Terminology Guide

Formulas

Value = NOI / CAP Rate

CAP Rate = NOI / Value

Net Operating Income (NOI) = Value * CAP Rate

OR Total Income – Property Related Expenses

Net Income = Annual Gross Revenue – All Annual Expenses

Gross Rent Multiplier (GRM) = Price / Gross Rents

Debt to Service Coverage Ratio (DSCR) = NOI / Debt Service Cost

Vacancy Rate = Vacant Space / Total Available Space

Cash On Can Return (COC) = Net Income / Total Cash Invested

Glossary

Absorption Rate: The rate at which a space is leased or purchased within a specified period. It is often expressed in square feet per year for commercial property and units or homes per year for residential property.

Adjustable-Rate Mortgage (ARM): ARM refers to an adjustable-rate mortgage that comes with variable interest rates that are based on the outstanding balance of each period on the loan.

Amortization: The gradual reduction of a loan principal through regular payments. Amortization is a process of using regular payments or installments to pay off debts. It keeps track of the amount of money assigned to the principal and interest for each installment. At the end of the agreed term, the loan should be paid in full so there is no balance left.

Anchor Tenant: A major tenant, such as a department store that attracts other tenants to a shopping center or mixed-use property.

Annual Percentage Rate (APR): How much a loan costs annually, may include interest rate, broker fees, points, and some other credit charges required from a borrower. Under the Truth in Lending regulations, the APR must be reported by lenders. The APR must include all charges not expected to come up in an all-cash transaction, such as charges paid to lenders such as credit report fees, appraisal fees, as well as title insurance charges.

Appraisal: The valuation of a property’s market value, typically conducted by a certified appraiser.

Appreciation: The increase in a property’s value over time due to market conditions or improvements. Appreciation is defined as an increase in a property’s market value or worth due to improvements or changing market conditions. Some factors that can lead to an increase in a property’s value are inflation, economic growth of the area, increased demand for the property, population growth, changing interest rates, and more.

As-Is: A real estate term used to refer to a property that is in its present condition without the seller giving any guarantees. The term is used when a seller is selling a property in its current condition to a buyer, who is agreeing to purchase it with all its faults, including the faults that are not yet apparent. The purpose of the clause is to let the buyer know that the seller does not intend to make any repairs or improvements to the property.

Assessed Value: Assessed value is the value an appraiser places on a property for taxation purposes. When calculating property taxes and other related charges,a tax appraiser has to determine the fair value of the real property in the market.

An assessed value is often calculated as a particular percentage of the appraised value, and this percentage varies depending on what the property is used for and any exemptions.

Assisted/Subsidized Housing: A privately owned rental property that, through government subsidy, houses low-income residents who otherwise would not be able to afford market rents.

Assumable Mortgage: An assumable mortgage is an existing loan that the buyer can take over or assume on the same terms the original borrower was given. A loan assumption must be approved by the lender.

Bridge Loan: A bridge loan or it is sometimes referred to as a “swing loan,” is a short-term loan that uses a borrower’s present property to secure a loan and bridge the gap between two transactions by using the proceeds for building or closing a new property before the final sale of the present property. This is a form of temporary financing, it is obtained at the completion of a construction loan period before arrangements can be made for permanent financing.

Building Class: Building classes refer to the desirability of location, modernization of the building, types of building amenities, age, and other factors.

Class A is a classification used to describe an extremely desirable building, in terms of location, amenities, and overall quality. Class A is the most desirable of the classes.

Class B is a classification used to describe a desirable building, in terms of location, amenities, and overall quality. Class B is the second most desirable of the classes.

Class C is a classification used to describe a desirable building, in terms of location, amenities, and overall quality. Class C is the third most desirable of the classes.

Build-to-Suit: A type of commercial development where a property is constructed to meet the specific needs of a single tenant.

Capital Expenditures (CapEx): The funds used to acquire, maintain, or upgrade long-term assets, such as buildings or equipment.

Certificate of Occupancy (CO): A document issued by a local government authority certifying that a property complies with building codes and is safe for occupancy.

Collateral: Property or assets pledged as security for a loan, which the lender can seize and sell in the event of default.

Common Area Maintenance Charges (CAMs): Fees charged to tenants to cover the costs of maintaining common areas within a property.

Capitalization Rate: CAP Rate is the ratio of net operating income to property value. It provides an idea of the (unleveraged) percentage return an investor would get on purchasing the property. If the cap rate for comparable properties is known, it can be used to estimate the property value.

NOI / Purchase Price x 100 = Cap Rate (displayed in %). $50,000 NOI / $1,000,000 = .05 x 100 = 5%”

Cash Flow: The income generated from a multifamily property after deducting all expenses, including mortgage payments and operating costs.

