Commercial Real Estate Terms
The amount of inventory or units of a specific commercial property type that become occupied during a specified time period (usually a year) in a given market, typically reported as the absorption rate.
Accumulated cost recovery
Total cost recovery deductions taken throughout the holding period of a property.
Income from salary, wages, tips, commissions, and activities in which the taxpayer materially participates. “Also see passive income”
The ratio of rentable to useable square feet, also known as the load factor and the rentable-to-useable ratio. Also see efficiency percentage. Formula:
Add-on factor =Rentable square feet
Useable square feet
Fourth stage of four-stage transaction management process pertaining to a transaction manager’s planning, effort, and continual contact with key decision-makers, investors, and users, as well as contact with ancillary professionals. This ongoing process allows for feedback, establishes a network for problem solving, provides a means to offer additional services to the client, and enhances the transaction manager’s preparedness for the next assignment.
The original cost basis of a property plus capital improvements, less total accumulated cost recovery deductions, and partial sales taken during the holding period.
See annual debt service.
Cost reductions or savings that come about from efficiency gains associated with the concentration or clustering of firms/producers or economic activities and the formation of a localized production network.
The repayment of loan principal through equal payments over a designated period of time consisting of both principal and interest.
Annual debt service (ADS)
The total amount of principal and interest to be paid each year to satisfy the obligations of a loan contract.
Annual percentage rate (APR)
The true annual interest rate payable for a loan in one year taking account of all charges made to the borrower, including compound interest, discount points, commitment fees, and mortgage insurance premiums. It also takes into account the time at which the principal is repaid (especially when payments of principal are made in installments throughout the year, but interest is charged at the beginning of the year), but not the actual expenses incurred by the lender in making the loan and recharged to the borrower.
Regular fixed payments or receipts over a designated period of time.
An investment’s increase in value.
The possibility or probability that a real estate investment will increase in value during the holding period.
The value of real property established by the tax assessor for the purpose of levying real estate taxes.
Average annual effective rate
The average annual effective rent divided by the square footage.
Average annual effective rent
The tenant’s total effective rent divided by the lease term.
A simple technique used to forecast next period's/year's vacancy rate by averaging previous years' vacancy rates; especially effective where vacancy rates have remained relatively flat or show little variability over time.
The final payment of the balance due on a partially amortized loan.
Base (in lease terminology)
A face, quoted, dollar amount representing the rate or rent in dollars per square foot per year and typically referred to as the base rate.
The minimum rent due to the landlord. Typically, it is a fixed amount. This is a face, quoted, contract amount of periodic rent. The annual base rate is the amount upon which escalations are calculated.
Employment that is considered to be export-oriented or export-driven associated with activities that generate income from the sales of products and services in markets outside the local economy.
The total amount paid for a property, including equity capital and the amount of debt incurred.
Before-tax investment value
The sum of the present values of the mortgagor and mortgagee of property.
The stage at which an investment produces an income that is just sufficient to cover recurring expenditure. For an investment in real property, the point at which gross income is equal to normal operating expenses, including debt service (the stage at which the next cash flow becomes positive). Also known as the default point
The sales threshold over which percentage rent is due. It is calculated by dividing the annual base rent by the negotiated percentage applied to the tenant’s gross sales.
The uncertainty associated with the possible profit outcomes of a business venture.
The point at which there is a recognizable shift of expenditure allocations away from owner-occupied housing and to the rental housing market (or vice-versa) as a result of changing market conditions.
See common area maintenance.
The maximum amount for which the tenant pays its share of common area maintenance costs. The owner pays for any CAM expenses exceeding that amount.
See capitalization rate.
Property improvements that cannot be expensed as a current operating expense for tax purposes. Examples include a new roof, tenant improvements, or a parking lot—such items are added to the basis of the property and then can be depreciated over the holding period. Distinguished from cash outflows for expense items such as new paint or plumbing repairs (operating expenses) that can be expensed in the year they occur. Also see operating expenses.
Taxable income derived from the sale of a capital asset. It is equal to the sales price less the cost of sale, adjusted basis, suspended losses, excess cost recovery, and recapture of straight-line cost recovery.
The supply and demand for resources to invest in real estate and other investments.
A percentage that relates the value of an income-producing property to its future income, expressed as net operating income divided by purchase price. “Also referred to as cap rate”.
Any tax on a change in capital value (including capital gains tax, estate tax, or inheritance tax); as distinguished from a tax on income.
The net cash received in any period, taking into account net operating income, debt service, capital expenses, loan proceeds, sale revenues, and any other sources and uses of cash.
