Glossary of Commercial Real Estate Terms

In the case of for lease property, absorption is 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.  

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.

The average revenue generated per paid occupied room per day, calculated by dividing room revenue by the number of rooms sold. The ADR is commonly used in the hospitality industry together with the RevPAR metric to assess the property’s performance.

A measure of the profitability of a real estate investment or a type of return metric. The average rate of return is calculated as the total net profit of an investment (total cash inflows minus total cash outflows), divided by the length of the investment, divided by the invested capital. The main drawback of this return metric is that it does not take into account the time value of money. Average Rate of Return = Total Net Profit ÷ Investment Period ÷ Equity Contributed Example: An investor purchases a retail center for 1,000 all cash. The investor holds the center for 10 years during which time the investment earns 100 each year. At the end of the 10 year period, the investor sells the property for 1,500. The average rate of return of this investment is: Average Rate of Return = 15% = 1,500 ÷ 10 years ÷ 1,000

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.

The occupancy at which the effective gross income is equal to the sum of the operating expenses plus debt service. Breakeven occupancy is an important metric for lenders, developers, and operators as it is the point at which the property shifts from an operating deficit to an operating surplus. Real estate owners will often use rent concessions to speed the investment to breakeven. Point at which EGI = OpEx + DS; also the point at which DSCR = 1.00X Example: A property has a potential gross income of $1,000 with $500 in operating expenses and $250 in debt service. Breakeven occupancy in this case would be calculated as (500 + 250) ÷ 1,000 = 75%.

A fee paid to one party in a real estate transaction by a counter-party when the counter-party backs out of the transaction. The breakup fee is generally a percentage of the purchase price or mortgage loan amount and is used to compensate the damaged party for time and resources spent on the transaction.

Also referred to as a mini-perm, in real estate a bridge loan is a short-term loan typically provided to developers and value-add real estate investors and is used to "bridge" periods during which the property is not eligible for permanent financing. The term of a bridge loan can be anywhere from a few months to several years, and generally caries a higher interest rate commensurate with the higher risk to the lender.

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.

Founded in 1907, BOMA is an international real estate trade organization representing owners and managers of commercial real estate. The organization promotes, provides advocacy and develops various pertinent research publications in support of its members. BOMA members span the entire property and investment type spectrum. BOMA International is widely recognized as a primary source of information on building management and operations, development, leasing, building operating costs, energy consumption patterns, local and national building codes, legislation, occupancy statistics, technological developments and other industry trends.

An alternative method for arriving at a capitalization rate for a real estate investment. The buildup rate is the sum of all risks of an investment (denoted in percentage) plus the risk-free interest rate. For example: Risk-Free Rate (e.g. 10-yr UST): 2.25% +  Illiquid nature of investment: 0.75% + Credit risk of tenants: 1.25% + Inflation risk: 1.00% + And so forth... = Buildup rate: 5.25%  

An expense used to upgrade a property which is expected to result in a long-term (longer than 1 year) improvement. Typical capital expenditures (CapEx) include roof repairs, HVAC replacement and other expenses generally related to the structural improvement of the building. For tax purposes, Capital Expenditures are capitalized and depreciated over a period of years with the length of the depreciable life varying depending on the capital item.

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.

The use of any free cash flow (after deducting debt service payments) to pay down an outstanding loan balance. In real estate, a cash sweep is often implemented by a lender when a borrower is unable to payoff the balloon balance upon loan maturity.

Cash flow after financing (CFO - Debt Service) divided by the total equity contribution to date, 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.

The process by which a borrower takes out a new mortgage with sufficient loan proceeds to pay off the existing mortgage plus return all or part the borrower's invested capital in the investment. The Cash-Out Refinance is sought by owners of real estate, because it provides them an opportunity to reduce their risk in the property while simultaneously freeing up capital to invest in new opportunities.

Any building/rentable area that consists only of a bare, unimproved shell i.e. no interior finishes, HVAC, plumbing, lighting, elevators etc.

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.

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.

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.

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.

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.

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.

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.

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.

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.

A type of prepayment which reduces a mortgage loan's outstanding principle balance. Curtailment can be done by either increasing one’s monthly payments or repaying a lump sum amount, both of which would shorten the loan maturity period.

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.

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.

The voluntary transfer of a title deed by the borrower to the lender in order to satisfy a defaulting loan (thereby avoiding foreclosure proceedings). Also referred to as "giving back the keys" or Jingle Mail.

