Common Commercial Real Estate Terms

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

The repayment of loan principal and interest through equal payments over a designated time period.

The true annual interest rate payable for a loan in one year taking into account all charges made to the borrower, including compound interest, discount points, commitment fees, and mortgage insurance premiums. APR also takes into account the time at which the principal is repaid (particularly payments of principal made in installments throughout the year, when interest is charged at the beginning of the year), but not the actual expenses the lender incurs in making the loan that are recharged to the borrower.

The value of real property that the tax assessor establishes for the purpose of levying real estate taxes.

The final payment of the balance due on a partially amortized loan.

The minimum rent due to the landlord. Typically, it is a fixed amount. This is a face, quoted, contract amount of periodic rent. Escalations are calculated from the annual base rate. See contract rent.

A contract in which the owner agrees to develop or finish a property or space to the specifications of the tenant. The tenant may partly carry the cost in the form of increased rent.

Taxable income derived from the sale of a capital asset. It equals the sale price less the costs of sale, adjusted basis, suspended losses, excess cost recovery, and recapture of straight-line cost recovery.

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 known as cap rate.

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

The 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.

Charges the tenant pays 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 items such as parking lot maintenance, snow removal, and utilities.

A method of determining the market value of a property by evaluating the costs of creating a property exactly like it.

An annual deduction based on the class life of an asset.

Ratio of net operating income to annual debt service. Expressed as net operating income divided by annual debt service.

Characteristics of human populations as defined by population size and density of regions, population growth rates, migration, vital statistics, and their effect on socioeconomic conditions.

The loss of utility and value of a property.

A method of reducing risk by investing in unrelated (uncorrelated) assets.

The process of examining a property, related documents, and procedures conducted by or for the potential lender or purchaser to reduce risk. Applying a consistent standard of inspection and investigation can determine whether actual conditions reflect the information represented.

Economic activities or sectors in a local or regional economy that account for a certain share of the area’s income that is generated from exports of goods and services.

Features or state of the physical environment and the surroundings, factors, or forces that influence or modify that environment.

Real estate traded for other like-kind property. Under Section 1031 of the Internal Revenue Code, like-kind property used in a trade or business or held as an investment can be exchanged with all capital gains taxes deferred until the newly acquired real estate is disposed of in a taxable transaction. The philosophy behind the deferral of capital gains taxes is that taxation should not occur as long as the original investment remains intact in the form of like-kind real estate (like-kind refers to real property as such, rather than the quality or quantity of property).

Costs that do not change with a building’s occupancy rate. They include property taxes, insurance, and some forms of building maintenance.

A term used to describe industrial and commercial properties. The property type often is developed in an industrial park setting or as a build-to-suit on a selected piece of property. Freestanding properties usually are designed for manufacturing, distribution, assembly, packaging, and similar uses. In commercial establishments providing goods and services in single- or multiple-use buildings of various sizes, the larger, newer freestanding stores also are referred to as big boxes.

A lease in which the landlord pays all expenses associated with owning and operating the property. Contrast with net lease.

The total income generated by property operations before payment of operating expenses. It is calculated from potential rental income, less vacancy and credit losses, plus other income not affected by vacancy. The Annual Property Operating Data form or the Cash Flow Analysis Worksheet can be used to calculate a property’s gross operating income.

A method investors may use to determine market value. It calculates the market value of a property by using the gross rents an investor anticipates the property will produce at end of year one multiplied by a given factor. This factor is known as the gross rent multiplier, which is derived from the marketplace.

A lease of the land only. Usually the land is leased for a relatively long time period to a tenant that constructs a building on the property. A ground lease separates ownership of the land from ownership of buildings and improvements constructed on the land.

A determination of the highest and best use of one or more vacant or as though vacant properties as improved by examining the profitability of all possible use scenarios, including renovation, rehabilitation, demolition, and replacement.

The total number of households in a given geographic market or submarket as defined by specific demographic and socioeconomic characteristics.

The total number of housing units demanded in a given market, defined as occupied household units divided by one minus the vacancy allowance for that market. Demand is affected by the rate at which new households are being added to the market, allowing for a normal vacancy level.

A method to estimate the value of an income-producing property by converting net operating income into a value. It is calculated by dividing net operating income by capitalization rate.

Commercial properties that are used for the purposes of production, manufacturing, or distribution. Types of industrial properties include: bulk, freestanding, industrial park, multi-tenant, office/service, office/warehouse, and research and development.

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.

Limiting current consumption in favor of future consumption.

The owner of a leased property. See lessor and owner.

A contract stating the relationship between landlord and tenant that grants a right to exclusive possession or use of property, usually in return for a periodic payment called rent.