Cash flow after tax/ (CFAT)
For properties, it is the result of first calculating the net operating income, less mortgage and construction loan interest, less cost recovery for improvements and personal property, less amortization of loan points and leasing commissions to arrive at real estate taxable income. Next, real estate taxable income is multiplied by the applicable marginal tax rate to result in the tax liability (savings). Then, from the net operating income, annual debt service is subtracted to equal the cash flow before taxes (CFBT). Finally, the cash flow after taxes (CFAT) is calculated from the CFBT, less the tax liability (savings), plus investment tax credit. The Cash Flow Analysis Worksheet can be used to calculate a property’s gross operating income, net operating income, real estate taxable income and tax liability or (savings), CFBT, and CFAT.
Net operating income
For properties, it is the result of calculating the effective rental income, plus other income not affected by vacancy, less total operating expenses, less annual debt service, funded reserves, leasing commissions, and capital additions. The Annual Property Operating Data form can be used to calculate a property’s effective rental income, gross operating income, total operating expenses, net operating income, and cash flow before taxes.
Cash flow model
The framework used to determine the cash flow from operations and the cash proceeds from sale.
A return measure that is calculated as cash flow before taxes divided by the initial equity investment.
Cash proceeds from sale
The sales price less sales costs, mortgage balance, and tax liability on sale. Also known as sales proceeds after tax.
Central place theory
A location theory that accounts for the size, distribution, and organization of settlements, places, market areas, and establishments in a competitive and interdependent urban system, to explain differences in the locational tendencies and preferences of businesses as they seek to maximize market accessibility, sales, and profits.
See cash flow after tax.
See cash flow before tax.
An urban settlement or system containing various functions, agents, institutions, and components which interact and work together to satisfy the wants and needs of its inhabitants (as well as a portion of the population in surrounding rural areas).
The useful economic life of an asset set by the Internal Revenue Service.
Third stage of four-stage transaction management process pertaining to bringing the parties together and consummating an agreement. The acronym CLOSE represents the contingencies, legal instruments, obstacles, signatures, and execution involved in the close stage.
Commercial real estate
Any multifamily residential, office, industrial, or retail property that can be bought or sold in a real estate market.
For lease purposes, the areas of a building (and its site) those are available for the non-exclusive use of all its tenants, such as lobbies, corridors, and parking lots. (Real Estate Information Standards)
Common area maintenance (CAM)
Charges paid by the tenant for the upkeep of areas designated for use and benefit of all tenants. CAM charges are common in shopping centers. Tenants are charged for parking lot maintenance, snow removal, and utilities.
A community center is a retail property type that typically offers a wider range of apparel and other soft goods than the neighborhood center does. Among the more common anchors are supermarkets, super drugstores, and discount department stores. Community center tenants sometimes contain off-price retailers selling such items as apparel, home improvement/furnishings, toys, electronics, or sporting goods. The center is usually configured as a strip, in a straight line, “L”, or “U” shaped. Of the eight center types, community centers encompass the widest range of formats. For example, certain centers that are anchored by a large discount department store refer to themselves as discount centers. Others with a high percentage of square footage allocated to off-price retailers can be termed off-price centers.
The principle that cities or regions tend to produce those items or support those activities for which they have the greatest advantage over other areas as defined by the factors of production, demand, supporting industries, and quality of life considerations, as defined in relation to human, financial, and physical resources, and opportunity costs—costs expressed in terms of opportunities foregone.
A market condition or setting in which numerous firms compete for a share of the retail market in a given geographic area; a term which is also used to denote rivals or competitors.
Interest computed on the original principal and accumulated interest.
A type of calculation in which interest earned is reinvested and earns additional interest.
Confidence range method (95%)
A statistical method of estimating a range of vacancy rates with a 95% confidence such that the expected vacancy rate for the next time period falls within that range (using the sample mean vacancy rate and corresponding standard deviation as input).
The total rental obligation, expressed in dollars, as specified in a lease. Also known as base rent. (Real Estate Information Standards)
The actual dollar amount paid for a property or the amount needed to build or improve it at a specified time in the future.
A method of determining the market value of a property by evaluating the costs of creating a property exactly like the subject.
Cost approach improvement value
The current cost to construct a reproduction of, or replacement for, the existing structure less an estimate for accrued depreciation from all causes.
Cost of capital
See weighted average cost of capital.
Cost of occupancy
Expenditures that are required to assume and maintain occupancy of a space. Such expenditures include rent and/or mortgage payments, and recurring costs, such as real estate taxes, repairs, operating expenses, and other outgoings directly resulting from the use of the property.
An annual deduction based on the class life of an asset.