Chain of Title: A history of all documents that have transferred title to an existing parcel of real property. This history of owners and lienholders of the real property contains the date of acquisition and the nature of the title. If your rights to own property are ever questioned, the chain of title will come in handy to prove your ownership.

Clear Title: Refers to a land title, good title, or other marketable titles with no liens, mortgages, defects, legal encumbrances, or adverse claimants against it. A clear or clean title shows that you have acquired full ownership rights to real property without any type of claim or lien by creditors against the property. A title search is vitally important to determine if you can receive a clear title in a commercial real estate transaction.

Closing: The conclusion of a sales transaction that occurs when a seller transfers title to a buyer in exchange for consideration. Closings are often held at a title company or an attorney’s office. A closing is the final process involved in completing a financial transaction and requires that all necessary signatures be obtained, all required disclosures made, and all monies collected and disbursed before transferring title to real estate, and/or executing a mortgage.

The Real Estate Settlement and Procedures Act regulates closings.

Closing Costs: The costs, fees, or expenses a buyer has to pay when closing a sale or refinancing an existing mortgage. A buyer has to pay these costs in addition to the down payment, which may include title charges, points, document preparation fees, credit report fees, mortgage insurance premiums, appraisals, inspections, deed recording fees, insurance, prepayments for property taxes, survey fees, agent’s commissions, transfer taxes (depending on area), and other expenses.

Commercial Mortgage-Backed Security (CMBS): A type of security backed by commercial mortgage loans, typically pooled together and sold to investors.

Common Area: Shared spaces within a multifamily property, such as hallways, parking lots, and recreational areas.

Concession: An economic incentive granted by an owner to encourage the leasing of space or the renewal of a lease. Concessions are usually related specifically to the rental rate for example a “free” month’s rent.

Condo Conversion: The process of converting an apartment building into individually owned condominium units.

Conforming Loan: A mortgage loan that meets the criteria set by government-sponsored entities like Fannie Mae and Freddie Mac.

Contingency: A condition that the parties involved in a contract must meet before the contract becomes legally binding. A contingency is often used as a safety measure for both the buyer and seller. Commercial property investors can benefit from having contingency plans as they help to mitigate lots of unnecessary risks. Some common contingencies in real estate can be an appraisal contingency, financing contingency, inspection contingency, insurance contingency, title contingency, or various other contingencies.

Conventional Loan: A mortgage loan not insured or guaranteed by a government agency. This type of loan will require a “good” credit score and a down payment, or equity, of around 5%-25% of the purchase price or property value.

Cross-Collateralization: Using multiple properties or assets as collateral for a single loan.

Debt Service Coverage Ratio (DSCR): The ratio of Net Operating Income (NOI) to mortgage debt service. DSCRs are most commonly expressed as a decimal (e.g., 1.25), but sometimes as a percentage (125 percent).

Deed: A deed is a legal document that serves as evidence of the transfer of ownership of real property from one party to another. It is typically used in real estate transactions to convey title or interest in a property. Deeds contain detailed information about the property, including its legal description, the names of the parties involved in the transaction (grantor and grantee), the purchase price (if applicable), and any conditions or restrictions on the transfer of ownership.

Deferred Maintenance: Delaying necessary repairs or maintenance of a property, which can lead to increased costs over time.

Depreciation: Depreciation refers to the decrease in the value of an asset over time due to factors such as wear and tear, obsolescence, or deterioration. It’s a common concept in accounting and finance used to allocate the cost of an asset over its useful life. This allocation reflects the idea that assets lose value as they are used, which impacts the financial statements of a business. Depreciation is typically recorded as an expense on the income statement and reduces the asset’s book value on the balance sheet. There are various methods to calculate depreciation, including straight-line depreciation, declining balance depreciation, and units of production depreciation, each with its own approach to spreading the cost of an asset over its useful life.

Down Payment: A percentage of the price of a property that is paid up-front by the buyer to the seller, is often the difference between the mortgage amount and the purchase price, usually ranging between 3 to 20 percent. A larger down payment will help to reduce the monthly mortgage payments and often will reduce the amount of interest to be paid over the term.

Due Diligence: The process of thoroughly researching and inspecting a property before purchase. The due diligence process involves investigating the facts, conditions, laws, financial considerations, regulations, rules, and other related matters that are likely to affect a person’s decision to purchase the property. The investigative process will vary from one property to another and could include a property inspection, review of restrictive covenants, zoning regulations, and other factors. When purchasing land, the process may include Investigations regarding possible environmental contamination, use, soil compaction studies, analysis of developmental cost versus the value of the property upon completion, etc.

Earnest Money: A deposit made by the buyer to show “good faith”, that is usually held by a title company or brokerage in an escrow account. Earnest money is typically paid shortly after the contract is executed or during the due diligence/attorney review period.

Equity: The difference between a property’s value and the amount of the mortgage debt on it.

