Real Estate Education

AllGraduate Education | Special Topics Book Reviews | CRE Terms | Find a Job

Glossary of Commercial Real Estate Terms

Welcome to the new Glossary of Commercial Real Estate Terms on A.CRE. This will be an ever growing list of commercial real estate terms and definitions and we hope it will become a valuable resource for our readers. We want to give a huge thank you to Matthew de Klerk for spearheading this initiative on the site.

If you don’t see a term here that you are looking for, please feel free to contact us with the terms or definitions you would like to see and we will add it to our list.

  • Absorption
    The rate at which rentable area is leased up over a period of time in a given market. The net absorption figure considers construction of new space, demolition of exiting space and any additional vacancies during that period. It is often used to forecast demand and supply trends and is thus a key indicator for both property owners and developers, significantly influencing their pricing and timing decisions.
  • Add Alternate
    An additional item of work that is priced out by a consultant/subcontractor during the contract negotiation or bid process, but isn’t yet part of the scope of work. It is an item that an owner is considering adding to the consultant/subcontractor’s contract, but has not yet been confirmed as to whether the service is wanted. As a result, the owner would like to know/negotiate the price for this item in the case they decide to move forward with it post contract agreement. For example, the owner of a multifamily residential project is hiring an interior designer to do the layouts for five different floor plans. The owner is also considering having the interior designer do the penthouse as well. Although not currently part of the scope, the owner wants to know/negotiate the price for designing the penthouse and requests the interior designer to include an add alternate for designing the penthouse in the case they decide to pursue the option.
  • Bid and Award Process
    The period during which the owner solicits bids from the numerous subcontractors within trades needed to build the project. Once the subs have responded to the bid requests, the general contractor may request additional information or conduct interviews and will awards a contract to the selected group. High quality construction documents are crucial at this stage in order to ensure contractors are able to accurately take off material estimates and make realistic project bids.
  • Building Core
    A main concrete structural component that goes the entire vertical length of a high-rise building and houses elevators, stairwells, and MEP vertical risers. In many cases, the core will also house the bathrooms in non-residential commercial buildings.
  • Car Stacker
    A hydraulic machine used to vertically stack cars in order to maximize parking efficiency. This technology is increasingly being used in high-density urban areas where land costs and parking rates make implementing this economically feasible.
  • Carried Interest (Carry)
    A financial interest provided to the sponsor (investment manager) as an incentive to maximize performance. This is typically a share of the profits, payable once the investors have received back their entire initial capital contributions.
  • Cash-on-Cash Return
    The total levered (with debt) pre-tax cash flow divided by the total equity contributions expressed on an annual basis as a percentage. While the Cash-on-Cash Return (CoC) does not account for taxes and does not take into account the time value of money, it is a useful screening tool used by investors when evaluating potential investments.. The Cash-on-Cash Return of an investment is especially important to core investment strategy investors more interested in stable cash flow than in asset appreciation. The Cash-on-Cash Return is typically used alongside other return metrics such as the Equity Multiple, Internal Rate of Return, and Free and Clear Return to appropriately assess an investment.
  • Cold Shell
    Any building/rentable area that consists only of a bare, unimproved shell i.e. no interior finishes, HVAC, plumbing, lighting, elevators etc.
  • Conceptual Design
    A pre-design phase where owner and A & E team work together to bring shape to the project and outline it’s function and form. The conceptual design promotes an open dialogue between the architect and the owner, with concept sketches often being used to illustrate and communicate ideas and expectations.
  • Concessions
    Also referred to as an "Inducement", any preferential financial treatment offered by one party to another in a real estate transaction. In the case of a lease agreement, a concession most often takes the form of free rent for a period of time or an agreement by the landlord to waive certain charges such as parking charges or pet fees. These concessions are meant to induce the tenant to sign the lease. Concessions are most often used during initial lease-up (i.e. when a building first delivers) or during tenant-friendly periods in the market cycle to maintain rent rates.