The process of releasing a borrower from its debt obligation (mortgage loan) and substituting the lien on the property with acceptable replacement collateral (typically treasury bonds). This replacement collateral is expected to generate a comparable substitute cash flow, which would otherwise be required on the existing debt were it not prepaid.

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.

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.

The difference, denoted in basis points, between the market cap rate and the yield-on-cost . The Development Spread measures the "development pop", or value-added by taking on the construction and lease-up risk. The greater the development spread, the more likely a development project will be deemed financially feasible. Think of it in these terms. A real estate investor has the option to either a) acquire a fully-built and stabilized asset at some market cap rate or b) construct and lease-up a brand new property at some yield-on-cost. In order to make the latter worthwhile, a benefit commensurate with the risk must be gained, otherwise there is no incentive to take on the development risk. One way the developer and its capital partners measure the potential benefit is by looking at the difference in yield between the two options, or the Development Spread.

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.

An investment analysis tool used regularly by real estate professionals to make buy, sell, hold, and development investment decisions. The discounted cash flow (DCF) is a process by which the real estate professional forecasts the future cash flows of an investment (rents, expenses, CapEx, debt service, sale price, etc), and then discounts those cash flows to present to arrive at time value of money return metrics such as internal rate of return and net present value. The estimated cash flows from the DCF can also be used to calculate other risk and return metrics such as debt service coverage ratio, breakeven occupancy, debt yield, cash-on-cash return, equity multiple, etc, as well as perform other analysis such as sensitivity analysis. The most common non-Excel DCF software used in real estate is created by the Altus Group and is called ARGUS. An example of a DCF in Microsoft Excel is the A.CRE All-in-One Underwriting Model for Real Estate Acquisitions and Development.

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.

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.

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 typically used in conjunction with other return metrics such as Internal Rate of Return, Cash-on-Cash Return, Free and Clear Return, Average Rate of Return, among others. The equity multiple can be calculated before and after taxes and on an unlevered (without debt) or on a levered (with debt) basis.

A mechanism in a Full Service Gross Lease, the Expense Stop is a fixed amount of operating expense above which the tenant is responsible to pay. Thus, the landlord is responsible to pay for all operating expenses below the Expense Stop, while the tenant is responsible for any amount above the Expense Stop. So for example, if the Expense Stop is $10 per square foot and operating expenses in a given year equal $11 per square foot, the tenant would be responsible to reimburse the landlord $1 per square foot ($11 - $10). Expense Stops can take the form of an agreed upon amount, typically expressed in an amount per square foot or per square meter or a base year stop. A base year stop sets the expense stop equal to the actual operating expenses in the first year of the lease. So for instance, if the actual operating expenses in the first year amounted to $9.50 per square foot, the Expense Stop would be set at $9.50 per square foot and the tenant would be responsible to reimburse the landlord for any expenses above $9.50 per square foot in any subsequent year.  

Furniture, Fixtures, and Equipment (FF&E). In real estate financial analysis, FF&E is most often found as a line item in development budgets and operating statements. It is defined as any moveable furniture, fixtures or equipment not affixed to the building in any manner.

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.

Costs that do not change based upon of the property’s level of operation. For example. the landlord’s monthly insurance premiums will generally remain fixed regardless of whether the property is 50% or 80% occupied. In some real estate financial models, the user is given the option to choose what percentage of a given expense is fixed with items such as insurance and taxes deserving 100% fixed treatment. This is in contrast to Variable Costs, which do vary with the property's level of operation.

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.

The height between each floor plate in a building measured from the top of a floor to the surface of the ceiling.

The height between each floor plate in a building measured from the top of a floor to the top of the floor above.

A binding contract between two parties to enter into a purchase and sale agreement at a fixed future date, the terms and conditions of which are agreed upon today.

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.

A commercial lease where the tenant pays a base rent and the landlord pays for all operating expenses related to the tenant's occupancy of the space such as common area maintenance, utilities, property insurance, and property taxes. Full Service Gross (FSG) leases generally include an Expense Stop, or expense ceiling, above which any additional expenses are passed through to the tenant. FSG leases contrast with net leases, wherein the tenant pays for some or all operating expenses.

A hotel that offers a full range of amenities and services such as concierge service, luxury retail shopping, bars and restaurants, pool and spa, etc. Full service hotels have high fixed costs and appeal to the more affluent casual and business travelers who are able to afford the higher than average room rate.

