A reduction in taxes/penalties or a rebate. Often referred to as free rent. May happen at the beginning of the lease term, outside the lease term or at intermittent intervals during the lease term.
Localities may also offer a tax abatement to businesses or developers to entice them to move into a city.
The amount of inventory that becomes occupied over a specified period of time in a given market, typically reported as the absorption rate.
- Accredited Investor
A term used by the Securities and Exchange Commission (SEC) under Rule 501 of Regulation D. In order to qualify as an accredited investor you must meet one of the following criteria:
- Earn an individual income of more than $200,000 per year, or a joint income with your spouse of $300,000, in each of the last two years and expect to reasonably maintain the same level of income.
- Have a net worth exceeding $1 million, either individually or jointly, excluding your primary residence.
- Accrual Rate
The periodic rate at which interest is due on a loan. This rate may differ from the current pay rate.
- Accrued Interest
Interest due on a loan that has not yet been paid. Accrued interest usually must be paid before any principal reductions are allowed on the loan.
- Adaptive Reuse
The process of reusing an existing building for a different purpose than what it was originally built for. For example, a mill building that has been converted into loft apartments.
- Add-on Factor
The number of usable square feet divided by the number of rentable square feet in a lease.
In commercial real estate, lease cost is calculated based on the rentable area, which includes areas that are not usable. Non-usable space includes common areas shared with other tenants and space occupied by structural components. This means that for the same amount of usable space, a building with a lower add-on factor will cost the tenant less than a building with a higher add-on factor. Potential tenants can use the add-on factor to compare leases and determine which lease offers the best value.
- Adjustable Rate Mortgage (ARM)
A loan on which the interest rate adjusts periodically (e.g. monthly, every six months, annually). The rate is stated as a spread over a published index rate (e.g. 250 basis points over the 10-Year Treasury).
- Alternative Investment
An investment that is not one of the three traditional asset types (stocks, bonds and cash). Most alternative investments are held by institutional investors or accredited, high-net-worth individuals due to their complex nature, limited regulations and relative lack of liquidity. Alternative investments include hedge funds, managed futures, real estate, commodities and derivatives contracts.
A repayment schedule of loan principal over a period of time until the debt is paid off; the periodic payment consists of a growing portion of principal and a declining portion of interest over time.
- Anchor Tenant
Usually the largest and leading tenant in a commercial property. Due to the anchor tenant’s brand equity and ability to drive traffic to the site, other smaller tenants are often attracted to the same area. An example of an anchor tenant in a retail property would be a grocer.
- Annual Debt Service
The total amount of principal and interest required each year for payment on debt obligations.
A valuation of property by an authorized person. Appraisers use several valuation methods to determine a property’s current market value.
An increase in the value of an asset over time. The increase can occur for a number of reasons including increased demand or weakening supply, or as a result of changes in inflation or interest rates.
- Assessed Value
The value assigned to a property by a tax assessor on land and/or structures for purposes of levying real estate taxes.
- Availability Rate
The ratio of available space to total rentable space, calculated by dividing total available square feet by total rentable square feet.
- Available Space
The total amount of space that is marketed as available for lease in a given time period. This includes any space that is available, regardless of whether that space is vacant, occupied, available for sublease, or available at a future date.
- Average Daily Rate (ADR)
A hospitality metric measuring the average rate paid for rooms sold, calculated by dividing total daily room revenue by rooms sold on a given day. This is one of the core indicators used to measure the operating performance of a hotel.
- Balloon Payment
An oversized payment due with the final payment of a loan. This payment encompasses the remaining loan balance because the life of the loan was shorter than the amortization period.
- Base Rent
A set amount used as a minimum rent with provisions for increasing the rent over the term of the lease.
- Base Year Stop
The annualized amount per rentable square foot that a landlord pays toward the operating expenses of a building. Amounts exceeding the expense stop in subsequent years are billed back to the tenant. Expense stops are often set following the first year ("Base Year") of the lease.
The total amount paid for a property, including equity capital and the amount of debt incurred.
- Basis point (BPS)
One hundredth of one percentage point, or 1/100 of 1 percent. Basis points are often used when comparing interest rates.
A term seen in retail leases, this is the sales threshold over which percentage rent is due. Breakpoint is calculated by dividing the annual base rent by the negotiated percentage applied to the tenant’s gross sales.
- Bridge Loan
A loan of short duration that is utilized to “bridge the gap” until permanent financing can be secured.
The space improvements put in place as requested by the Tenant (this considers the amount of Tenant Improvement Allowance provided for in the lease agreement).
A contract in which the owner agrees to develop a particular property specifically for a certain tenant to occupy, with structural features designed specifically for the needs of that tenant. A build-to-suit can be leased or owned by the tenant. In a leased build-to-suit, a tenant will usually have a long-term lease on the space.