  • Construction Documents
    Detailed documents of the development project put together by the architect after the Design Development Phase of the design process. The Construction Documents (CDs) reflect the finalized building design and provide specific details to communicate to the contractor and subcontractors how the project should be constructed. These legally binding documents are used during construction by all the trades and are also initially used to obtain bids from contractors and subcontractors. CDs, at minimum, will include numerous detailed drawings of the project and a specifications manual.
  • Construction Financing
    A short-term loan, typically with a floating interest rate, issued by a lender to finance the construction of a real estate project. The loan is paid out to the borrower in draws as construction progresses. After construction is complete and the property is fully leased and/or sold, the loan is repaid using permanent loan proceeds or proceeds from the sale of the property.
  • Construction-Perm Loan
    Also referred to as a "Rollover Loan", a construction-perm loan is one that immediately converts into permanent debt financing once construction of the project is finalized.
  • Contingency Cost
    An estimated amount set aside by the developer and/or the contractor in order to account for any unknown risks associated with the project. These costs are designed to cover unforeseen expenses which are not precisely known at the time of estimate but which the contractor expects will occur based on statistical probabilities and personal experience.
  • Contractor Controlled Insurance Program (CCIP)
    OCIP and CCIP are broad and all-encompassing insurance policies that usually cover, at a minimum, general liability insurance, worker’s compensation, and excess liability insurance for all contractors and subcontractors on a construction project. An OCIP is sponsored and held by the owner, in contrast to a CCIP, which is sponsored and held by the contractor. The sponsor holds and is directly responsible for securing the appropriate and required insurance coverage.
  • Core Investment Strategy
    A real estate investment strategy categorized by low risk and commensurately low, stable returns. Core investment strategies typically involve longer hold periods, lower levels of leverage, and higher quality assets. Core investments are generally stabilized properties, with high occupancy rates and predictable cash flows. Investors of core real estate investments value stable, reliable and consistent cash flows over price appreciation.
  • Cost Plus Contract
    A contract whereby the contractor is reimbursed for all the construction related costs, in addition to an agreed upon percentage of such costs covering the contractor’s overhead and profit. These contracts are typically used when the scope of works is unclear, however they require additional owner supervision (in comparison to Fixed Price Contracts) as the contractor is less incentivised to exercise prudent cost controls.
  • Debt Service Coverage Ratio
    A financial metric used in real estate to measure a property’s ability to cover its debt obligations. The Debt Service Coverage Ratio (DSCR or DSC) is calculated by dividing the net operating income by the debt service payment and is often expressed as a multiple (i.e. a DSCR of 1.2 x). The DSCR is used by banks to determine the maximum loan amount offered to a borrower and to assess the probability that a borrower might default on the loan.
  • Debt Yield
    The ratio of Net Operating Income (NOI) to the mortgage loan amount, expressed as a percentage. The debt yield is useful to lenders as it represents the lender's return on cost were it to take ownership of the property. Amongst other metrics, lenders use debt yield to determine an appropriate loan amount.
  • Delaware Statutory Trust (DST)
    A distinct legal entity used by real estate investors seeking to defer their capital gains taxes through the use of a 1031 tax deferred exchange. The primary advantage of the DST is the trust’s ability to obtain favourable financing terms compared to other ownership structures (such as “Tenants in Common”) because the lender views the entity as only one borrower.
  • Design Development
    The period following schematic design whereby all design team consultants work together to further refine the project details. In this phase, the design team begins to select systems and materials and looks carefully at the coordination of all the components. The team will start to develop construction details and produce more refined graphical representations of the project. Typical items produced during this phase are detailed plans, sections, and elevations; schedules; and MEP specs. The architect may produce material boards showing various finishes, materials and colours that will be utilized in the development. The structural engineers, among other things, get specific with laying out and sizing structural components. The MEP engineers go into more details with equipment sizing and layouts. Many other design consultants are also contributing and working together with the architect and the owner in preparation of moving to into the Construction Documents phase.
  • Discount Rate
    The rate at which cash flows are discounted in a discounted cash flow (DCF) model. In real estate valuation models, the discount rate can be interpreted as the Cap Rate plus expected NOI growth, representing the income and growth components of total required rate of return respectively.
