ground Lease: A long term lease of land only. The tenant builds and owns the improvements during the term.
Leasehold Improvements: Alterations made to a leased space to fit a tenant's use.
Market Rent: The rent comparable space would command today in the open market.
Net Lease: A lease where the tenant pays base rent plus some or all of the property's operating costs.
Percentage Lease: Base rent plus a share of the tenant's gross sales, common in retail.
Rent Roll: A schedule of every tenant with unit, rent, deposit and lease dates. The starting point of any underwrite.
Right of First Refusal: The right to match an offer and buy or lease a property before a third party can.
Sublease: A tenant leasing all or part of its space to another party while remaining liable on the original lease.
Tenant Improvement (TI) Allowance: Money the landlord contributes toward building out a tenant's space.
Triple Net Lease (NNN): The tenant pays rent plus property taxes, insurance and maintenance.
Lease Commencement Date: The date the lease term and rent obligations begin.
Lease Expiration Date: The date the lease ends unless it is renewed or extended.

Valuation and Performance

Capitalization Rate (Cap Rate): Net operating income divided by price. The quickest read on yield and relative value.
Debt Service Coverage Ratio (DSCR): NOI divided by annual debt service. Lenders typically want 1.20x to 1.25x or better.
Gross Rent Multiplier (GRM): Price divided by gross annual rent. A fast screen for small multifamily.
Fair Market Value: The price a willing buyer and willing seller would agree on with neither under pressure.
Highest and Best Use: The legal, physically possible and financially feasible use that produces the most value.
Loan to Value (LTV): The loan amount as a percentage of the property's value.
Net Operating Income (NOI): Income after operating expenses and before debt service and income taxes.
Operating Expenses: The recurring costs of running a property: taxes, insurance, utilities, repairs, management.
Pro Forma: A forward projection of income and expenses used to evaluate a deal.
Return on Investment (ROI): Profit relative to the total capital invested.
Cash Flow: What is left after operating expenses and debt service.
Vacancy Rate: The share of space that is unoccupied, a key signal of market health.
Appreciation: An increase in property value over time.
Depreciation: A decline in value over time, and separately the tax deduction for wear on improvements.
Equity: Property value minus the debt against it.

Financing and Transactions

Amortization: Paying down a loan through scheduled payments of principal and interest.
Debt Service: Total principal and interest paid on a loan over a period.
Loan Commitment: A lender's formal agreement to fund on stated terms.
Sale Leaseback: An owner sells the property and leases it back, freeing capital while staying in place.
Covenant: A binding promise in a deed, loan or lease.
Due Diligence: Investigating a property's physical condition, financials, title and entitlements before closing.
Reversion: The return of a property to the owner or lessor when a lease or interest ends, or the sale value at the end of a hold.
1031 Exchange: A tax deferred exchange of one investment property for another of like kind under IRC Section 1031.

Property, Use and Costs

Building Classifications: Class A, B and C ratings based on age, quality, location and amenities.
Rentable Square Feet (RSF): Usable area plus a share of common areas. What rent is usually quoted on.
Usable Square Feet (USF): Space a tenant occupies exclusively.
Zoning: Local rules that govern what can be built and how a property can be used.
Capital Expenditures (CapEx): Spending on major replacements and upgrades, as opposed to routine repairs.
Capital Improvement: An upgrade that extends a property's life or increases its value.
Turnkey Property: A property ready to occupy or operate with little additional work.

This is for informational purposes only. Consult your attorney, tax advisor or other qualified professional.