Cost recovery recapture
According to the Taxpayer Relief Act of 1997, for properties sold after May 6, 1997, a no corporate taxpayer will have to recapture, or pay taxes on, any straight-line cost recovery taken during the holding period, to the extent there is any gain.
A visual representation of the relationship between the costs of leasing and owning at varying discount rates.
Cross-over (office use) demand
Industrial space that is used as office space in order to lower the rental rate of a property. Also known as flex space.
An approach to estimating the retail trade area (and sales/revenue potential) for a given establishment or center based on the location of existing customers via point-of-sale information (by obtaining customer address or zip code data) or customer surveys (by interviewing customers as they enter the store); data which can later be mapped to determine the extent of the trade area.
Refers to information collected and presented in a form that facilitates processing and analysis.
The amount or degree to which data points in a series are spread or dispersed about their mean (also referred to as variation about the mean).
Debt-coverage ratio (DCR)
Ratio of net operating income to annual debt service. Expressed as net operating income divided by annual debt service.
The loss of utility and value of a property.
The volume or quantity of a product or service purchased, or willing to be purchased, in relation to price.
Elements or forces that influence the demand for goods and services in a given market area.
Characteristics of human populations as defined by population size and density of regions, population growth rates, migration, vital statistics, and their effect on socio-economic conditions.
The loss of utility and value of a property.
GIS software programs that support a wide variety of functions, queries, and mapping capabilities for personal computer-based applications, geared toward visual presentation and descriptive analyses of geo-coded data.
Differential cash flow
The difference that results when the cash flows from one alternative are subtracted from the cash flows from another alternative.
Direct survey method
The use of personal interviews with key personnel in all major firms within a given community to determine the percentage of a firm’s revenues obtained from sales made outside the local economy for the purpose of estimating firm-specific basic employment and, by aggregation, the total basic employment in that community; a method that is known to be costly and time consuming.
The process of separating and identifying the various forces and factors which affect the demand for a given property type in a given market or the differentiation of demand by category (in reference to tenure, household income, and geographic submarket).
The process of separating and identifying the various forces and factors which affect the supply of a given property type in a given market or the differentiation of supply by category (including leased versus owned, unit type, price, and geographic submarket).
The percentage rate at which money or cash flows are discounted. The discount rate reflects both the market risk-free rate of interest and a risk premium. Also see opportunity cost.
Discounted effective rent
The cash flows over the term of the lease, discounted to the present value.
The process of reducing the value of money received in the future to reflect the opportunity cost of waiting to receive the money.
Sales that result from purchases made by customers who are not located in the subject service area (represents a revenue gain for retail establishments as sales are generated from consumers who reside outside the local trade area).
A method of reducing risk by investing in unrelated (uncorrelated) assets.
Information (substantiated and rumored) regarding inventory that is to be removed from the market by the forecast period.
An approach to estimating the trade area (and sales/revenue potential) for a given retail establishment or center based on the central place theory concept of range and how far people are willing to travel to obtain retail goods as defined by drive time or mileage.
The process of examining a property, related documents, and procedures conducted by or for the potential lender or purchaser to reduce risk. Applying a consistent standard of inspection and investigation one can determine if the actual conditions do or do not reflect the information as represented.
A complex and ever-changing or evolving set of diverse and interrelated entities and agents which are organized into a coherent and working totality which serves multiple and/or common purposes or objectives. Also see system and market dynamics.
Those economic activities or sectors in a local or regional economy that account for a certain share of the area's income that is generated from exports of goods and services.
Economic base analysis
Inquiries that focus on the extent to which changes in basic employment (export-oriented activities and associated wage-income) affect the economic, employment, and population growth of a local or regional economy.
Economic base multiplier
A measure that provides a rough estimate of how changes in basic employment will affect total employment in a given region (all other things being equal); defined as the ratio of total employment to basic employment.
Attributes of the workforce, including production and employment activities.
The reduction in a property’s value due to external circumstances such as legislation or changes in nearby property use.
Branches or divisions of a local or regional economy in which particular activities take place.
An amount after a base amount has been adjusted for concessions, allowances, and costs.
A measure of the capacity or effectiveness of space to produce the desired results with a minimum expenditure of time, money, energy, and materials.
The relationship of useable area to rentable area on a given property. Also see add-on factor, load factor, and rentable-to-useable ratio. Formula:
The percentage of total employees (at the firm or industry level) that are office space users.
Features or state of the physical environment and the surroundings, factors, or forces which influence or modify that environment.
Any physical or natural condition or event which possesses a risk to humans.
The repercussions of an activity or specific land use on the physical/social environment as a consequence of emissions, waste disposal, water and power usage, etc.
The price at which the quantity supplied equals the quantity demanded.
