Glossary of Commercial Real Estate TermsFrom the REALTORS Commercial Alliance12/2005
-- AAbsorptionThe amount of inventory or units of a specific commercial property type that becomeoccupied during a specified time period (usually a year) in a given market, typically reportedas the absorption rate.Accumulated cost recoveryTotal cost recovery deductions taken throughout the holding period of a property.Active incomeIncome from salary, wages, tips, commissions, and activities in which the taxpayermaterially participates. Also see passive income.Add-on factorThe ratio of rentable to useable square feet. Also known as the load factor and therentable-to-useable ratio. Also see efficiency percentage. Formula:Add-on factor Rentable square feetUseable square feetAdd valueFourth stage of four-stage transaction management process pertaining to a transactionmanager’s planning, effort, and continual contact with key decision-makers, investors, andusers, as well as contact with ancillary professionals. This ongoing process allows forfeedback, establishes a network for problem solving, provides a means to offer additionalservices to the client, and enhances the transaction manager’s preparedness for the nextassignment.Adjusted basisThe original cost basis of a property plus capital improvements, less total accumulated costrecovery deductions, and partial sales taken during the holding period.ADSSee annual debt service.Agglomeration economiesCost reductions or savings that come about from efficiency gains associated with theconcentration or clustering of firms/producers or economic activities and the formation of alocalized production network.AmortizationThe repayment of loan principal through equal payments over a designated period of timeconsisting 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 aloan contract.Annual percentage rate (APR)The true annual interest rate payable for a loan in one year taking account of all chargesmade to the borrower, including compound interest, discount points, commitment fees,mortgage insurance premiums. It also takes into account the time at which the principal isrepaid (especially when payments of principal are made in installments throughout the year, 2001 CCIM Institute. All rights reserved. Version 10/01. 2002 National Association of REALTORS . All Rights Reserved.1
Annual percentage rate (APR) continuedbut interest is charged at the beginning of the year), but not the actual expenses incurredby the lender in making the loan and recharged to the borrower. (Encyclopedia of RealEstate Terms 2nd Edition, Damien Abbott)AnnuityRegular fixed payments or receipts over a designated period of time.AppreciationAn investment’s increase in value.Appreciation potentialThe possibility or probability that a real estate investment will increase in value during theholding period.Assessed valueThe value of real property established by the tax assessor for the purpose of levying realestate taxes.Average annual effective rateThe average annual effective rent divided by the square footage.Average annual effective rentThe tenant’s total effective rent divided by the lease term.Averaging methodA simple technique used to forecast next period's/year's vacancy rate by averaging previousyears' vacancy rates; especially effective where vacancy rates have remained relatively flator show little variability over time.-- BBalloon paymentThe final payment of the balance due on a partially amortized loan.Base (in lease terminology)A face, quoted, dollar amount representing the rate or rent in dollars per square foot peryear and typically referred to as the base rate.Base rentThe minimum rent due to the landlord. Typically, it is a fixed amount. This is a face,quoted, contract amount of periodic rent. The annual base rate is the amount upon whichescalations are calculated.Basic employmentEmployment that is considered to be export-oriented or export-driven, associated withactivities that generate income from the sales of products and services in markets outsidethe local economy.BasisThe total amount paid for a property, including equity capital and the amount of debtincurred.Before-tax investment valueThe sum of the present values of the mortgagor and mortgagee of property. 2001 CCIM Institute. All rights reserved. Version 10/01. 2002 National Association of REALTORS . All Rights Reserved.2
Break-even pointThe stage at which an investment produces an income that is just sufficient to coverrecurring expenditure. For an investment in real property, the point at which gross incomeis equal to normal operating expenses, including debt service (the stage at which the nextcash flow becomes positive). Also known as the default point. (Encyclopedia of Real EstateTerms 2nd Edition, Damien Abbott)BreakpointThe sales threshold over which percentage rent is due. It is calculated by dividing theannual base rent by the negotiated percentage applied to the tenant’s gross sales.Business riskThe uncertainty associated with the possible profit outcomes of a business venture.Buy/rent thresholdThe 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 changingmarket conditions.-- CCAMSee common area maintenance.CAM capThe maximum amount for which the tenant pays its share of common area maintenancecosts. The owner pays for any CAM expenses exceeding that amount.Cap rateSee capitalization rate.Capital expendituresProperty improvements that cannot be expensed as a current operating expense for taxpurposes. Examples include a new roof, tenant improvements, or a parking lot—such itemsare 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 operatingexpenses.Capital gainTaxable income derived from the sale of a capital asset. It is equal to the sales price lessthe cost of sale, adjusted basis, suspended losses, excess cost recovery, and recapture ofstraight-line cost recovery.Capital marketThe supply and demand for resources to invest in real estate and other investments.Capitalization rateA 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. 2001 CCIM Institute. All rights reserved. Version 10/01. 2002 National Association of REALTORS . All Rights Reserved.3
