Real Estate Glossary
Many of you have asked for us to explain the jargon that real estate professionals, builders, and newspaper advertisers use concerning commercial real estate. Here are some buzzwords that we've translated to plain English. Additionally, we've included other words that you will encounter during a typical commercial real estate transaction.
United States Real Estate Glossary || British Real Estate Glossary || Bahamian Real Estate Glossary
Commercial Real Estate Glossary of Terms
[ A ][ B ][ C ][ D ][ E ][ F ][ G ][ H ][ I ][ J ][ K ][ L ][ M ][ N ][ O ][ P ][ Q ][ R ][ S ][ T ][ U ][ V ][ W ][ X ][ Y ][ Z ]
A
ADA Compliance - Compliance with the provisions of the American with Disabilities Act which establishes minimum requirements for facilities with public access to accommodate physically handicapped persons.
ADC - Acquisition, Development, Construction. Used by lenders to describe this type of interim financing.
Adjusted Basis - Basis at acquisition, plus capital additions, minus cost recovery (deprecation) taken, minus basis in partial sales = adjusted basis
After Tax Cash Flow (CFAT) - The cash flow remaining after deduction of an allowance for taxes attributable to that income.
Agreement for Deed - Often referred to as Contract for Deed. A contract for the sale of property in which transfer of title to the buyer is contingent on the fulfillment of certain conditions.
Annuity - Periodic fixed payments to be received for a specified period of time for life, in consideration for prior lump sum or installment payments made to the other party in the annuity contract.
Amortization - Number of payment periods to reduce the principal of loan to zero.
Appreciation - Sale price minus the acquisition price.
APOD - Annual Property Operating Data. A form used to record property income and expenses.
Attornment Agreement - A letter acknowledging a new owner as a landlord or a new organization as a loan servicer.
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B
Band of Investment - Method used to determine capitalization rates using market equity return rates, debt rates with mortgage constant, and equity/debt ratio.
Basis - The acquisition price of a property.
Basis Points - Term used in the financial community. One percent (1%) = 100 basis points.
Bond Loan - A municipal (state, county, city, school board) sponsored method of financing at a reduced interest rate.
Bondable Net Lease - A long term, absolute net lease with a tenant who has a very high credit ceiling. The lease must be non-cancelable and must call for a net rental equal to or above the amount of debt service.
Bridge Loan - Interim financing which is usually used to cover a short period until committed financing closes.
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C
Capital Market - The financial market for buying and selling long term investments (those with maturities of greater than one year), such as mortgages, Treasury bonds, and certificates of deposit.
Capital Gain - The gain from appreciation on investment used in a trade or business - (long term capital gain if holding period is greater than one year; short term if less than one year).
Capitalization - The conversion of a future net income stream into present value (PV) by using a specific desired rate of earnings as a discount rate.
Capitalized Rate (Cap Rate) - The rate of return on net operating income considered acceptable for an investor and used to determine the capitalized value. This rate should provide a return on, as well as a return of, capital.
Capped Rate - A rate commitment by a lender (usually with a charge) which locks in a maximum rate but allows the borrower to relock if the market rates decrease. Also referred to as cap and float.
Capitalized Value - The estimated market value of business assets in terms of the present value of anticipated earning.
Cash Equivalent Value - A method of calculating the appraised value of a property that considers sales and financing concessions when evaluating comparable properties. There is no standard in the appraisal industry for measuring cash equivalent value, but investors and mortgage insurers sometimes insist that cash equivalency be incorporated in appraised value.
Cash Flow Before Taxes (CFBT) - Cash received less cash paid out, before any consideration for income taxes.
Cash Market - A market where mortgages and/or mortgages backed securities are bought and sold for immediate delivery and cash payment. Also called spot market.
Cash-on-Cash Return - The rate of return on an investment as measured by cash returned to the investor, based on the investors’ cash investment and without regard to income tax savings or the use of borrowed funds.
CBD - Central Business District
CMBS - Commercial Mortgage Backed Securities are bonds backed by the income stream from a pool of commercial real estate mortgages. See also Private Conduit, Yield Maintenance and Prepayment penalty.
Commitment Letter - A contract from lender to borrower to close financing subject to the terms stated in the Commitment Letter.
Compounding - Interest earned on interest.
Cost of Funds Rate - The cost of the monies that are loaned or invested, and may include lenders operating costs.
Cost/Income Ratio - Operating costs divided by Expected Gross Income (before vacancy and credit loss).
Cost Recovery (Depreciation) - The annual tax deduction allowed on the cost of depreciable property used in a trade or business (real estate and personal). The allowable annual allowance varies by property type. In real estate, residential properties can be depreciated over 27.5 years and commercial properties over 39.5 years, using the straight line method. At sale, cost recovery is taxed at a different rate than gains on appreciation.
