As Spencer and I continue to flesh out the Adventures in CRE Glossary of Commercial Real Estate Terms, we thought it would be fun and useful to provide some of our readers who are just starting out in the industry with some practice flashcards. We hope you can use this as a tool to test yourself with common and not-so-common CRE terminology.  Every month or so, we will continue to put out a new deck of terms from our glossary. This series of flashcards may prove useful throughout your early career and particularly during the interview process.

We hope that these are helpful.

CRE Flashcards

 

Deck #1 – May 2018

A.CRE Flashcards – Deck #1
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Answer: 

Rentable area / usable area = load factor

Example: If a building has 50,000 sf of rentable area and 40,000 sf of usable area, the building has a load factor of 1.25 (50,000/40,000)

A.CRE Flashcards – Deck #1
A.CRE Flashcards – Deck #1
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The discount rate at which the net present value of an investment is equal to zero. The internal rate of return is a time value of money metric, representing the true annual rate of earnings on an investment. In real estate practice, IRR is used together with other return metrics such as equity multiplecash-on-cash return, and average rate of return to compare real estate investments and make investment decisions.

Unlevered IRR or unleveraged IRR is the internal rate of return of a string of cash flows without financing.

Levered IRR or leveraged IRR is the internal rate of return of a string of cash flows with financing included.

The Internal Rate of Return is arrived at by using the same formula used to calculate net present value (NPV), but by setting net present value to zero and solving for discount rate r. In Excel, IRR can be calculated by using the IRR(), XIRR(), or MIRR functions.

A.CRE Flashcards – Deck #1
A.CRE Flashcards – Deck #1
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A reserve account held by the lender of a construction loan and used by the borrower to cover loan interest shortfalls during construction and lease-up. The interest reserve is funded via the initial proceeds from the construction loan, and is calculated based either on expected future draws or by means of a simple average estimate of the outstanding loan balance throughout the loan period.

 

A.CRE Flashcards – Deck #1
A.CRE Flashcards – Deck #1
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A unit of land that equals 43,560 square feet, or 4,047 square meters.

 

A.CRE Flashcards – Deck #1
A.CRE Flashcards – Deck #1
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A ratio expressing the relationship between a building’s floor area (currently built or permitted) and the land on which the property is located. A higher FAR ratio indicates a higher density (i.e. the more square feet legally permissible to be built on the land). For example, if a plot of land is 10,000 SF and there is a FAR of 6. The allowable buildable square footage is 60,000 (10,000 x 6).

 

 

A.CRE Flashcards – Deck #1
A.CRE Flashcards – Deck #1
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In real estate, mezzanine debt or mezz, is a subordinate loan on real property secured by an interest in the entity that owns the real property rather than on the real property itself. In the event of default, because the entity rather than the real estate acts as collateral, the mezzanine lender is able to foreclose on the entity via a UCC foreclosure – a faster and less expensive process than a foreclosure on the real estate would be. In the capital stack, mezzanine debt falls between mortgage debt and equity. It carries a higher interest rate than more senior debt due to its riskier place in the capital stack.

 

A.CRE Flashcards – Deck #1
A.CRE Flashcards – Deck #1
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Debt covenants are essentially rules written into the loan documents which govern the behaviour of a borrower once the debt is issued. There are 2 general types of covenants which either permit (affirmative covenant) or restrict (negative covenant) the borrower’s ability to perform certain actions. Should the borrower break a covenant, the lender typically has the legal right to call back the loan (i.e. demand repayment).

 

A.CRE Flashcards – Deck #1
A.CRE Flashcards – Deck #1
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A form of loan guarantee only enforceable by a lender when certain default or credit events occur (e.g. if a borrower violates operating covenants, does not meet net worth requirements, files for voluntary bankruptcy, etc.). In springing recourse or springing liability, when such adverse events occur, the borrower’s guarantor (i.e. principal) becomes partially or fully liable for the loan obligation regardless of whether the loan is non-recourse or not.

A.CRE Flashcards – Deck #1
A.CRE Flashcards – Deck #1
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The partner that “sponsors” a real estate investment, this individual or company is responsible for finding, acquiring and managing the investment. The sponsor generally brings market and property type expertise and plays the primary management role, whilst third party investors (limited partners) typically take on a more passive investment role. The Sponsor is also referred to as the General Partner (GP).

A.CRE Flashcards – Deck #1
A.CRE Flashcards – Deck #1
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A method of calculating a resident’s utility bill based on specific factors such as occupancy rate or apartment square footage and then billing the tenant for their share of utility use. It is often used when the installation of sub meters is not financially feasible (due to the large up front capital investment) or economically feasible (due to a poorly designed utility configuration). The practice is becoming increasingly common as landlords seek ways to increase revenue and limit their cost inflation risk.

A.CRE Flashcards – Deck #1

 

Deck #2 – Coming soon…