A type of joint venture arrangement in which an owner enters into a contract with a user who agrees to occupy a space and pay rent as a tenant, but at the same time, receives a share of the ownership benefits such as periodic cash flows, interest and cost recovery deductions, and perhaps a share of the sales proceeds.
Equity yield rate
The return on the portion of an investment financed by equity capital.
Under Section 1031 of the Internal Revenue Code, like-kind property used in a trade or business or held as an investment can be exchanged tax-deferred. Under a fully qualified Section 1031 exchange, real estate is traded for other like-kind property. All capital gains taxes are deferred until the newly acquired real estate is disposed of in a taxable transaction. The underlying philosophy behind the deferral of capital gains taxes is that taxation should not occur as long as the original investment remains intact in the form of (like-kind) real estate (like-kind refers to real property as such, rather than the quality or quantity of property).
A phase of the real estate or business cycle characterized by the dramatic short-term increase in the supply of available units in a given market (due to economic growth and increasing construction activity) as a response to increasing and/or pent-up demand and rising price levels.
Expected value (EV)
The sum of the weighted averages of all possible outcomes of a probability distribution. Probability distribution is the collection of all possible outcomes for an event and their corresponding probabilities of occurrence. The probabilities of occurrence for each possible outcome are used as the weights. The sum of each possible value multiplied by its probability of occurrence equals the EV of the outcome. EVs can be calculated for any type of outcome the investor chooses to analyze: net operating incomes, after-tax cash flows, and rates of return (IRRs)
The tendencies or propensities of individuals/households to spend disposable income on a given good or service in comparison to other goods and services (typically defined as a percentage of disposable income) in relation to income level or range and/or other demographic or socio-economic characteristics.
The level (or maximum amount) up to which the landlord will pay certain operating expenses. Amounts above the stop are the responsibility of the tenant.
Savings or cost-cutting allowances realized by firms or industries within a given city that are primarily due to the advantages of sharing production inputs, information, and infrastructure and/or possibly linked to a city's comparative advantage to support a given activity.
A form or source of accrued depreciation considered in the cost approach to market value. The loss of value is because of external forces and change. For example, a new mall causes traffic and congestion, negatively affecting residential property values nearby, or a motel is no longer viable because a highway is rerouted, or another example would be depressed market conditions.
Factors of production
The rudimentary components of any production process or system consisting of: land and land-based resources (including raw materials); capital, which includes real capital such as machinery, facilities, and infrastructure and financial capital to start or expand businesses; labor or human input (as defined in terms of labor hours or quality/productivity); and technology which includes production know-how and methods, as well as management and operations skills.
Fair value of an asset (or liability)
The amount at which the asset (or liability) could be bought (or incurred) or sold (or settled) in a current transaction between willing parties, that is, other than in a forced or liquidation sale
This type of retail center is composed mainly of upscale apparel shops, boutiques, and craft shops carrying selected fashion or unique merchandise of high quality and price. These centers need not be anchored, although sometimes restaurants or entertainment can provide the draw of anchors. The physical design of the center is very sophisticated, emphasizing a rich décor and high-quality landscaping. These centers usually are found in trade areas having high-income levels.
The process of evaluating a proposed project to determine if that project will satisfy the objectives set forth by the agents involved (including owners, investors, developers, and lessees).
The use of borrowed funds to acquire an investment.
The possible change in an investment’s ability to return principal and income.
Costs that do not change with a building’s occupancy rate. They include property taxes, insurance, and some forms of building maintenance.
A lease in which the lessee pays a fixed rental amount for the duration of the lease.
Space that is flexible in terms of what it can be used for (for example, space that could be utilized for industrial or office activities). Also see cross-over (office use) demand.
An estimate or prediction of a future condition or outcome.
An upcoming time period of interest in which a forecast is to be made.
Formal (or geographic) data
Information/data collected and presented by formal region. Also see formal region.
A region identified by political jurisdiction or on the basis of the presence or absence of one or more distinguishing features or characteristics.
See rent concessions.
Fully amortized mortgage loan
A method of loan amortization in which equal periodic payments completely repay the loan.
Factors which determine how a location or site functions.
Information/data collected and presented by functional region. Also see functional region.
Considerations made in the site selection process which assist in the evaluation of site potential as defined in terms of the practicality of a site, the best site for a given use, or the determination of a site's best use, through the examination of linkages, competition, demographics, and market conditions.
A form or source of accrued depreciation considered in the cost approach to market value. The reduced capacity of a property or improvements to perform their intended functions due to new technology, poor design, or changes in market standards.
A region delineated in terms of linkages or economic interactions that are typically organized as a trade area about a dominant location, center, or economic activity.