- Capital Gain
An increase in the value of a capital asset (investment or real estate) that gives it a higher worth than the purchase price. The gain is not realized until the asset is sold.
- Capital Stack
A description of the totality of capital invested in a project, including pure debt, hybrid debt and equity. The stack is described as containing the most risk at the top, traveling down the stack to the position with the least risk at the bottom. The higher the position in the stack, the higher the expected returns.
- Capitalization Rate (Cap Rate)
The ratio between the yearly income that a property produces before reserves, capital costs and debt service—also known as Net Operating Income (NOI)—and the value of the property. The Cap Rate is determined by dividing the NOI by the Property Value. This metric estimates the investor’s annual potential return on their investment.
- Cash-on-Cash Return
The annual return on an investment calculated by dividing the levered cash flow (NOI less reserves, capital costs and debt service) by total equity investment. Also referred to as Equity Yield Rate.
- Commercial Mortgage Backed Security (CMBS)
Securities collateralized by a pool of mortgages on commercial real estate in which all principal and interest from the mortgages flow to certificate holders in a defined sequence or manner.
- Common Area Maintenance (CAM)
CAM refers to the payments by the tenant for the conservation of any shared areas within a property. Common areas include spaces such as parking areas, restrooms and lobbies.
A relief or reduction in total payments for a period of time, used as an incentive to attract or retain tenants in lease agreements. Concessions can include reduced or free rent (abatements) for a portion of the lease period, above-market tenant improvement and work letters. Concessions are generally a response to current market conditions.
- Contiguous Blocks of Space
Space within a property that is currently, or can be, joined together to create a single contiguous space.
- Contract Rent
The current value being paid by a tenant according to the specifications of the lease. Contract rent will differ from market rent based on market cycles.
- Cost Approach
A valuation approach used to determine a property’s value by evaluating the cost to build an exact replica of the structure being valued.
- Co-Tenancy Provisions
A lease clause most often found in retail leases that permits a tenant to reduce its rent or cancel its lease if another major tenant vacates the property and another equal tenant does not take occupancy.
- Corporate Guarantee
A guaranty made by the issuer (issuer guaranty) or a third-party to cover losses due to delinquencies up to the guaranteed amount. Corporate guarantees can be found in leases and mortgages.
Provides custody of the assets, processes all transactions, maintains other records pertaining to them, files required IRS reports, issues client statements, helps clients understand the rules and regulations pertaining to certain prohibited transactions, and performs other administrative duties on behalf of the self-directed IRA owner. Self-directed IRA custodians are equipped to handle the increased complexity of documentation required for transactions involving alternative investments.
- Debt Service
The scheduled payments due on a loan, including principal, interest and any other fees required by the loan agreement.
- Debt Service Coverage Ratio (DSCR)
Calculated by dividing the property’s Net Operating Income (NOI) by the debt service. DSCR is a measure of a mortgaged property’s ability to meet monthly debt service payments. The higher the ratio, the more likely a property is to continually cover its debt service. A DSCR less than 1.0 means that there is insufficient cash flow to cover debt payments.
- Debt Yield
Calculated by dividing the Net Operating Income (NOI) by the total outstanding loan amount. In its simplest form, the Debt Yield is the expected return on investment for a lender were it to take back the property through foreclosure.
A prepayment method whereby the collateral on a mortgage is replaced with government bonds which replicate the scheduled cash flows for the remainder of the loan term. Defeasance guarantees that future cash flows will be undisturbed by the prepayment, and effectively raises the credit rating on the collateral to the U.S. Government’s credit rating. The cost of the defeasance to the borrower is the difference between the remaining loan balance and the cost of the government securities replacing the loan.
- Deferred Maintenance Account (Replacement Reserve Account)
A reserve account established by the borrower to cover future property maintenance costs.
The characteristics of a population in a given area, more specifically population size, income levels, age, race and gender.
The reduction in the value of an asset due to time and ageing. In real estate, buildings and improvements can take a depreciation deduction for tax purposes, while land is excluded.
- Discount Rate
The rate used in Discounted Cash Flow (DCF) analysis to determine the present value of future cash flows. The discount rate not only takes into account the time value of money, but also the risk or uncertainty of future cash flows. The greater the uncertainty of future cash flows, the higher the discount rate.
- Discounted Cash Flow Analysis
Discounted Cash Flow (DCF) Analysis is a valuation method used to estimate the attractiveness of an investment opportunity. Discounted cash flow analysis discounts future cash flow projections at a specified discount rate to arrive at a present value.
- Due Diligence
Part of the underwriting process that involves the inspection of a property, analysis of the market, assessment of the tenancy and the evaluation of financial records. Proper due diligence protects investors from unethical and unprofessional practices and is said to be the cornerstone of securities law.