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D
Discounted Cash Flow (DCF) - The ratio of annual Net Income (NOI for real property) divided by the Annual Debt Service. Also called “debt service coverage.”
Debt/Equity Ratio - The proportion of capital borrowed to the amount of capital invested out-of-pocket or obtained through the sale of common stock. Also called “leverage ratio.”
Debt Service - The amount of the periodic debt payment (Principal and interest).
Deed-in-Lieu of Foreclosure - An agreement by borrower to voluntarily transfer deed to lender in the event of default. The risk is that liens may have been placed on the property that lender will be responsible for.
Dollars/Square Foot - Commonly used measure to compare income and costs.
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E
Environmental Impact Statement - A document required by many federal, state, and local environmental land use laws, containing an analysis of the impact that a proposed change may have on the environment of a specific geographic region. It examines a wide variety of physical, social, and economic conditions that would be affected by the proposed development. The analysis covers effects that cannot be avoided, alternatives to the proposed change, short-term versus long-term uses, and long term productivity, irreversible commitment of resources, and the benefits to be derived from the proposed change.
Environmental Impairment Insurance - A special form of insurance desired to protect an insured against claims for liability and clean up costs related to pollution. Coverage may be for gradual and/or sudden accidental pollution, and is always written on a claims made form.
Equity Build-Up - Build-up on equity achieved from appreciation and mortgage principal reduction.
Equity Return Rate - Rate of return desired by an investor on his out-of-pocket cash invested, with no borrowed funds.
Exculpatory Clause - A clause in a contract holding a specified party harmless in the event of default. For example: the provision in a note that the debtor will not be held personally liable in the event of default (Non-recourse loan).
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F
Financial Management Rate of Return (FMRR) - Used when analyzing alternative investment, wherein negative future cash flows are discounted at a “safe rate” (demand deposit rate), and positive future cash flows are compounded to the end of the investment holding period at a “reinvestment rate” (highest rate for investment instruments that would mature at the end of the holding period). The resulting rate of return on the adjusted invested dollars is the FMRR rate.
Force Majeure Insurance - A specialized form of coverage for owners and contractors to protect against damage or delays caused by unexpected events such as war, strikes, or perils not normally insured under “all risk” policies.
Funded Reserves - Monies set aside from cash flow to fund future costs of capital repairs and replacements and insurance against future operations cash shortfalls.
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G
Gross Lease - Lease in which the tenant pays one rent, and the landlord pays all property expenses.
Ground Lease - A lease where the land owner leased his land to another party. This is often seen in the case of public owned land, and is common in some real estate markets. In these leases, the improvements constructed on the land usually revert to the land owner at the end of the lease.
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H
Haircut - The difference between the market value of a mortgage and the amount of money an investor or lender will advance against it.
Hard Money Loan - Financing, usually by private sources, wherein the amount of the loan is secured only by the collateral. These loans are usually very expensive, and the loan-to-value ratios are very low. Like a pawn shop loan.
Hazard Waste Risk - A financial or health risk that is created due to any substance such as asbestos, urea formaldehyde foam insulation, transformers containing polychlorinated biphenyls (PBSs) in excess of 50 parts per million, lead paint, or any substance deemed hazardous, toxic, or required to be disclosed, reported, treated, removed, disposed of, or cleaned up by any applicable hazardous material law.
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I
Internal Rate of Return (IRR) - A method of determining investment yield (return on) over time, assuming a set of income, expense, and property value conditions.
Interim Financing - Short-term financing such as acquisition, development, construction, and bridge loans, wherein the lender expects to be taken out with sale proceeds or permanent financing proceeds. Rates are usually indexed to Prime or BIBOR or short-term bond rates.
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J
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K
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L
Letter of Intent (LOI) - A letter from buyer which outlines the terms and conditions under which he is prepared to move to contract. This letter is usually not legally binding. It may be accompanied by a “good faith” deposit.
Leverage - Use of borrowed funds to increase return on equity invested.
LIBOR - London Interbank Offered Rate. Rate used by lenders as index, similar to the use of Prime as an index.
Loan Term Sheet - A letter from a lender to borrower-similar to a Letter of Intent-which states the terms and conditions by which the lender will proceed forward in the loan process. This letter is usually not legally binding.
Loan-to-Value (LTV) - Loan amount divided by the value of the asset. In real estate, lenders are required to have an appraisal from the lender approved appraiser for loans in excess of $500,000.