Future value (FV)
The amount to which money grows over a designated period of time at a specified rate of interest.
An evaluation of the difference in the demand and supply of space (measured in terms of square footage) for a particular type of commercial property in a given market area where gaps are expressed as the amount of square footage demanded less the amount of square footage available in a given time period. Note that if demand exceeds supply, the gap will be positive. A positive gap indicates that potential opportunities exist for successful commercial real estate transactions. However, transactions might be avoided when supply exceeds demand (or when a negative gap occurs), as there is an oversupply of available space in the market.
General market area gap analysis
A gap analysis that is carried out for a city or several cities (simultaneously) to identity one or more general market areas where a positive gap exists for a particular type of commercial real estate. Also see gap analysis.
General market factors
Factors influenced by the demographic, economic, and locational characteristics and the organizational aspects of a market.
Commercial space that can be used for a variety of purposes, such as multiple-use office space.
Geographic Information System(s) (GIS)
System(s) (usually computer-based) used for capturing, handling, storing, retrieving, managing, manipulating, and displaying geographic information or geo-coded data.
The total number of households or housing units within a given area as defined by tenure, income, and other socio-economic attributes that are known to exist or estimated to be within specific geographic units or divisions (for example, in various census tracts).
The condition of being or becoming globalized. A concept used to recognize cross-jurisdictional interdependencies and the continuing integration of local, regional, and national economies which now form a larger economic and production system that is worldwide in scope and application; a trend that has greatly affected local economic change and real estate values.
Concession given or measures taken by local or regional government to attract firms or investment dollars to a given locality for the purposes of promoting economic growth and encouraging development.
A model that is used to account for a wide variety of flow patterns in human/economic systems, based on Newton's gravity equation which defines gravity or the flow potential (between two sites or locations) as directly proportional to the product of their masses (or size) and inversely proportional to the square of the distance between them.
The entire floor area of a building or the total square footage of a floor.
Gross leasable area (GLA)
The total floor area designed for tenant occupancy and exclusive use, including basements, mezzanines, and upper floors, and it is measured from the center line of joint partitions and from outside wall faces. GLA is that area on which tenants pay rent; it is the area that produces income.
A lease in which all expenses associated with owning and operating the property are paid by the landlord. Also see net lease.
Gross operating income
The total income generated by the operations of a property before payment of operating expenses. It is calculated from potential rental income, plus other income affected by vacancy, less vacancy and credit losses, plus other income not affected by vacancy. The Annual Property Operating Data form or the Cash Flow Analysis Worksheet can be used to calculate a property’s gross operating income.
Gross rent multiplier (GRM)
Method investors may use to determine market value. This method calculates the market value of a property by using the gross rents an investor anticipates the property will produce at end of year 1 multiplied by a given factor (known as the gross rent multiplier extracted from the marketplace).
A lease of the land only, usually the land is leased for a relatively long period of time to a tenant that constructs a building on the property. A land lease separates ownership of the land from ownership of buildings and improvements constructed on the land.
In reference to the patterns of urban or population growth in a geographic market, an important consideration in retail trade area analyses as growth patterns are known to affect sales/revenue potential within a market given the tendency of retail to follow population movement and income concentrations over time.
Heavy utility needs
In reference to location-decision considerations made in relation to the energy or power requirements of a firm/user in the assessment of the feasibility of a location to support a given activity.
Protecting one against negative outcomes.
High order good
A good or service requiring a high threshold population before it is offered to a market. Such a good or service requires a large number of consumers to support its business and requires a larger trade area than a low order good.
Economic sectors and activities oriented toward the creation and production of high-technology products and the use of advanced designs, techniques, or devices in fields like electronics, optics, lasers, aerospace, computers, semiconductors, and telecommunications.
Highest and best use
The reasonably probable and legal use of vacant land or an improved property, which is physically possible, appropriately supported, financially feasible, and that results in the highest value.
Highest and best use (financial) analysis
A determination of the highest and best use of one or more sites (either vacant or as though vacant) or properties as improved by examining the profitability of all possible use scenarios (including renovation, rehabilitation, demolition, and replacement).
A housing unit or residence at a given location that is occupied by one or more persons (that is, a social unit comprised of one or more individuals living together in the same dwelling or place).
The total number of households in a given geographic market or submarket as defined by specific demographic and socio-economic characteristics.
The total number of housing units demanded in a given market, defined as occupied household units divided by one minus the vacancy allowance for that market (where demand is affected by the rate at which new households are being added to the market, allowing for a normal level of vacancy).
Unstable or no sustainable conditions which arise out of market disequilibrium or the lack of balance between the forces of supply and demand in any or all subcategories of commercial properties in one or more geographic submarkets over a given time period.
