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The Key Commercial Investment Property Terms You Should Know
Category: BusinessAnchored tenants: big brand-name national tenants, e.g. Albertsons, Longs Drug, Walmart that bring in lots of traffic to the shopping center.
adjusted sale price: The figure produced when the transaction price of a comparable sale is adjusted for elements of comparison.
Anticipation: The perception that value is created by the expectation of benefits to be derived in the future.
Arms length transaction: A transaction between unrelated parties under no duress.
Assemblage: The combining of two or more parcels, usually but not necessarily contiguous, into one ownership or use.
Balance: The principle that real property value is created and sustained when contrasting, opposing, or interacting elements are in a state of equilibrium.
CAM: Common Area Maintenance. Associated with CAM is CAM fees. For NNN leases, the term CAM fees refer to the money tenants pay landlord to cover property taxes, insurance and maintenance.
Cap rate: Capitalization rate or the ratio of Net Operating Income over purchase price. The higher the cap rate, the higher the rental income in term of percentage. For people who invest in the stock market, cap rate is the inverse of P/E ratio. Any rate used to convert income into value.
Cash on cash: annual percentage return of your down payment not including appreciation.
capital recovery: The return to investors of that portion of their property investment expected to be lost over the income projection period.
capital recovery rate: The return of invested capital, expressed as an annual rate; often applied in a physical sense to wasting assets with a finite economic life.
cash equivalency analysis: The procedure in which the sale prices of comparable properties sold with atypical financing are adjusted to reflect typical market terms.
comparables: A shortened term for similar property sales, rentals, or operating expenses used for comparison in the valuation process.
comparative unit method: A method used to derive a cost estimate in terms of dollars per unit of area or volume based on known costs of similar structures that are adjusted for time and physical differences.
competition: The active demand for real estate by two or more market participants.
Conduit loan: also called Commercial Mortgage Backed Securities (CMBS) loan often with the lower rate than traditional commercial loan but either has high pre-payment penalty (called defeasance or Yield Maintenance Penalty) or does not have payoff flexibility.
consideration: The recorded price for which title to a property is transferred.
conventional loan: A mortgage that is neither insured nor guaranteed by an agency of the federal government, although it may be privately insured.
cost index: A multiplier used to translate a known historical cost into a current cost estimate. cost to cure. The cost to restore an item of deferred maintenance to new or reasonably new condition.
CPD: Car Per Day or traffic volume on a road.
CPI: Consumer Price Index. It’s often used to calculate annual rental increase to compensate for inflation.
curable functional obsolescence: An element of accrued depreciation; a curable defect caused by a flaw in the structure, materials, or design.
curable physical deterioration: An element of accrued depreciation; a curable defect caused by deferred maintenance.
debt coverage: The ability of a property to meet its debt service out of net operating income.
debt/equity ratio: The ratio between an enterprises loan capital and its equity capital.
debt service: The periodic payment that covers interest on, and retirement of. the outstanding principal of the mortgage loan.
deferred maintenance: Curable, physical deterioration that should be corrected immediately, although work has not commenced.
depreciation: 1) In appraising, a loss in property value from any cause; 2) In regard to improvements, depreciation encompasses both deterioration and obsolescence.
direct capitalization: A method used to convert an estimate of a single years income expectancy into an indication of value in one direct step, either by dividing the income estimate by an appropriate rate or by multiplying the income estimate by an appropriate factor.
discounted cash flow analysis: The procedure in which a discount rate is applied to a set of projected income streams and a reversion. The analyst specifies the quantity, variability, timing, and duration of the income streams as well as the quantity and timing of the reversion and discounts each to its present value at a specified yield rate.
Due Diligence Period: the duration after acceptance normally 15-30 days to allow buyer to investigate about the property. Buyer can cancel the contract during this time for any reasons and get full refund of the deposit.
easement. An interest in real property that conveys use, but not ownership, of a portion of an owners property.
economic age life method. A method of estimating accrued depreciation in which the ratio between the effective age of a building and its total
economic life is applied to the current cost of the improvements to obtain a lump sum deduction.
economic life: The period over which improvements to real property contribute to property value.
effective age. The age indicated by the condition and utility of a structure.
effective gross income (EGI). The anticipated income from all operations of the real property after an allowance is made for vacancy and collection losses.
effective gross income multiplier. The ratio between the sale price (or value) of a property and its effective gross income.
effective interest rate Interest per dollar per period; the nominal annual interest rate divided by the number of conversion periods per year.
equity. The net value of a property, calculated by subtracting all liens or other charges against the property from its total value.
equity capitalization rate An income rate that reflects the relationship between a single years pretax cash flow expectancy and the equity investment.
equity debt ratio. The ratio of the equity value or equity capital invested in a property to the amount of debt incurred on that property.
equity ratio The ratio between the down payment paid on a property and its total price; the fraction of the investment that is unencumbered by debt.
equity yield. The dollar return on equity from all sources.
escalation clause. A clause in an agreement that provides for the adjustment of a price or rent based on some event or index.
estate. A right or interest in property. excess land. The land not needed to accommodate the sites highest and best use.