The process by which a landlord, tenant, or third party pays to terminate the tenant’s remaining lease obligation and rights under its existing lease agreement.

The value to the tenant of the lease. The value of the leasehold interest is determined by present value of the difference between market rent and the contract rent.

A means of obtaining the physical and partial economic use of a property for a specified period without obtaining an ownership interest.

The party renting or leasing a property. See tenant.

The party who rents or leases a property to another. See landlord and owner.

The use of borrowed funds to finance a portion of the cost of an investment.

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.

The steps taken by an investor or manager to control or reduce investment risk.

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.

A geographical area in which supply and demand operate to influence the course of industrial and commercial activities, for example, a Metropolitan Statistical Area (MSA).

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.

Generally, the area in and around a major city. The Office of Management and Budget defines an MSA as a city with a population of at least 50,000, or an urbanized area with a population of at least 50,000 within a total metropolitan population of 100,000.

Industrial space category that attracts the smallest user of industrial space (1,000 to 5,000 square feet). It often is situated in a complex of similar buildings, where necessary support services are located in or near the complex. Multi-tenant properties might contain incubator space for start-up high tech, warehousing, or distribution tenants renting on a short-term basis. Buildings for such tenants usually require 18-foot or higher ceilings, efficient truck-loading arrangements, and office space.

Housing units that accommodate more than one family or household.

A lease in which the tenant pays, in addition to rent, all operating expenses such as real estate taxes, insurance premiums, and maintenance costs. Contrast with gross lease.

The potential rental income plus other income, less vacancy, credit losses, and operating expenses.

The sum of all future cash flows discounted to present value and netted against the initial investment.

Expenditures required to assume and maintain occupancy of a space. These include rent and/or mortgage payments and recurring costs, such as real estate taxes, repairs, operating expenses, and other costs directly resulting from property use. The occupancy cost is the actual dollars paid out by the tenant to occupy the space. It can be expressed in either pre-tax or after-tax dollars.

Cash outlays necessary to operate and maintain a property. Examples of operating expenses include real estate taxes, property insurance, property management and maintenance expenses, utilities, and legal or accounting expenses. Operating expenses do not include capital expenditures, debt service, or cost recovery.

The party who has the right to possess, use, lease, and sell a property. See landlord and lessor.

Income from rental activity, limited business interests, or other activities in which the investor does not materially participate. Contrast with active income.

A periodic amount paid or received for two or more periods.

A lease in which the rent amount is based on a percentage of gross sales (monthly or annually) made by the tenant.

The classification of commercial real estate based on its primary use. The four primary property types are retail, industrial, office, and multifamily (residential income).

The regularly repeating sequence of economic downturns and upturns and associated changes in real estate market transactions tied to market dynamics and changing macroeconomic conditions, whose phases include (in order) recession, recovery, expansion, and oversupply.

An investment vehicle in which investors purchase ownership in a trust, which in turn invests the money in real estate and distributes at least 90 percent of its taxable income to investors. The trust is not subject to corporate income tax if it complies with REIT tax requirements. Shareholders must include their REIT income in their personal tax returns.

Long-term movements or tendencies in the demand for commercial real estate, typically lasting for years or decades, usually tied to macroeconomic or business cycles.

Single- or multifamily housing units that are used, serve, or are designed as a place of residence.

Property used to market and sell consumer goods and services. Types of retail properties include: community center, fashion/specialty center, neighborhood center, outlet center, power center, regional center, superregional center, and theme/festival center.

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.

The sale proceeds before tax minus the tax liability on the sale.

The sale price minus the sale costs and the mortgage loan balance.

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

An estimated value used to compare a property being appraised to similar recently sold properties. It applies appropriate units of comparison and makes adjustments to the sales prices of the comparables based on the elements of comparison.

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.

The impact of taxes on investment income and rate of return.

Real estate taxable income multiplied by the tax rate.

The ability of real estate investments to reduce an investor’s tax liability through the use of cost recovery.

Adjusted gross income less personal deductions and exemptions.

A person or entity that has possession of a property though a lease. See lessee.

Preparation of leased premises prior to or during a tenant’s occupancy, which may be paid for by either the landlord, the tenant, or both.

Entry on the tenant’s Lease Analysis Form. A specified amount of money the owner will pay for tenant improvements.

An economic principle recognizing that a dollar today has greater value than a dollar in the future because of its earning power.

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. It is calculated by dividing vacant space by total space.

Costs, such as utility costs, that vary with a building’s occupancy rate.

The average cost of capital (whether equity or debt), that considers the relative proportions of each capital source.

The percentage return on each dollar invested. See rate of return.

The designation of specific areas by a local planning authority within a given jurisdiction for the purpose of legally defining land use or land-use categories.