A market in which product differentiation exists, there is a lack of important product information, and certain buyers or sellers may influence the market. Commercial real estate is bought and sold in an imperfect market.
The process by which a given geographic area absorbs new individuals/households from locations outside that area (an influx of individuals/households to a given area).
An approach to estimating the trade area (and sales/revenue potential) for a given retail establishment or center based on observed flow patterns or traffic counts, where estimates are obtained for both the percentage of traffic that stops or patronizes that establishment/center and the percentage of people coming in-the-door who make a purchase.
Income capitalization approach
A method to estimate the value of an income-producing property by converting net operating income into a value. The cap rate is divided into the net operating income to obtain the estimated value. Value = net operating income ÷ capitalization rate
A lease in which the rental amount adjusts accordingly to changes and/or movements in a price index, commonly the consumer price index.
The difference between the demand for an industrial property and the supply of that property in a given market or area.
Industrial location decision-making
A decision-making process that involves the examination and evaluation of alternative locations or sites for a particular industrial activity based on location/site feasibility characteristics; great importance is placed on the national or regional location decision (usually narrowing the location decision to a handful of cities or localities), with less importance given to the local site selection process.
Commercial properties that are used for the purposes of production, manufacturing, or distribution.
Industrial service area
The geographic area within a market that contains either an acceptable number of employees (and meets necessary labor requirements), or the necessary service and resources needed to support a given industrial activity or facility.
The outlay of cash needed to acquire an investment.
A mathematical approach to the description of a local or national economy, which takes explicit account of the flows and linkages within and between economic sectors. Recognizing that output (products and services) from one sector may require production inputs for other sectors, used to estimate sector- and region-specific multipliers for the purpose of analyzing the direct and indirect impacts of a given change in a particular sector or region.
The value of the portions of the property that is physically destructible.
Attributes that are not directly measurable or quantifiable, and therefore must be expressed in a qualitative or abstract manner.
A method of loan amortization in which interest is paid periodically over the term of the loan and the entire original loan amount is paid at maturity.
The rate at which a base population or the number of new households is changing due to natural increase (births less deaths) and time (the aging and maturation of that population), as children are born, grow up, and form families and households of their own.
Internal rate of return (IRR)
The percentage rate earned on each dollar that remains in an investment each year. The IRR of an investment is the discount rate at which the sum of the present value of future cash flows equals the initial capital investment.
Internal rate of return method
A comparison method that calculates the internal rate of return of the differential cash flow between any two investment alternatives then compares that rate with the user’s opportunity cost. Also see internal rate of return.
The supply or stock of a given commodity or a listing thereof.
Limiting current consumption in favor of future consumption.
The value to a specific investor, based on that investor’s requirements, tax rate, or financing.
See internal rate of return.
IRR of the differential
The internal rate of return on the difference between the cash flows for any two investment alternatives. Also see internal rate of return method and differential cash flow
Key federal laws
With respect to the handling of hazardous materials, they are important laws or statutes enacted to enforce the responsible handling of materials to minimize the danger to human beings and/or the environment.
A body or core group of workers (employed and employable) that make up the local labor force.
The lessor or owner of the leased property.
Landlord-paid tenant improvements (LPTI)
The total cost (outlay) of necessary tenant improvements paid by the landlord netted against any contribution made by the tenant.
The same concept as a sale-leaseback, but only the land is sold and leased back using a ground lease.
Purchases made in other service areas by consumers located within the subject area (representing a loss of revenue for retailers located within the trade area in which those consumers reside).
A contract that creates the relationship of landlord and tenant. A contractually binding agreement that grants a right to exclusive possession or use of property, usually in return for a periodic payment called rent.
The process by which a landlord, tenant, or third party pays to extinguish the tenant’s remaining lease obligation and rights under its existing lease agreement.
Terms commonly used in reference to a lease.
In exchange for permitting a tenant to use the property, the owner/lessor has the right to receive rental income and the right to repossess the property upon termination of the lease.
Leased fee interest
The value (to the owner) of the rental payments plus the value of the property at the end of the lease term (reversionary interest).
In exchange for rent, the tenant has the right to occupy and use the property for the duration of the lease.
The value (to the tenant) of the lease. The value of the leasehold interest is determined by present value of the difference between market rent and the contract rent.
A means of obtaining the physical and partial economic use of a property for a specified period without obtaining an ownership interest.
The person renting or leasing the property. Also known as a tenant.
The person who rents or leases a property to another. Also known as a landlord.
The use of borrowed funds to finance a portion of the cost of an investment.