Also called the Future Amount of One or FV Factor, the Future Value Factor is a formula used to calculate the Future Value of 1 unit today, n number of periods into the future. The FV Factor is equal to (1 +i)^n where i is the rate (e.g. interest rate or discount rate) and n is the number of periods. So for example at a 12% interest rate, $1 USD invested today would be worth (1 + 12%)^5 or $1.7623 USD five years from now. One use for the FV Factor in real estate is to estimate future rent based on today's rent, grown at some growth rate. So if an apartment unit rents for $1,000 per month today and rent is expected to grow 3% per year for the next five years, five years from now that same apartment unit will be expected to rent for (1+3%)^5 * $1000 or $1,159.27 per month. The FV Factor is the inverse of the related PV Factor or Present Value Factor.

Additional funds paid out to the borrower by a mortgage lender upon the occurrence of certain “good news” events, such as the owner concluding a lease agreement with a major tenant in the building or reaching some pre-determined net operating income. Such additional funds are added to the outstanding loan balance and are generally subject to the same terms as the underlying loan.

A measure used to describe the market value of a property. The value includes debt and equity positions but excludes any acquisition/closing costs.

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.

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.

The hangout is the expected outstanding loan balance owed the lender by the borrower at the end of the lease term of a key tenant, while the hangout risk is the risk to the lender associated with the borrower's ability or inability to repay said loan. An especially important consideration in investments with a single tenant, the hangout risk is determined by comparing the hangout to the dark value (value of the vacant real estate) to determine whether the borrower will be able to repay the loan. This risk can be quantified by dividing the hangout by the dark value. For example, a borrower secures a 100,000, 20-year loan against a property leased to WalBlues for 15 years. At the end of year 15, the outstanding loan balance is expected to be 50,000. The lender projects the value of the vacant property in year 15 to be 50,000. Therefore the hangout risk is high, as represented by the expected LTV at the end of the lease term (50,000 ÷ 50,000  = 100%), since the borrower will need to re-lease the property before year 20 to be able to refinance the property to repay the lender.  

Any development costs associated with the physical construction of a building. These costs are easy to quantify and typically include items such as raw materials, labor, and interior finish, etc. Hard costs are also referred to as Direct Costs.

An informal term used to denote an operating brand within the hotel industry. Marriott, Hilton, and Best Western are examples of "Flags" used by owners of hotel properties.

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.

An institutional real estate investor is a large company or organization with substantial capital and an allocation to real estate investments. Pension funds, life insurance companies, investment banks, sovereign wealth funds, and endowments are examples of institutional investors. Most often, the institutional investor act as the limited partner in a real estate partnership, providing equity capital while relying on the general partner (sponsor) for geographic and property type expertise. Given their size and ready access to the capital markets, institutional investors tend to have a lower cost of capital than their non-institutional counterparts, allowing them to pay more for real estate assets.

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.

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 multiple, cash-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 colloquialism in real estate, a Jingle Mail is the letter a lender would receive containing a borrower’s keys (making a “jingle” sound as the keys bounced around). This situation typically occurs when there is a sharp decrease in the market value of property, such as occurred during the 2008 subprime mortgage crisis. Jingle Mail generally refers to a Deed in Lieu of Foreclosure and in many parts of the world is also called "giving back the keys."

A metric used to measure the performance of a property. Real estate-specific KPI’s include metrics such as Cap Rate, LTV, Debt Yield, Cash on Cash Return, Internal Rate of Return, Equity Multiple, among others.

The distance measured between the building window line and the building core wall’s exterior side.

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.

A limited partner is a passive, in terms of management responsibility, partner in a real estate investment. In a typical real estate partnership, the general partner (sponsor or GP) manages the day-to-day aspects of the investment strategy and brings local and property type expertise. The limited partner (or partners), typically brings the majority of the equity capital and only weighs in on critical decisions.

A hotel that provides only the basic amenities and services with some hotels offering facilities such as a swimming pool and/or business center. Limited service hotels (such as Fairfield Inn or Homewood Suites) operate on smaller budgets enabling them to pass on the cost savings to travelers via lower room rates.

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.