Estoppel Certificate: a letter provided and signed by tenant confirming the current rent and terms.
excess rent. The amount by which contract rent exceeds market rent at the time of the appraisal; created by a lease favorable to the landlord.
expense ratio. The ratio of total expenses, excluding debt service, to either potential or effective gross income.
externalities. The principle that economics outside a property have a positive effect on its value while diseconomies outside a property have a
negative effect upon its value.
external obsolescence. An element of accrued depreciation; a defect, usually incurable, caused by negative influences outside a site and generally incurable on the part of the owner, landlord, or tenant.
fee simple estate. Absolute ownership unencumbered by any other interest or estate, subject only to the limitations imposed by the governmental powers of taxation, eminent domain, police power, and escheat.
fixed expenses. Operating expenses that generally do not vary with occupancy and which prudent management will pay whether the property is occupied or vacant.
Full-service lease: lease in which tenant pays rent that covers everything including utilities.
functional utility. The ability of a property or building to be useful and to perform the function for which it is intended according to market tastes and standards; the efficiency of a buildings use in terms of architectural style, design and layout, traffic patterns, and the size and type of rooms.
GLA: Gross Leaseable Area or total rentable area. This is the space that can be leased and receive rental income. It does not include spaces for utilities room, elevator, etc.
grantee. A person to whom property is transferred by deed or to whom property rights are granted by a trust instrument or other document.
grantor. A person who transfers property by deed or grants property rights through a trust instrument or other document.
gross building area. The total floor area of a building, including below grade space but excluding unenclosed areas, measured from the exterior of the walls.
Gross income: total annual income attributable to real property at full occupancy before vacancy and operating expenses are deducted.
gross income multiplier The ratio between the sale price of a property and its potential gross income or effective annual gross income.
gross leaseable area The total floor area designed for the occupancy and exclusive use of tenants,
gross lease. A lease in which the landlord receives stipulated rent (tenants just pay rent) and is obligated to pay all or most of the operating expenses of the property, (eg.: insurance, maintenance, real estate taxes.)
operating expenses: insurance, maintenance, real estate taxes.
gross rent multiplier GRM-The relationship or ratio between the purchase price or value of a property and its gross rental income.
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. The four criteria the highest and best use must meet are legal permissibility, physical possibility, financial feasibility, and maximum profitability.
holding period. The term of ownership of an investment.
incurable functional obsolescence. An element of accrued depreciation; a defect caused by a deficiency or superadequacy in the structure, materials, or design, which cannot be practically or economically corrected.
incurable physical deterioration. An element of accrued depreciation; a defect caused by physical deterioration that cannot be practically or economically corrected.
insurable value. 1) The portion of the value of an asset or asset group that is acknowledged or recognized under the provisions of an applicable loss insurance policy. 2) Valued used by insurance companies as the basis for insurance .
interim use. The temporary use to which a site or improved property is put until it is ready to be put to its future highest and best use.
internal rate of return The annualized yield rate of return or rate of return on capital that is generated or capable of being generated within an
investment or portfolio over a period of ownership.
land to building ratio. The proportion of land area to gross building area.
land residual technique. A capitalization technique in which the net operating income attributable to the land is isolated and capitalized to indicate the lands contribution to total property value.
lease. A written document in which the rights to use and occupy land or structures are transferred by the owner to another for a specified period of time in return for a specified rent.
leased fee estate. An ownership interest held by a landlord with the rights of use and occupancy conveyed by lease to others.
leasehold estate. The interest held by the lessee (the tenant or renter) through a lease conveying the rights of use and occupancy for a stated term under certain conditions.
LLC: Limited Liabilities Company. A legal entity many investors formed to own commercial properties.
loan to value ratio The ratio between a mortgage loan and the value of the property pledged as security; usually expressed as a percentage
LOI: Letter of Intent/Interest or the normally non binding offer letter used to make an offer to buy a commercial property.
MAI appraiser: Member Appraisal Institute commercial appraiser.
Market rent. The rental income that a property would most probably command in the open market; indicated by the current rents paid and asked for comparable space as of the date of the appraisal.
Master lease: lease signed by the seller to rent the vacant space to provide rent guarantee.