Equity Multiple: The total net profit returned over the lifetime of an investment plus the amount invested divided by the amount invested.

Equity Multiple = (total net profit + amount invested / amount invested

Escalation Clause: A provision in a lease agreement that allows for rent increases over time, typically tied to inflation or changes in operating expenses OR a provision written into an offer, that allows for modifying the purchase price of the offer, if other competing offers exist.

Escrow: A process in which a non-interested third party known as an “escrow agent” holds money or documents in trust to consummate the instructions of the concerned parties as written in their contracts.

Eviction: The legal process of removing a tenant from a rental property due to non-payment or violation of lease terms.

Fair Housing Act: Federal legislation that prohibits discrimination in housing based on race, color, religion, sex, disability, familial status, or national origin.

Gross Lease: A lease agreement in which the tenant pays a fixed amount of rent, and the landlord is responsible for operating expenses, such as taxes, insurance, and maintenance.

Gross Rent Multiplier (GRM): A formula used to estimate a property’s value by dividing the purchase price by the gross rental income.

Price of Property/Gross Rental Income=GRM

Ground Lease: A lease agreement for the use of land only, where the tenant constructs improvements on the land and pays rent to the landowner.

Hard Costs: The direct construction costs associated with building improvements, such as materials, labor, and contractor fees.

HUD (U.S. Department of Housing and Urban Development): A government agency that oversees affordable housing programs and regulations.

Internal Rate of Return (IRR): The discount rate that equates all future returns to the initial outlay on that investment. A percentage rate that is earned on the money remaining in an investment every year. For income properties, the IRR can be either the interest or discount rate required to discount the total amount of future net cash flows (which may include amortization, payments of loans, and depreciation of the real property), to an amount that equals the initial equity of the property.

In the case of development projects, IRR is defined as the interest or discount rate required to discount the sum of all development expenditures and incomes in order to equal zero.

Joint Venture (JV): A business arrangement between two or more parties to jointly develop or invest in a real estate project, typically sharing risks and returns.

Key Performance Indicator (KPI):This metric is often used by Property Managers or Owners when measuring a property’s performance. The best KPIs for commercial real estate include aged receivables, resident activity such as lease renewals, move-outs, and move-ins, financial statements, occupancy, prospect conversion ratios, work orders, evictions, P&L, and portfolio analytics.

Lease Option: A lease agreement that gives the tenant the right, but not the obligation, to purchase the property at a specified price and within a specified time frame.

Leasing Agent: A representative responsible for marketing and leasing rental units.

Lease Agreement: A legally binding contract outlining the terms and conditions of a rental arrangement between a landlord and tenant.

Leasehold Estate: A form of real estate that allows a tenant to construct permanent structures on a parcel of leased land, and during the lease period, also receive income from the structures. Leasehold estates often involve long-term leases and landowners can have their property developed without spending their own money. Another benefit to landowners is that they retain their rights to the land and still get a steady stream of income from it without having to sell it.

Lease Renewal: The process of extending a tenant’s lease for an additional term.

Leverage: The use of borrowed funds to help finance an investment, to increase either the potential rate of return or one’s purchasing power.

Letter of Intent (LOI): A document that expresses the intent of each party in a real estate agreement. An LOI is not a legally binding contract, but it is often aimed at reducing misunderstandings between the parties. Terms of the purchase or lease that should be included in the LOI include negotiations, timeframes, and concessions.

Lien: A legal claim against a property as security for the payment of a debt or obligation, such as a mortgage or unpaid taxes.

Loan to Cost (LTC) Ratio: The ratio of the mortgage loan amount to the property’s purchase price.

Loan to Value (LTV): The ratio of the mortgage loan amount to the property’s value. LTV ratios may affect interest rates, lender requirements for escrow accounts, PMI, and loan qualifying criteria. The formula is expressed as the amount of loan divided by the value of the property.

For example, a $100,000 commercial building with a mortgage of $80,000 has an LTV of 80%.

Maintenance Reserve: A fund set aside for future maintenance and repair expenses.

Market Analysis: An assessment of local real estate market conditions to determine property value and rental rates.

Market Rent: The average rental rate for comparable units on the open market in a specific area

Master Lease: A lease agreement that allows a tenant to sublease all or part of a property to other tenants.

Mezzanine Financing: A type of financing that combines debt and equity, typically used to fill the gap between the senior debt and the equity portion of a real estate investment.

Mixed-Use Development: A type of development combining retail, office, residential, or industrial developments in one parcel or group of parcels of land.

Mortgage Broker: A professional who connects borrowers with lenders and assists in securing mortgage loans.

Mortgage Insurance: Insurance that lenders require when a borrower makes a down payment of less than 20% to protect against default.

Mortgage Debt Service:The amount of money required to cover a mortgage’s principal payments, interest payments, and any credit enhancement costs.