  • Earnest Money Deposit
    An initial deposit paid by the buyer as a show of good faith to the seller. The money is typically held in escrow until the transaction closes and all suspensive conditions have been fulfilled, following which the earnest money is used to offset the initial purchase price paid by the buyer. However, if the seller defaults and the deal falls through then the deposit is returned to the buyer.
  • Economic Vacancy
    The difference between the gross potential rent at a property and the actual rent collected. An example of this would be an apartment complex with a 2-week preparation period for new tenants and a 50% annual tenant turnover. Assuming the property was 100% occupied (i.e. a physical vacancy of 0%), there would still be an economic vacancy of 1.85% (2/54 weeks x 50%) whereby the property owner would only receive 98.15% of his annual cash flow.
  • Equity Multiple
    A return metric which shows how much an investor’s capital has grown over time. The equity multiple (EMx) is calculated by dividing the sum of all capital inflows (capital distributions) by the sum of all capital outflows (capital contributions). While the equity multiple does not account for the time value of money, it does describe the total cash returned to the investor and is thus often utilized alongside the internal rate of return in real estate investment analysis. The Equity Multiple is also used in conjunction with the Cash-on-Cash Return and Free and Clear Return metrics. The equity multiple can be calculated before and after taxes and on an unlevered (before debt) or on a levered (with debt) basis.
  • Financing Memorandum
    A request for mortgage financing given to lenders by commercial real estate borrowers (or their representatives) for the lenders' investment consideration. The memorandum will typically highlight various terms and property specifics such as the borrower's requested loan terms, a detailed description of the property, the location and relevant demographic trends, a financial summary, pictures, comparable sales and/or rentals, and any other information pertinent to the investment. The Financing Memorandum is similar to the Operating Memorandum in format and content, but the offering is for a real estate debt rather than equity investment.
  • Floor Plate
    A term commonly used in commercial real estate to refer to an entire floor of a building. The term is commonly used when discussing square footage and/or variations in size and shape of floors within a building. Example of how it can be used: There are two different floor plates in this building that should accommodate various users. The bottom third of the tower has 30,000 GSF floor plates that are rectangular, while the upper two thirds of the building consist of 20,000 GSF floor plates that are square.
  • Free and Clear Return
    The total unlevered (before debt) pre-tax cash flow of a real estate project divided by the total capital invested expressed on an annual basis as a percentage. While the Free and Clear Return does not account for taxes and does not take into account the time value of money, it is a useful screening tool used by investors when evaluating potential investments. The Free and Clear Return of an investment is especially important to core investment strategy investors more interested in stable cash flow than in asset appreciation. The Free and Clear Return is typically used alongside other return metrics such as the Equity Multiple, Cash-on-Cash Return, and Internal Rate of Return to appropriately assess an investment.
  • Guarantee of Non-Recourse Carve-Outs
    Also referred to as a "Bad-Boy Guarantee", a Guarantee of Non-Recourse Carve-Outs is a guarantee provided by an individual or entity which covers the extent of the recourse liability arising from any non-recourse carve-out.
  • Guaranteed Maximum Price (GMP)
    A type of cost plus contract whereby the contractor is reimbursed for all construction related costs, plus a fixed fee. The agreed upon costs and fee are capped, transferring the risk of cost overruns to the contractor, whilst any savings resulting from cost underruns may either be a point of negotiation between the general contractor and the owner or completely realized by the project owner.
  • HUD Home
    A residential property owned by the Department of Housing and Development (HUD). If a foreclosed home was acquired using proceeds from an FHA-insured loan, the FHA will pay out the lender for the balance due and ownership of the property will transfer to HUD.
  • Interest Reserve
    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.
  • Internal Rate of Return
    The discount rate at which the net present value of an investment is equal to zero. The internal rate of return (IRR) takes into account the time value of money and is used by companies to evaluate whether to pursue (IRR > required rate of return) or decline (IRR < required rate of return) an investment opportunity. The IRR can be calculated before and after taxes and on an unlevered (before debt) or on a levered (with debt) basis. The IRR is typically used alongside other return metrics such as the Equity Multiple, Cash-on-Cash Return, and Free and Clear Return to appropriately assess an investment.
  • Lease Depth
    The distance measured between the building window line and the building core wall’s exterior side.