In real estate, Loan to Cost (LTC) is the ratio of the outstanding loan balance to total project cost. The higher the loan-to-cost, the less cash equity the borrower has invested in the property (i.e. less skin in the game) and therefore the higher the risk that the borrower will default on the loan. Real estate lenders most often use this metric in assessing the risk of lending on a real estate development project, but LTC is also considered on acquisition loans to compare the proposed loan amount to the acquisition price. Loan to Cost (LTC) = Loan Amount ÷ Total Project Cost

In real estate, Loan to Value (LTV) is the ratio of the outstanding loan balance to the value of the property expressed as a percentage. The higher the loan-to-value, the less likely the borrower will be able to repay the loan at maturity. Real estate lenders use this important metric, together with debt yield, debt service coverage ratio, among others to assess the risk of a loan and arrive at an appropriate loan amount. Loan to Value (LTV) = Loan Amount ÷ Property Value

A resolution agreed upon between the lender and the borrower to restructure the terms of the loan before foreclosure of the property. Workouts typically involve negotiations regarding the minimum monthly payment and/or the amortization period. In some cases, a loan workout results in the borrower "giving back the keys" rather than the lender formally foreclosing on the property.

The difference between in-place rent and market rent. The loss-to-lease concept is most often used in multifamily underwriting. Because contractual lease rates lag the actual market, the loss-to-lease metric acts to help the real estate professional forecast coming changes to actual income going forward.

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.

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.

A tenant who leases directly from the property owner and subsequently subleases all (or portion of) the property to other tenants.

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.

The rate used to calculate the property tax on real property. This is calculated in increments of $1,000, with each “mill” representing 0.1% of the property’s taxed assessed value (often lower than market value). For example, if a property's tax assessed value is $20,000,000 and has a millage rate of 20, then its property tax would equate to $400,000 ($20 for every $1,000 of value). In many jurisdictions, the millage rate is converted to a percentage (mill rate ÷ 1000) and quoted as a property tax rate for ease of calculation.

A rate calculated by dividing the periodic loan payment by the initial loan amount. The Mortgage (or Loan) Constant is often used as a tool to efficiently calculate loan payments and is represented as a percentage. For instance, a mortgage loan with an annual payment of $16,000 and an initial loan balance of $250,000 has a Mortgage Constant of 6.40%.

A commercial lease where the tenant pays base rent plus pays for its pro rata share of some or all operating expenses related to the tenant's occupancy of the space. Types of net leases include single net, double net, triple net, and absolute triple net. Expenses may be billed directly to the tenant, or the expenses may be paid by the landlord and reimbursed by the tenant. Net leases contrast with Gross Leases, wherein the landlord pays for all operating expenses. Single Net (N): a net lease where the tenant pays base rent plus pays for one of the operating expense items such as common area maintenance (CAM), insurance, or property taxes Double Net (NN): a net lease where the tenant pays base rent plus pays for property insurance and property taxes Triple Net (NNN): a net lease where the tenant pays base rent plus pays for all operating expenses Absolute Triple Net: a type of triple net lease where the tenant pays base rent, all operating expenses, plus pays a portion or all of the capital expenditures to maintain the condition property

The net income from a property, in a given period, after deducting operating expenses but before deducting capital expenditures, debt service, and taxes. To calculate Net Operating Income, the real estate professional subtracts operating expenses from effective gross income (Effective Gross Income - Operating Expenses = Net Operating Income). Net Operating Income is arguably the most important income metric, as it is widely used to estimate the value of the property using the Income Capitalization Method.

A state in the United States where the sales price of a sold property is not publicly available. In such situations, the sales value is estimated - for tax assessment and other purposes - using other metrics which are publicly available, such as the loan amount granted by the bank or the mortgage transfer taxes paid.

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).

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.

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.

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.

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.

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.

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.

The most prolific, popular or expensive suburb within a city or town.

The lump-sum value today of a string of future cash flows discounted back to today at a specified discount rate. In real estate, the Present Value of a real estate investment is the price that an investor would be willing to pay today for a string of future real estate cash flows so as to achieve a given target return (discount rate). In order to calculate Present Value, a discounted cash flow statement must be built forecasting the future net cash flows of a real estate investment. Net Present Value is the Present Value of an investment less the amount that must be invested in time zero to acquire said investment. So, if the Present Value of an investment is $1,000,000 and the investor must pay $750,000 to acquire that investment, the Net Present Value would equal $250,000 ($1,000,000 - $750,000). In Excel, the Present Value is best calculated using the NPV() function, not including the value in time zero in the selected range. NPV is arrived at by calculating the Present Value and then subtracting the amount invested in time zero.