Net Lease: A lease agreement in which the tenant pays a base rent plus additional expenses, such as property taxes, insurance, and maintenance.

Net Operating Income (NOI): Revenue minus all operating costs, excluding debt service, depreciation, capital expenditures, and income taxes.

Non-Recourse Loan: A loan in which the borrower is not personally liable for repayment, and the lender’s only recourse is the property itself.

Occupancy Rate: The percentage of a property that is occupied.

Offering Memorandum (OM): A document created to explain all of the attributes of a property.

Operating Expenses: The ongoing costs associated with running and maintaining a multifamily property. Examples of operating expenses often include real estate taxes, property insurance, property management, maintenance expenses, utilities, and legal expenses. Operating expenses do not include capital expenditures, debt service, or cost recovery.

Opportunity Zone: A designated economically distressed area where investors can receive tax incentives for investing in real estate or businesses.

Phase I Environmental Site Assessment: An initial investigation of a property to identify potential environmental risks or liabilities, typically conducted before purchasing or financing a property.

Pro Forma: A projection that estimates future expectations.

Property Inspection: A thorough examination of a property’s condition, often conducted by a professional inspector.

Property Management: The process of overseeing and maintaining a multifamily property, including rent collection, maintenance, and tenant relations.

Property Tax Assessment: The value assigned to a property for tax purposes, which can affect property taxes.

Real Estate: Land and permanent improvements attached to it (either natural or man-made), as well as the right to own them and also use them. It is also referred to as realty or real property. Categories of real estate include residential, commercial, raw land, industrial, and special use real estate.

Recourse Loan: A loan in which the borrower is personally liable for repayment, and the lender can pursue the borrower’s assets in case of default.

Real Estate Investment Trust (REIT): a company that owns, operates, or finances income-generating real estate. REITs are designed to provide investors with a way to invest in real estate without having to directly buy, manage, or finance properties themselves.

One key feature of REITs is that they are required by law to distribute a significant portion of their income, usually at least 90%, to shareholders in the form of dividends. This requirement allows REITs to enjoy certain tax advantages, provided they meet specific criteria outlined in tax regulations.

Real Estate Owned (REO): Properties owned by a lender, typically acquired through foreclosure proceedings, and held as assets on the lender’s balance sheet.

Rental Market Analysis: An evaluation of market conditions to determine rental property demand and pricing.

Rent Roll: A document that provides a summary of all current tenants.

Return on Cost: A term used by developers to evaluate the viability of a project by dividing the return or net income of a property by the cost to develop the property.

Return on Investment (ROI): An undiscounted return over a single period expressed as a percentage of the initial capital invested. ROI = (Gains – Cost) / Cost

Sale-Leaseback: A transaction in which a property owner sells the property to an investor and then leases it back from the investor, allowing the owner to access capital while retaining use of the property.

Section 8 Subsidized Housing: Privately owned residential rental units that are used to participate in the low-income rental assistance program created by the 1974 amendments to Section 8 of the 1937 Housing Act. There are two types of Section 8 programs, known as “place-based” and “tenant-based”. Under the tenant-based program, HUD pays a rent subsidy to the landlord on behalf of qualified low-income tenants, they pay a limited portion of their income for rent (voucher program). Residents may receive rent subsidies for the entire rent and not pay any portion of the rent themselves (certificate program).

In Place-based Section 8 programs, the rental assistance is tied to a rental property, not an individual household.

Some cities and municipalities require landlords to participate in Section 8 programs.

Security Deposit: A sum of money paid by a tenant to a landlord or property owner as a form of financial protection against potential damages, unpaid rent, or breaches of the lease agreement during the tenancy period. It is usually paid before the tenant moves into the rental property and is held by the landlord for the duration of the lease.

Site Plan: A detailed drawing that shows the layout of a property, including buildings, parking, landscaping, and other site features.

Sublease: A lease agreement in which a tenant rents all or part of a property to another party, known as the subtenant.

Title: Legal ownership of a property, typically evidenced by a deed or title certificate.

Title Insurance: Insurance that protects property owners and lenders against losses due to defects in the title or ownership of a property.

Triple Net Lease (NNN): A lease agreement in which the tenant pays a base rent plus all operating expenses, including property taxes, insurance, and maintenance.

Underwriting: The process of evaluating and analyzing the risk of a real estate investment, typically conducted by lenders or investors.

Vacancy Cost: The amount of rent that could have been collected from vacant units if they had been occupied and leased at current market rates.

Vacancy Rate: The percentage of a property that is vacant.

Value-Add: A real estate investment strategy focused on acquiring properties with the potential for improvement or redevelopment to increase value and returns.

1031 Exchange: A tax-deferred exchange of one investment property for another, allowing capital gains taxes to be postponed.