  • Levered Cash Flow
    The net cash inflows and outflows of a real estate investment taking into account cash flows related to financing.  Levered cash flows generally consist of total investment costs, loan fundings and payoffs, net operating cash flows after financing, and asset reversion cash flows (i.e. net proceeds from sale).  In real estate financial analysis, the levered cash flow line is used to calculate the levered internal rate of return and levered equity multiple of a prospective real estate investment.
  • Loan Amortization
    The repayment of the principal balance of a loan through periodic payments over time. In an amortizing loan, a portion of the loan payment each period is used to pay the interest owed for that period with the balance used to pay down principal on the loan. Although the periodic loan payments remain constant throughout the loan term, the portion allocated to principal reduction increases over time as the principal balance is reduced and thus, less interest is owed in each period.
  • Lump Sum Contract
    A contract whereby the total price of an entire construction project is negotiated and agreed to between the General Contractor and the Owner regardless of what the actual price ends up being at the end of the project. This type of contract shifts all risks (future price increases) and rewards (potential future cost savings) onto the contractor. To further clarify, if the actual costs of construction are above the lump sum, the contractor bares the cost; if the actual costs end up being below the lump sum, the GC will still get paid the lump sum and earn the difference. This type of contract is common when there is a clearly defined scope of work and costs can be reasonably estimated or if the general contractor has a reason to believe they can keep costs under control and under budget.
  • Make Ready Costs
    Most often seen on multifamily operating statements, 'Make Ready' costs refer to minor repairs and maintenance work to an apartment unit in order to ensure that the unit is in a suitable condition before being placed on the market and leased to a subsequent tenant. Activities included in this process range from cleaning services and painting to countertop resurfacing and trash removal.
  • Master Tenant
    A tenant who leases directly from the property owner and subsequently subleases all (or portion of) the property to other tenants.
  • Non-Recourse Carve-Outs
    Referred to colloquially as "Bad Boy Carve-outs", a list of actions or guarantees that may result in the borrower or guarantor taking on partial or full recourse liability for the loan. These actions initially were limited in scope to “bad acts” such as theft or voluntary bankruptcy by the borrower, however over time the list of non-recourse carve-outs has grown to include acts which one may not consider wrongful (failing to permit property inspections or not paying real estate taxes).
  • Occupancy Cost
    The total cost incurred by a tenant in order to occupy space in a building. These costs are all stipulated in the lease agreement and include items such as base rent, tenant reimbursement expenses, percentage rent, parking charges, etc.
  • Offering Memorandum (OM)
    A presentation and legal document given to investors for their investment consideration summarizing a potential deal. The memorandum will typically highlight various aspects of the investment such as a detailed description of the property, the location and relevant demographic trends, a financial summary, pictures, comparable sales and/or rentals, and any other information pertinent to the transaction.The Offering Memorandum is similar to the Financing Memorandum in format and content, but the offering is for a real estate equity rather than debt investment.
  • Opportunistic Investment Strategy
    A real estate investment strategy categorized by high risk and high returns. Opportunistic real estate strategies typically involve a high degree of uncertainty, more volatility in cash flow and require greater subject matter expertise. These strategies will often employ more leverage and subject the investors to a greater probability of losing their capital. Opportunistic real estate investments are most often either ground-up developments or the redevelopment of properties to a higher and better use.
  • Owner Controlled Insurance Program (OCIP)
    OCIP and CCIP are broad and all-encompassing insurance policies that usually cover, at a minimum, general liability insurance, worker’s compensation, and excess liability insurance for all contractors and subcontractors on a construction project. An OCIP is sponsored and held by the owner, in contrast to a CCIP, which is sponsored and held by the contractor. The sponsor holds and is directly responsible for securing the appropriate and required insurance coverage.
  • Pari Passu
    A Latin term used to describe the equal treatment of investors, returns or securities. In real estate, the term is commonly used in waterfall distribution models to reference the pro-rata distribution of profits based on each investor’s initial equity contribution percentage. The term is likewise commonly used to describe the cash flow from and to two or more lenders holding an equal position in the capital stack of a real estate investment.