Capital taxAny tax on a change in capital value (including capital gains tax, estate tax, or inheritancetax); as distinguished from a tax on income. (Encyclopedia of Real Estate Terms 2ndEdition, Damien Abbott)Cash flowThe net cash received in any period, taking into account net operating income, debt service,capital expenses, loan proceeds, sale revenues, and any other sources and uses of cash.Cash flow after tax/es (CFAT)For properties, it is the result of first calculating the net operating income, less mortgageand construction loan interest, less cost recovery for improvements and personal property,less amortization of loan points and leasing commissions to arrive at real estate taxableincome. Next, real estate taxable income is multiplied by the applicable marginal tax rateto result in the tax liability (savings). Then, from the net operating income, annual debtservice is subtracted to equal the cash flow before taxes (CFBT). Finally, the cash flow aftertaxes (CFAT) is calculated from the CFBT, less the tax liability (savings), plus investmenttax credit. The Cash Flow Analysis Worksheet can be used to calculate a property’s grossoperating income, net operating income, real estate taxable income and tax liability or(savings), CFBT, and CFAT.Net operating income– Interest– Cost recovery– Amortization of loan pointsReal Estate taxable income Investor’s marginal tax rateTax liability (savings)ThenNet operating income– Annual debt serviceCash flow before taxes– Tax liability (savings)Cash flow after taxesCash flow before tax/es (CFBT)For properties, it is the result of calculating the effective rental income, plus other incomenot affected by vacancy, less total operating expenses, less annual debt service, fundedreserves, leasing commissions, and capital additions. The Annual Property Operating Dataform 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 modelThe framework used to determine the cash flow from operations and the cash proceedsfrom sale. 2001 CCIM Institute. All rights reserved. Version 10/01. 2002 National Association of REALTORS . All Rights Reserved.4
Cash-on-cash rateA return measure that is calculated as cash flow before taxes divided by the initial equityinvestment.Cash proceeds from saleThe sales price less sales costs, mortgage balance, and tax liability on sale. Also known assales proceeds after tax.Central place theoryA location theory that accounts for the size, distribution, and organization of settlements,places, market areas, and establishments in a competitive and interdependent urbansystem, to explain differences in the locational tendencies and preferences of businesses asthey seek to maximize market accessibility, sales, and profits.CFATSee cash flow after tax.CFBTSee cash flow before tax.CityAn urban settlement or system containing various functions, agents, institutions, andcomponents which interact and work together to satisfy the wants and needs of itsinhabitants (as well as a portion of the population in surrounding rural areas).Class lifeThe useful economic life of an asset set by the Internal Revenue Service.CloseThird stage of four-stage transaction management process pertaining to bringing the partiestogether and consummating an agreement. The acronym CLOSE represents thecontingencies, legal instruments, obstacles, signatures, and execution involved in the closestage.Commercial real estateAny multifamily residential, office, industrial, or retail property that can be bought or sold ina real estate market.Common areaFor 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. (Real EstateInformation Standards)Common area maintenance (CAM)Charges paid by the tenant for the upkeep of areas designated for use and benefit of alltenants. CAM charges are common in shopping centers. Tenants are charged for parkinglot maintenance, snow removal, and utilities.Community centerA community center is a retail property type that typically offers a wider range of appareland other soft goods than the neighborhood center does. Among the more commonanchors are supermarkets, super drugstores, and discount department stores. Communitycenter tenants sometimes contain off-price retailers selling such items as apparel, home 2001 CCIM Institute. All rights reserved. Version 10/01. 2002 National Association of REALTORS . All Rights Reserved.5
Community center (continued)improvement/furnishings, toys, electronics, or sporting goods. The center is usuallyconfigured as a strip, in a straight line, “L”, or “U” shaped. Of the eight center types,community centers encompass the widest range of formats. For example, certain centersthat are anchored by a large discount department store refer to themselves as discountcenters. Others with a high percentage of square footage allocated to off-price retailers canbe termed off-price centers.Comparative advantageThe principle that cities or regions tend to produce those items or support those activitiesfor which they have the greatest advantage over other areas as defined by the factors ofproduction, demand, supporting industries, and quality of life considerations, as defined inrelation to human, financial, and physical resources, and opportunity costs—costs expressedin terms of opportunities foregone.Competition (retail)A market condition or setting in which numerous firms compete for a share of the retailmarket in a given geographic area; a term which is also used to denote rivals orcompetitors.Compound interestInterest computed on the original principal and accumulated interest.CompoundingA type of calculation in which interest earned is reinvested and earns additional interest.Confidence range method (95%)A statistical method of estimating a range of vacancy rates with a 95% confidence such thatthe expected vacancy rate for the next time period falls within that range (using the samplemean vacancy rate and corresponding standard deviation as input).Contract rentThe total rental obligation, expressed in dollars, as specified in a lease. Also known as baserent. (Real Estate Information Standards)CostThe actual dollar amount paid for a property or the amount needed to build or improve it ata specified time in the future.Cost approachA method of determining the market value of a property by evaluating the costs of creatinga property exactly like the subject.Cost approach improvement valueThe current cost to construct a reproduction of, or replacement for, the existing structureless an estimate for accrued depreciation from all causes. [Appraisal Institute]Cost of capitalSee weighted average cost of capital.Cost of occupancyExpenditures that are required to assume and maintain occupancy of a space. Suchexpenditures include rent and/or mortgage payments, and recurring costs, such as realestate taxes, repairs, operating expenses, and other outgoings directly resulting from theuse of the property. (Encyclopedia of Real Estate Terms 2nd Edition, Damien Abbott)Cost recoveryAn annual deduction based on the class life of an asset. 2001 CCIM Institute. All rights reserved. Version 10/01. 2002 National Association of REALTORS . All Rights Reserved.6