A loan agreement that provides additional funds to a borrower once certain operating performance hurdles are hit such as debt yields, debt service coverage ratios or loan to values. Earn-out loans are made on properties of which performance is expected to improve in the near-term due to factors such as renovations, re-tenanting or repositioning.
- Economic Base
- Effective Rent
Effective rent is the contract rent less free rent and any cash allowances such as a lease buyout or moving allowance. Escalations in the lease are included in the effective rent, however tenant improvements and brokerage commissions are not subtracted from the contract rate.
- Equity Multiple
A ratio dividing the total net profit plus the maximum amount of equity invested by the maximum amount of equity invested. The Equity Multiple of an investment does not take into account when the return is made and does not reflect the risk profile of the offering or any other variables potentially affecting the project’s return.
A deposit held by a third party on behalf of a borrower and a lender in a transaction. The funds are held by the escrow service until it receives the appropriate written or oral instructions or until obligations have been fulfilled.
- Fair Market Value
The fair market value of a property is the price it would receive in an open marketplace given all prospective buyers have the same level of knowledge of the asset, there is no undo pressure for the sale to be completed, and a reasonable time period was provided for the transaction to be completed.
- Feasibility Analysis
An analysis that determines the likelihood of success for a given project. The analysis takes into account many factors including legal, economic, technological and capital markets. An effective feasibility analysis takes into account both negative and positive outcomes and allows decision makers to compare multiple projects.
- Fixed Lease
A lease in which the tenant pays a fixed payment for the entirety of the contract.
- Gross Leasable Area (GLA)
The total square footage of a building generally measured from the external walls.
- Gross Lease
A type of commercial lease where the landlord pays for all taxes, insurance and maintenance. These charges are included in the base rent and a tenant will generally pay the increases over a base year stop.
- Gross Rent Multiplier
The gross rent multiplier is often used in smaller apartment buildings to determine the property’s value. This method uses the annualized income from the property’s rents and applies a multiplier to determine the value.
- Ground Lease
A ground lease is generally a long-term (often 99 years) lease to a developer or tenant to develop building improvements. The developer or tenant will own the structures and pay rent to the landlord for use of the land during the term of the lease. At the end of lease, the land and all structures and enhancements revert to the land owner.
- Highest and Best Use
The rationally credible and permissible use of land or a vacant property that produces the best financial outcome and overall return.
- Hold Period
The hold period is the lifespan of a given investment.
- Internal Rate of Return (IRR)
The rate of return on invested capital that is generated, or capable of being generated, from the investment within the ownership period. IRR in its simplest terms is the estimated total interest rate paid to an investor for their initial contribution.
The owner of a property, otherwise known as the lessor.
A contract between the lessor and the lessee, the tenant. A binding agreement that gives the tenant exclusive use of property for a payment of rent.
- Lease Buyout
The process in which a tenant, landlord or third party pays to terminate the tenant’s existing lease agreement.
The tenant leasing or renting the property.
The landlord that is renting out the property to another person or business.
- Letter of Intent (LOI)
A letter of intent is a non-binding agreement between the landlord and tenant that states the two parties’ will to enter into a transaction. The document outlines the proposed transactions to which either party can review and counter.
The usage of borrowed funds to help fund an investment. The use of leverage allows a borrower to maximize their purchasing power and afford larger properties. Leverage can also produce increased returns on equity, but can also add risk.
If the cap rate (NOI/Purchase Price) is greater than the loan constant (Debt Service/Loan Amount) then using leverage will magnify returns (Positive Leverage). If the cap rate is less than the loan constant, additional leverage will hurt overall returns.
- Limited Liability Company (LLC)
A corporate structure whereby the members of the company cannot be held personally liable for the company's debts or liabilities. A LLC combines the characteristics of a corporation and a partnership or sole proprietorship. While the limited liability feature is similar to that of a corporation, the availability of flow-through taxation to the members of a LLC is a feature of partnerships.
The ease and frequency which an asset or security can be bought or sold in the secondary market.
- Loan Constant
An interest factor used to calculate the debt service of a loan. When the loan constant is multiplied by the loan principal, it will give you the dollar amount of the payment.
Example: a $1,000,000 loan with a 10% constant will yield a $100,000 annual payment. The formula for the loan constant is the annual loan payment/loan amount = loan constant.
- Loan to Value Ratio (LTV)
This ratio compares the amount of money borrowed to the market value of a property.
- Market Data Approach
A valuation approach that analyzes recent sales or rental prices of comparable properties in a specified area.
- Market Rent
The rental value a property would achieve if it were leased today. The market rent is determined by location, building specifications and similar properties—also known as comparables—in the area.
- Mezzanine Debt
A subordinate loan that gives the lender the rights to convert to an ownership or equity interest in the company if the loan is not paid back in time and in full. Mezzanine debt is the level of debt between senior or asset-backed debt and corporate equity.