  • Permanent Financing
    A long-term mortgage loan typically secured by a fully stabilized and performing real estate asset. A Permanent Loan (i.e. Permanent Financing) often includes a fixed interest rate with a longer loan term (7+ years). The permanent loan may or may not include an interest-only payment period for part or all of the loan term. These loans almost universally come with a penalty (i.e. yield maintenance, defeasance, % penalty, etc.) for prepaying the loan before maturity and many include a lock-out period early in the loan term during which the borrower is forbidden from prepaying the loan.
  • Premier Suburb
    The most prolific, popular or expensive suburb within a city or town.
  • Project Buyout
    The Project Buyout is the time when the owner of a development project selects the General Contractor (GC) who then, either together with the project owner or alone, goes through the process of selecting and hiring all the subcontractors (subs) and pricing the project. A generic buyout process may look like the following: Project owner selects the GC. The GC creates a list of subs for each trade and puts together Bid Packages or Request for Proposals. These packages will include all relevant information about the project (drawings, specs, trade specific info., etc.) and asks the subs to evaluate and respond with a price as well as provide all relevant information about themselves (proof of insurance, references, resumes, etc.). Based on the subs responses and rate quote; the GC will interview, select, and negotiate and sign a contract with the winning sub for each trade.
  • Ratio Utility Billing System (RUBS)
    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.
  • Renewal Option
    A clause contained in a lease agreement giving the tenant the right to renew or extend their lease agreement. The option clause usually contains various predefined terms which both parties initially agree upon, such as a reversion to a ‘market-related’ rental rate.
  • Rent Roll
    A property owners’ reflection of all the rental income derived from tenants of an income producing real estate asset at a specific time (usually at the end of the month). The rent roll often includes other information related to the tenants, such as a description of the space being rented, lease start/expiry dates and any security deposits held.
  • Residual Pro Forma
    The pro forma used to evaluate the residual/terminal value of a property. The residual pro forma seeks to forecast the net operating income a subsequent purchaser might use in valuing the subject property. This figure is often either the trailing twelve months (TTM) or the next twelve months from the sale date but can be altered to reflect a stabilized state at the time of sale.
  • Retention (Retainage)
    The withholding of funds owed in order to increase the probability that the project will be fully completed to the standards initially promised by the contractor/subcontractor. An example of this would be an owner retaining say 10% of the funds owed to the contractor until the project is complete. This minimises the risk of the contractor moving on to another job by ensuring incentives are well-aligned.
  • Schematic Design
    The first formal stage of the design phase after the conceptual design period, where initial design concepts are re-evaluated and many early-stage design documents are produced such as early iterations of site plans, floor plans, sections, and elevations. This phase is used to verify the project is feasible, buildable, and conforms to the owner’s and design team’s vision. Typical items studied during this phase are further function and form analysis, structural feasibility, MEP space layouts, vertical transportation, ingress, egress, generic exterior aesthetics , and floor layouts.
  • Sources and Uses
    A schedule which provides an overview of where capital for a real estate project is sourced from (sources) and how capital is deployed (uses). The sources side includes items such as loan proceeds and investor equity contributions, whilst the uses side includes items such purchase price/construction costs and acquisition costs. Both sides must always balance.
  • Specifications Manual (Spec Book)
    A project manual that details the various products, construction materials and methods to be used in the project development.
  • Sponsor
    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).
  • Stabilized Pro Forma
    Also sometimes referred to as the Economic Pro Forma, the stabilized pro forma is used to evaluate the value of a property at the inception of the analysis period. The stabilized pro forma seeks to estimate the net operating income at time zero. The stabilized pro forma is used by acquirers to help determine acquisition price and by debt originators to calculate loan-to-value.
  • Stacking Plan
    A visual representation of a building showing a breakdown of space occupied by tenants on each individual floor. The breakdown may extend to include other details of the tenant such as their company name, occupied square footage, lease expiration date or rental rate.
  • Structured Parking
    Any above-grade or below-grade, ramp accessible structure capable of accommodating vehicle parking. The multi-level design allows for greater parking densities and increasing land use efficiency.