Mixed Use: commercial properties with retail on 1st floor and apartment on upper floors.
mortgage constant The capitalization rate for debt; the ratio of the annual debt service to the principal amount of the mortgage loan.
net lease. A lease in which the tenant pays all property operating expenses in addition to the stipulated rent.
NOI: net operating income The actual or anticipated net income that remains after all operating expenses are deducted from effective gross income, but before mortgage debt service and book
nominal interest rate A stated or contract rate; an interest rate, usually annual, that does not necessarily correspond to the true or effective rate of growth at compound interest.
obsolescence. One cause of depreciation; an impairment of desirability and usefulness caused by new inventions, changes in design, improved processes for production, or other external factors that make a property less desirable and valuable for a continued use.
occupancy rate. The relationship or ratio between the income received from the rented units in a property and the income that would be received if all the units were occupied.
operating expense ratio The ratio of total operating expenses to effective gross income.
operating expenses. The periodic expenditures necessary to maintain the real property and continued production of the effective gross income, assuming prudent and competent management.
overall capitalization rate An income rate for a total real property interest that reflects the relationship between a single years net operating income expectancy or an annual average of several years income expectancies and total property price or value; used to convert net operating income into an indication of overall property value.
Pad: stand alone building in a prime location of a big shopping center.
paired data analysis. A quantitative technique used to identify and measure adjustments to the sale prices or rents of comparable properties; to apply this technique, sales or rental data on nearly identical properties are analyzed to isolate a single characteristics effect on value or rent.
Pass Thru: see reimbursement.
Percentage lease: lease in which tenant pays base rent plus a percentage of tenants revenue.
Phase I Report: inspection report that provides an assessment for soil/environment contamination. It’s normally required by the lender as part of loan approval process for a commercial property.
Phase II Report: inspection report for soil & groundwater subsurface investigation. This inspection is more extensive which involves testing to see if there is any soil and water contamination.
Proforma income: potential, i.e. higher, income when the property is 100% leased.
Proforma Cap rate: potential cap rate assuming property is 100% leased at market rent.
Reimbursement: the share of property tax, insurance & CAM fees that a tenant has to pay the landlord besides the base rent.
remaining economic life. The estimated period during which improvements will continue to contribute to property value.
Rent guarantee: rent paid by the seller to buyer for vacant spaces until they are leased.
replacement allowance. An allowance that provides for the periodic replacement of building components that wear out more rapidly than the building itself and must be replaced during the buildings economic life.
replacement cost The estimated cost to construct, at current prices as of the effective appraisal date, a building with utility equivalent to the building being appraised using modem materials and current standards d i d layout.
residual techniques. Procedures used to capitalize the income allocated to an investment component of unknown value after all investment components of known values have been satisfied.
reversion. A lump sum benefit that an investor receives or expects to receive at the termination of an investment; also called reversionary benefit.
reversion factor. A compound interest factor that is used to discount a single future payment to its present worth, given the appropriate discount rate and discount period.
risk factor. The portion of a given return or rate of return from capital invested in an enterprise that is assumed to cover the risks associated with the particular investment.
sale/leaseback. A financing arrangement in which real property is sold by its owner/user, who simultaneously leases the property from the buyer for continued use.
sandwich lease. A lease in which an intermediate, or sandwich, leaseholder is the lessee of one party and the lessor of another. The owner of the sandwich lease is neither the fee owner nor the user of the property; he or she may be a leaseholder in a chain of leases, excluding the ultimate sublessee.
SBA Loan: a government-guaranteed loan for owner-occupied properties.
sublease. An agreement in which the lessee in a prior lease conveys the right of use and occupancy of a property to another, the sublessee.
substitution. The appraisal principle that states that when several similar or commensurate commodities, goods, or services are available, the one with the lowest price will attract the greatest demand and widest distribution.
supply and demand. In real estate appraisal context, the principle of supply and demand states that the price of real property varies directly, but not necessarily proportionately, with demand and inversely, but not necessarily proportionately, with supply.
Triple Net (NNN) lease: lease in which tenants pay base rent plus property tax, insurance & CAM fees. Absolute NNN lease is NNN lease that tenants also pay property management fee.
units of comparison. The components into which a property may be divided for purposes of comparison; e.g., price per square foot, front foot, cubic foot, room, bed, set, apartment unit.
variable expenses. Operating expenses that generally vary with the level of occupancy or the extent of services provided.
yield capitalization. The capitalization method used to convert future benefits into present value by discounting each future benefit at an appropriate yield rate or by developing an overall rate that explicitly reflects the investments’ income pattern, value change, and yield rate.
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