- Net Lease
A net lease is the opposite of a gross lease. This lease requires that the tenant pay for all taxes, insurance and maintenance costs. There are three forms of this lease: single net (N), double net (NN) and triple net (NNN). A single net lease requires the tenant to pay for property taxes. A double net lease requires the tenant to pay for property taxes and insurance. Lastly, a triple net lease requires the tenant to pay for all three taxes, insurance and maintenance expenses.
- Net Operating Income (NOI)
This income is comprised of the complete rental income from all tenants and other sources of revenue minus all operating expenses, which include taxes, maintenance, insurance etc. The Net Operating Income (NOI) is one of the most important values for an investor to analyze because this quantitative amount includes their return. However it is important to note that the NOI does not consider financing nor capital improvement costs.
- Occupancy Cost
The expense paid out by a tenant to occupy a unit. This can either be expressed in after-tax or pre-tax dollars.
- Occupancy Rate
The comparison between the total number of rooms or units to the total amount of space available. Example: A strip mall has 20 available units for different tenants. Currently there are 15 spaces occupied. The occupancy rate would be 75%. This rate is important to investors because it is a quick indication of anticipated cash flows.
- Operating Expenses
Payments necessary to operate and maintain a property. Some typical operating expenses are property management, real estate taxes and maintenance expenses.
- Participation Mortgage
This is a loan that is secured by real property. This allows the lender to receive part of the earnings from production or resale.
- Perfect Market
In contrast to an imperfect market, a perfect market is homogenous in its offerings and no one buyer or seller may directly impact it.
- Physical Depreciation
The physical decay or deterioration that a property may receive from aging, weather or breakage.
- Population Migration
This refers to the migration or movement of people from one place to another due to economic and social factors. This can have a major effect on real estate values.
- Potential Gross Income
The total income generated by the operations of the property before any expense payments.
- Property Type
The organization of commercial real estate based on its use. Classifications include: industrial, office, retail and multi-family residential.
- Real Estate Investment Trust (REIT)
A security that sells like stocks, however it directly invests in real estate through properties or mortgages. Investors can buy shares of these companies as another way to invest in the real estate industry. REITs receive special tax consideration and often offer investors high yields.
- Rentable Square Footage
The square footage of the entire property that the tenant will pay rent for. Rentable area includes common areas such as lobbies and restrooms.
- Residual Value
The amount a fixed asset is worth at the end of its lease, or at the end of its useful life.
- Revenue Per Available Room (RevPar)
A performance metric in the hotel industry. The total hotel guestroom revenue over a specified time period divided by the number of available rooms in the hotel in the same time period. This can also be calculated by multiplying a hotel's average daily room rate (ADR) by its occupancy rate.
A financing and leasing strategy in which a landlord sells its property to an investor. In turn, the investor then leases it back which frees up capital.
- cale Economies
The idea of reducing costs by producing more.
- Self-Directed IRA (SDIRA)
A retirement account in which the individual investor is in charge of making the investment decisions and provides the investor with an opportunity to diversify their investments. All securities and investments are held in an account administered by a custodian.
- Senior Debt
Borrowed money that a company must repay first if it goes out of business. Companies have a number of options for obtaining financing, including bank loans and the issuance of bonds and stocks. Each type of financing has a different priority level in being repaid if the company decides to liquidate.
Senior debt is secured by collateral, and that collateral can be sold to repay the senior debt holders. As such, senior debt is considered lower risk and carries a relatively low interest rate.
- Site Factors
Qualities, conditions or elements that are important in the overall evaluation of an individual site or property.
- Special Purpose Entity (SPE)
Also referred to as a "bankruptcy-remote entity" whose operations are limited to the acquisition and financing of specific assets. The SPE is usually a subsidiary company with an asset/liability structure and legal status that makes its obligations secure even if the parent company goes bankrupt.
- Technical Feasibility
The evaluation of multiple sites to determine which should be considered further based on environmental concerns, physical restrictions, regulatory requirements and legal considerations.
A business or person that has control of a property through a contractual lease.
- Tenant Improvements
Customized improvements to a building or unit that the owner makes as a part of the lease agreement in order to fulfill the needs of the tenant.
- Time Value of Money
A principle that recognizes that a dollar today has a greater value than a dollar in the future because of its earning power.
- Usable Square Footage
The actual square footage rented and used by the tenant. This includes storage, rest rooms and other areas used only by one specific tenant. This square footage does not include common areas such as lobbies, shared hallways and shared rest rooms.
- Vacancy Rate
The opposite of occupancy rate, the vacancy rate is the percentage of the total amount of vacant space divided by the total amount of existing inventory. Example: A strip mall has 20 available units for different tenants. Currently there are 15 spaces occupied and 5 units vacant. This means there is a 25% vacancy rate.
The classification of different areas by planning authorities for the purpose of legally outlining what specific land must be used for. An example of a classification of land use is retail or industrial.
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