  • Tenant Estoppel Certificate
    A document signed between a landlord and an owner verifying certain facts are correct (such as whether or not a tenant is in good financial standing with the landlord). Tenant Estoppel Certificates are often required by lenders when financing a property or by a prospective buyer as part of their due diligence.
  • Tenant Rollover Risk
    The risk associated with expiring lease agreements at a property. This risk includes the possibility of not being able to re-lease the space should the a tenant vacate or alternatively, the possibility of signing a lease but on less favorable terms than the previous lease.
  • Tenants in Common (TIC)
    An ownership structure whereby two or more individuals may own an equal or unequal undivided share in a property. This partnership structure enables lower income investors the opportunity to purchase more expensive real estate which they otherwise may not have been able to afford individually. However, when mortgaging a property, the lender will also require that all co-tenants share joint liability for the loan, thereby increasing the risk of the TIC structure.
  • Trailing Twelve Months (TTM/T12)
    A TTM is a reflection of a properties last 12 months’ financial performance. The report shows actual historical data rather than forward looking estimates (typically presented by the broker) in the OM, thereby helping the investor make a more informed valuation of the property.
  • Trended (Forward) Rents
    Rental rate figures which are based upon some market growth projection. Trended rents use historical market data as an indicator of future growth, in contrast to “untrended rents” which assume no growth in annual rents.
  • Trophy Asset
    A term used in real estate to describe a property that is in exceptionally high demand by investors. These assets are usually iconic buildings situated in prime locations with strong underlying property fundamentals.
  • Unlevered Cash Flow
    The net cash inflows and outflows of a real estate investment before taking into account cash flows related to financing.  Unlevered cash flows generally consist of total investment costs, net operating cash flows before financing, and asset reversion cash flows (i.e. net proceeds from sale).  In real estate financial analysis, the unlevered cash flow line is used to calculate the unlevered internal rate of return and unlevered equity multiple of a prospective real estate investment.
  • Urban Infill
    Repurposing property in an urban environment for new development. The term implies that the surrounding area is mostly built up and what is being developed will “fill in” the gaps. Urban infill usually focuses on repositioning underutilized buildings, often part of a community redevelopment program.
  • Valet Trash
    A trash collection service, most common in multifamily properties, offered by the landlord to remove trash from residents’ doorsteps and deposit the waste into the dumpster/compactor area. Residents are typically charged for the service and in many cases the service is mandatory.
  • Value-Add Investment Strategy
    A real estate investment strategy categorized by medium-risk and medium returns. A Value-Add Strategy typically involves acquiring under-performing assets with upside potential and adding value through one or more repositioning strategies. These strategies may include property renovation, tenant realignment, operational improvements and re-tenanting strategies among others with the goal of boosting net operating income, and thus increasing the value of the property.
  • Vertical Expansion Option
    A real option which allows the owner of a development project to build and complete the project to a certain height with an option to increase the height of the building at some future point. The cost of a project when building with this option is estimated to add a 5-10% premium on standard construction costs due to implementing building systems and components that may be excessive for the current building size. However, this expense may be offset by the risk reduction benefits associated with the increased development timing flexibility and potential cost savings in the future phase of development for having built a majority of the building in a previous period.
  • Walkability
    A measure of how amenable an area or property is to walking. The most popular measure of walkability is the “Walk Score” which measures and allocates a score to a subject property based on its ease of access to public transport and other nearby amenities.
  • Warm Shell
    Any building/rentable area that has been minimally fitted out with basic services (such as ceilings, lighting, plumbing and HVAC) and is now ready to lease to the tenant. Usually these “warm shell improvements” - necessary to convert the building from a cold shell to a warm shell - are only completed following signature of the lease agreement in order to alleviate the Landlord paying for unnecessary improvements that the Tenant may not require. The transition from a "Cold Shell" to a "Warm Shell" is referred to as the "Build-out".
  • Wrap Up Insurance
    A insurance policy for larger construction projects that typically covers general liability insurance, worker’s compensation and excess liability coverage over the entire construction period for all contractors and subcontractors involved in the project. There are two types of wrap up insurance, namely Owner Controlled Insurance Program (OCIP) and Contractor Controlled Insurance Program (CCIP).