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M
Mezzanine Loan - Equity-type lending, usually secured with subordinate mortgage, when borrower is unable to meet the lender’s equity ratio. For example: Lender required 25% equity to cost, and borrower has only 15%. Equity lender brings the 10%. This financing is usually very expensive, and lenders require funding from the mezzanine monies first and pay-off after the superior loan. Typically the mezzanine lender requires a monthly payment of interest (at a rate lesser than the loan rate), and “look back” IRR at the mezzanine-e.g. mez rate is 22%; monthly pay rate is 10%; accumulated difference (compounded) is funded by borrower at the end of the loan term.
Mortgage Constant - A rate equal to the annual debt service (principal and interest) divided by the loan amount. Accordingly, this rate will be higher than the loan interest rate.
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N
Net Operating Income (NOI) - Income less expenses (including real estate taxes), before debt payment, reserve funding, participations payments and income taxes.
Net Present Value - The increase or decrease in the initial investment (PV) at differing discount rates.
Net Lease - A lease in which the tenant pays an agreed portion of the landlord’s expenses.
Non-Recourse Loan - Type of loan which prohibits the lender from attempting to recover against the borrower (personally) if the security value for the loan falls below the amount required to repay the loan.
NNN - Often used when referring to a net lease. NNN symbolizes real estate taxes, property insurance and common area maintenance.
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O
Occupancy Rate - Number of units occupied divided by the total number of units, or rentable square feet occupied divided by the total rentable square feet.
Overall Capitalization Rate (OCR) - A market-derived capitalization rate based on sales prices and rentals of comparable properties. The rate is calculated by dividing the net operating income of a property by its sales price.
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P
Participation Financing - A financing method wherein the lender (investor), in addition to interest, participates in a percentage of the cash flow.
Pre-Foreclosure Sale - Settlement of a mortgage default where the borrower allows the mortgage insurance company or servicer to sell the property securing the mortgage rather than foreclosing on it.
Pre-Payment Penalty - The penalty the borrower pays if the loan is paid off prior to the end of the loan term. It is usually equal to the present value of any costs to the lender resulting from the difference in interest rates between the date of the note and the date on which the prepayment is made (aka Yield Maintenance). Often related to CMBS and Conduits.
Present Value - The current value of cash received at a definite point or points in the future.
Prime Rate - An interest rate that is usually indexed to the Federal Reserve Funds rate. Usually banks will use the rate published in the Wall Street Journal. The rate is usually 3% over the Federal Funds rate. Often the index used for interim (short term) financing.
Private Conduit - A private market entity (without ties to the federal government) that increases the availability of real estate financing by purchasing and selling mortgages and mortgage backed securities. Private conduits match lender and investor needs, allowing for the sale or securitization of loans by mortgage bankers to a national market. (aka Conduit)
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Q
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R
Recapitalization - The process of refinancing an income producing property based on the continuation of the current use and anticipated future income and expenses.
Recourse Loan - In the event of loan default, the lender has the right to go after the borrower for repayment of the difference when the security value is less than the loan balance.
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S
Salvage Value - The value of the property at the end of its useful life. Not normally used in real estate.
Strict Foreclosure - A type of foreclosure proceeding used in some states in which the foreclosed property is invested directly in the mortgagee by court decree, without holding a foreclosure sale. (aka Judicial Foreclosure)
Subordination Lease Provision - A clause in a lease by which the tenant acknowledges that its interest in the leased premises is inferior to the interest of the lender whose mortgage encumbers the leased premises.
Subrogation - The right of a party to proceed against another for recovery.
Sub-mortgage - The use of one mortgage to obtain another.
Subordinate Lien - A lien or encumbrance (for example, a 2nd mortgage or mechanics lien) on real estate whose priority is inferior to another’s recorded interest in the same property. (aka Junior Lien)
Subordination - The act of a party acknowledging by written record (Subordination Agreement) that a debt is inferior to the interest of another in the same property. Subordination may apply not only to mortgages, but to leases, real estate rights, and any other types of debt instruments.
Subordinated Ground Lease - A lease in which rights of the lessor of the ground are junior to the rights of the holder of the first mortgage.
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T
Turnover Ratio - The number of units leased to new tenants during a twelve month period, divided by the total number of units.
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U
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V
Vacancy Rate - Number of units vacant, divided by the total number of units, or also, the number of square feet vacant, divided by the total rentable square footage. Economic Vacancy Rate is a term often used when comparing end-of-year EGI (Expected Gross Income) to actual income collected.
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W
Wrap-Around Mortgage - A financing technique involving the creation of a second or junior mortgage which includes the balance due on any existing mortgages, plus the amount of the new secondary or junior lien.
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Y
Yield Curve - The rate of investment income to the total amount invested over a given period of time. Also, a graphic representation of market yield for a fixed income security plotted against the maturity of the security.
Yield Maintenance - The prepayment premium which will equal the present value of any costs to the lender resulting from the difference in interest rates between the date of the note and the date on which the prepayment is made. (See also Pre-Payment Penalty).
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Z
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