Lifestyle characteristics (psychographics)
Intangible characteristics of a local economy that define and shape the quality of life element and the social and cultural identity of the local population.
The cost to transport goods, services, or people to and from a site measured in time, distance, and inconvenience.
The likely price that a property would bring in a forced sale (foreclosure or tax sale). Used when a sale must occur with limited exposure time to the market or with restrictive conditions of sale.
The ability to convert an investment into cash quickly without loss of principal.
The ratio of rentable area to useable area. The load factor is a gauge by which a user can evaluate different sites with comparable rents. It is also known as the add-on factor.
The amount of money remaining to be paid on an amortizing loan at a given time.
Loan or mortgage value
That portion of the value of real property recognized by the lender when used to secure a loan.
A charge prepaid by the borrower upon the origination of a loan. One point equals one percent of the loan amount.
Loan-to-value ratio (L/V)
The amount of money borrowed in relation to the total market value of a property. Expressed as the loan amount divided by the property value.
The process of evaluating whether a general location meets the requirements of being both possible and practical as defined on the basis of technical and functional components.
An index, defined in ratio form that compares the proportion of a local activity to the proportion of that activity found at some larger geographic scale, such as the nation.
Location quotient method
A method for estimating a community's economic base multiplier using basic employment estimates obtained from estimated location quotients (under various simplifying assumptions).
Lower order good
A good or service requiring a low threshold population to be offered. A good or service is considered to have a low threshold if it does not require a large number of consumers to support its business and thus requires a small trade area. Also see high order good.
Generally used in reference to matters of economy or economic factors and forces portrayed or operating at the macro-level (as opposed to micro-level), used synonymously with national economy.
The ability to monitor the performance of an investment and make changes as needed.
The steps taken by an investor or manager to control or reduce investment risk.
Mapping GIS software
Computer-mapping programs that perform any of a wide variety of map-making tasks (for both on-screen and file-oriented use).
The ability to sell or lease a property quickly. Marketability deals with the appeal and demand for a property, good, or service.
A geographical area in which supply and demand operate to influence the course of industrial and commercial activities, for example, a Metropolitan Statistical Area (MSA).
A change in market parameters or conditions brought about in response to one or more market signals (including price changes from shifts in supply and demand); typically characterized as cycles, fluctuations, or trends (categories that differ in terms of cause, duration, and impact on commercial real estate markets).
The process of examining market supply and demand conditions, demographic characteristics, and opportunities; identifying alternative locations/sites that meet specific objectives or satisfy various criteria; and assessing the financial feasibility of those locations/sites to facilitate decision making regarding the commercial potential or suitability of various locations/sites to support a given activity or use.
Information/data collected and displayed for a given market or by market area.
Market data approach
A method of determining the property’s value by analyzing recent sales or rental prices of comparable properties.
In reference to changing market conditions and the underlying processes responsible for creating change and defining/redefining interrelationships amongst components in an economic system (consider the change in price levels of a given commodity as an outcome of the forces and interplay of supply and demand).
Pertaining to the evaluation or selection of a site or an analysis of a site's highest and best use. Also see feasibility analysis.
The demand for space minus the supply of space for a specific type of commercial property in a given real estate market. Also see general market area gap analysis.
Advantageous circumstances in a market which facilitate a given action or outcome that is generally viewed as favorable from a money-making standpoint.
The pricing of commodities (including rental rates of various types of commercial properties) as determined by the forces and factors of influence operating in a market.
The possibility that downward market trends will reduce an investment’s market value.
Refers to the percentage of total sales in a retail category that each competing outlet is expected to capture based on current patterns and trends in the market.
A course of action defined with respect to a particular real estate market phase. For example, consider the market strategy of avoiding real estate transactions when there is an oversupply of space available in the market.
The most probable price that a property would bring in a competitive and open market under fair sale conditions. Market value also refers to an estimate of this price.
Second stage of four-stage transaction management process pertaining to gathering and evaluating property information to unite the investor and user. The acronym MATCH represents the activities to market, analyze, target, compare, and highlight during the match stage.
A measure of central tendency (for a distribution of values) defined as the average value of a variable in a sample and calculated by adding together all the values observed in a data set and dividing by the number of values observed.
Defined as the middle value of a data set (or sample) when the values are arranged in order (by size ranking, in ascending or descending order). Note that for an odd number of values in an ordered data set, the median is identified as the value which divides the data set into two data sets of equal size on each side of the median or middle value. For an even number of values arranged in order, the median is found by simply calculating the value mid-way between the two middle values. Note that the position of the median value of an ordered data set containing n observations may be found by using the formula: position of the median = n/2 + 1/2.