Also called the Present Value of One or PV Factor, the Present Value Factor is a formula used to calculate the Present Value of 1 unit n number of periods into the future. The PV Factor is equal to 1 ÷ (1 +i)^n where i is the rate (e.g. interest rate or discount rate) and n is the number of periods. So for example at a 12% discount rate, $1 USD received five years from now is equal to 1 ÷ (1 + 12%)^5 or $0.5674 USD today. The PV Factor can be used to calculate the Present Value of a future stream of cash flows by multiplying each period's cash flow by the given PV Factor for that year and then summing the resulting values. The PV Factor is the inverse of the related FV Factor or Future Value Factor.

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.

A financial interest provided to the sponsor (investment manager) as an incentive to maximize performance. This is typically an outsized share of the profits, payable once the investors have received back their entire initial capital contributions and achieved certain profit thresholds. Also referred to as the promoted interest, or carried interest.

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 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.

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.

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.

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.

The revenue generated per available room, calculated by dividing the total revenue by the number of available rooms. The RevPAR differs from the ADR in that it accounts for any unoccupied rooms.

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.

The sale of the property for less than the outstanding debt balance owed to all lienholders (typically senior and mezzanine debt providers). The property will fall into foreclosure if all parties do not reach a consensus agreement to sell.

Any indirect development costs (i.e. not labor or materials). These costs range from architecture and engineering fees to project management and developer fees and can affect hard costs significantly (e.g. an architect’s efficient building design may reduce the need for structured parking hard costs). Soft Costs are also referred to as Indirect Costs.

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.

The designated party responsible for handling situations wherein the borrower defaults. A special servicer has the authority to structure loan workouts or institute foreclosure proceedings. This is in contrast with a standard mortgage servicer who has limited legal power and is primarily responsible for collecting rental payments from the borrower.

A project manual that details the various products, construction materials and methods to be used in the project development.

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 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.

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.

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.

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.

A financing method used by government to incentivize urban renewal and development within targeted areas. When new development occurs in the TIF zone, the property’s incremental taxes (above a fixed baseline amount) will be allocated to a TIF fund. These funds are then allocated towards infrastructure improvement and job creation within the TIF district, which in turn leads to higher property values and further private investment.

A certificate of occupancy issued prior to project completion allowing the tenant or owner occupancy of a space whilst construction is still ongoing. A Temporary Certificate of Occupancy typically expires within a finite time period, which varies by jurisdiction and property type.

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.

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.

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.

One of three appraisal methods used in commercial real estate to estimate the value of income-producing property. The Income Approach includes two methods. The first method, the Income Capitalization Method, is a process whereby one year's Net Operating Income is divided by a market Capitalization Rate to arrive at an estimated value. The second method, uses the Discounted Cash Flow to calculate the present value of a real estate investment's forecasted future income and reversion value. The Income Approach is the most common appraisal method used to evaluate income-producing real estate.

A form of insurance that protects property owners and/or lenders against any property loss arising due to legal defects on the property being transferred (outstanding liens, encumbrances on the property etc.).

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.

A charge levied by the state or local government when property is sold from one individual/entity to another.

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. Real estate discounted cash flow models , which account for rental growth, generally are capable of calculating the trended rental rate of an investment at some future date (see the A.CRE Ai1 DCF as an example).

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.

Situation whereby the outstanding loan balance exceeds the open market value of the property. This limits the owner from selling the asset and, unless a loan workout is negotiated, the property will be foreclosed.

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.

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.

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.

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.

Costs that vary based upon of the property’s level of operation. For example, property management fees vary directly based on the property’s revenue and therefore will likely be higher the greater the occupancy of the building. This is in contrast to Fixed Costs, which do not vary with the property's level of operation.

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.

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.

The Wall Street Prime Rate (Prime Rate), is the interest rate charged between the largest banks in the United States. The rate is not linked to the Fed funds rate although there is typically a 300 basis points (3%) spread between them. The WSJP is widely utilized by lenders as an index against which other loans are measured i.e. WSJP + 1.5%.

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".

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).

Yield-on-cost is the net operating income (or sometimes cash flow from operations) at stabilization divided by the total project cost, whereas the capitalization rate (cap rate) is the stabilized net operating income (or sometimes cash flow from operations) divided by the market value of the property. The yield-on-cost serves to help the real estate investor calculate the difference between the market yield and the actual yield of an investment. In development, this difference between market yield (market cap rate) and actual yield (yield-on-cost) is called the development spread.