Cost recovery recaptureAccording to the Taxpayer Relief Act of 1997, for properties sold after May 6, 1997, anoncorporate taxpayer will have to recapture, or pay taxes on, any straight-line costrecovery taken during the holding period, to the extent there is any gain.Cross-over chartA visual representation of the relationship between the costs of leasing and owning atvarying discount rates.Cross-over (office use) demandIndustrial space that is used as office space in order to lower the rental rate of a property.Also known as flex space.Customer-spotting approachAn approach to estimating the retail trade area (and sales/revenue potential) for a givenestablishment or center based on the location of existing customers via point-of-saleinformation (by obtaining customer address or zip code data) or customer surveys (byinterviewing customers as they enter the store); data which can later be mapped todetermine the extent of the trade area.-- DDataRefers to information collected and presented in a form that facilitates processing andanalysis.Data dispersionThe amount or degree to which data points in a series are spread or dispersed about theirmean (also referred to as variation about the mean).Debt-coverage ratio (DCR)Ratio of net operating income to annual debt service. Expressed as net operating incomedivided by annual debt service.DepreciationThe loss of utility and value of a property.DemandThe volume or quantity of a product or service purchased, or willing to be purchased, inrelation to price.Demand factorsElements or forces that influence the demand for goods and services in a given marketarea.DemographicsCharacteristics of human populations as defined by population size and density of regions,population growth rates, migration, vital statistics, and their effect on socio-economicconditions.DepreciationThe loss of utility and value of a property. 2001 CCIM Institute. All rights reserved. Version 10/01. 2002 National Association of REALTORS . All Rights Reserved.7
Desktop GISGIS software programs that support a wide variety of functions, queries, and mappingcapabilities for personal computer-based applications, geared toward visual presentationand descriptive analyses of geo-coded data.Differential cash flowThe difference that results when the cash flows from one alternative are subtracted from thecash flows from another alternative.Direct survey methodThe use of personal interviews with key personnel in all major firms within a givencommunity to determine the percentage of a firm’s revenues obtained from sales madeoutside 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 tobe costly and time consuming.Disaggregating demandThe process of separating and identifying the various forces and factors which affect thedemand for a given property type in a given market or the differentiation of demand bycategory (in reference to tenure, household income, and geographic submarket).Disaggregating supplyThe process of separating and identifying the various forces and factors which affect thesupply of a given property type in a given market or the differentiation of supply bycategory (including leased versus owned, unit type, price, and geographic submarket).Discount rateThe percentage rate at which money or cash flows are discounted. The discount ratereflects both the market risk-free rate of interest and a risk premium. Also see opportunitycost.Discounted effective rentThe cash flows over the term of the lease, discounted to the present value.DiscountingThe process of reducing the value of money received in the future to reflect the opportunitycost of waiting to receive the money.Displaced salesSales that result from purchases made by customers who are not located in the subjectservice area (represents a revenue gain for retail establishments as sales are generatedfrom consumers who reside outside the local trade area).DiversificationA method of reducing risk by investing in unrelated (uncorrelated) assets.Drain informationInformation (substantiated and rumored) regarding inventory that is to be removed fromthe market by the forecast period.Drive-time approachAn approach to estimating the trade area (and sales/revenue potential) for a given retailestablishment or center based on the central place theory concept of range and how farpeople are willing to travel to obtain retail goods as defined by drive time or mileage. 2001 CCIM Institute. All rights reserved. Version 10/01. 2002 National Association of REALTORS . All Rights Reserved.8
Due diligenceThe process of examining a property, related documents, and procedures conducted by orfor the potential lender or purchaser to reduce risk. Applying a consistent standard ofinspection and investigation one can determine if the actual conditions do or do not reflectthe information as represented.Dynamic systemA complex and ever-changing or evolving set of diverse and interrelated entities and agentswhich are organized into a coherent and working totality which serves multiple and/orcommon purposes or objectives. Also see system and market dynamics.-- EEconomic baseThose economic activities or sectors in a local or regional economy that account for a certainshare of the area's income that is generated from exports of goods and services.Economic base analysisInquiries that focus on the extent to which changes in basic employment (export-orientedactivities and associated wage-income) affect the economic, employment, and populationgrowth of a local or regional economy.Economic base multiplierA measure that provides a rough estimate of how changes in basic employment will affecttotal employment in a given region (all other things being equal); defined as the ratio oftotal employment to basic employment.Economic characteristicsAttributes of the workforce, including produ
Commercial real estate Any multifamily residential, office, industrial, or retail property that can be bought or sold in a real estate market. Common area For lease purposes, the areas of a building (and its site) that are available for the non-exclusive use of all its tenants, such as lobbies, corridors, and parking lots. (Real Estate
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