Metropolitan Statistical Area (MSA)
Generally, the area in and around a major city. The Office of Management and Budget (OMB) defines an MSA as having one of the following characteristics: a city with a population of at least 50,000, or an urbanized area with a population of at least 50,000 with a total metropolitan population of 100,000.
A requirement of the Tax Reform Act of 1984 that taxpayers use the 15th of the month to establish the date of acquisition and date of disposition when calculating cost recovery deductions. This act applies to real estate placed in service after June 22, 1984 (with the exception of low-income housing).
The observed minimum proportion of employment in a given economic sector for communities within a given size range, assumed to be that employment/activity level that is necessary to serve the needs of a community that falls within a predetermined size range (the minimum amount of no basic employment necessary to support a typical mix of industry for a population base of a given size range).
Minimum requirements method
A method for estimating a community's economic base multiplier using basic employment estimates that are obtained by comparing employment levels by economic sector to the identified minimum requirement.
A specified dollar amount paid by the owner to cover, in part or in whole, tenant moving expenses. Also known as owner’s moving expense.
The cost incurred by the tenant to move into the new space. The landlord may pay a portion or all, depending on what is negotiated in the lease. Also see moving allowance.
Housing units that accommodate more than one family or household.
Multiple-use office space
Office space that can be used for a variety of purposes; sometimes referred to as generic office space.
Borrowed funds are invested at a rate of return lower than the cost of funds to the borrower.
This center is designed to provide convenience shopping for the day-to-day needs of consumers in the immediate neighborhood. According to ICSC’s SCORE publication, a supermarket anchors half of these centers, while about a third has a drugstore anchor. Stores offering pharmaceuticals and health-related products, sundries, snacks and personal services, support these anchors. A neighborhood center is usually configured as a straight-line strip with no enclosed walkway or mall area, although a canopy may connect the storefronts.
A lease in which the tenant pays, in addition to rent, all operating expenses such as real estate taxes, insurance premiums, and maintenance costs. Also see gross lease.
Net operating income (NOI)
The potential rental income plus other income, less vacancy, credit losses, and operating expenses.
Net present value (NPV)
The sum of all future cash flows discounted to present value and netted against the initial investment.
An investment situation in which the cost of borrowed funds is exactly equal to the yield provided by the investment.
Employment that is considered to be of the nonexport-oriented variety: employment not associated with export-oriented activities. Nonbasic employment is best characterized by industries and activities that produce goods and services exclusively for local use or consumption.
That portion of the total population that is not considered to be part of the local residential housing market; composed of individuals living in dormitory-like facilities (including military bases) or institutional settings (such as students in residence halls).
See net present value.
In reference to the inadequacy, disuse, outdated, or no functionality of facilities, infrastructure, products, or production technologies due to effects of time, changing market conditions, or decay (a factor considered in depreciation to cover the decline in value of fixed assets due to the invention and adoption of new production technologies, or changing consumer demand).
The actual dollars paid out by the tenant to occupy the space. It can be expressed in either pre-tax or after-tax dollars.
Low-rise - Fewer than seven stories high above ground level.
Mid-rise - Between seven and twenty-five stories above ground level
High-rise - Higher than twenty-five stories above ground level. [BOMA]
The difference between the demand for office space and the supply of office space by property type, submarket, sector, or user classification in a given geographic market.
A commercial property type used to maintain or occupy professional or business offices. Such properties typically house management and staff operations. The term office can refer to whole buildings, floors, parts of floors, and office parks. Office space that can be used for a variety of purposes is sometimes referred to as generic office space. Office properties may be classified as Class A, B, or C. Class A properties are the most functionally modern. Properties Classed B and C in the same market typically command lower rents because they are older and in need of modernization. They may not be as efficient or desirable as Class A properties because their design or condition causes functional problems.
Operating expense stop
A negotiable amount at which the owner’s contribution to operating expenses stops. It also can be stated as the amount above which the tenant is responsible for its pro rata share of operating expenses.
Cash outlays necessary to operate and maintain a property. Examples of operating expenses include real estate taxes, property insurance, property management and maintenance expenses, utilities, and legal or accounting expenses. Operating expenses do not include capital expenditures, debt service, or cost recovery.
The cost of selecting one alternative is the benefit foregone from the next best alternative.
The total amount paid for a property, including equity capital and the amount of debt incurred.
The process by which a given geographic area expels or loses individuals/households to locations outside that area (an out flux of individuals/households from a given area).
A retail property type usually located in rural or occasionally in tourist locations, outlet centers consist mostly of manufacturers’ outlet stores selling their own brands at a discount. These centers are typically not anchored. A strip configuration is most common, although some are enclosed malls, and others can be arranged in a village cluster.