Real Estate Finance Glossary

Special Studies Finance Baylor

Absolute Net Lease

Tenant pays all expenses, similar to a Triple Net Lease plus structural maintenance and repairs - usually a long-term lease to a credit tenant. See Triple Net Lease for comparison.

Accrued Depreciation

Difference between reproduction or replacement cost of improvements and the market value of improvements on the effective date of an appraisal.

Adjusted Basis

The beginning basis, or cost, of a property plus the costs of capital improvements, minus all depreciation expenses.

Acquisition

Acquisition means adding space to the portfolio which can be accomplished by leasing the space, purchasing the space, or building the space. Acquisition begins the life cycle of the property

Agreement of Sale

Also known as contract of purchase, purchase agreement, or sales agreement according to location or jurisdiction. Contract between seller and buyer with specific terms and conditions spelled out in writing and signed by both parties.

Appraisal

The estimation of the value of a legal interest in property, usually conducted by a qualified professional person / company

Asking Rental Rate

Also known as Quoted Rental Rate, Face Rate or Asking Rate. Rate per square foot or meter for a particular space being marketed for lease as stated by the broker or property owner. The basis for the asking rental rate is required (gross, modified, net, etc.).

Available Space

Total space available for lease or sale in a given time period. Space could be vacant, occupied, available for sublease, or available at a future date.

Balance Sheet

The balance sheet is one of the key financial statements of the company and it describes, at a point in time, the assets, liabilities and equity of the company.

Base Year

Also known as Comparison Year. Calendar or defined fiscal year defined within a lease - usually the year the lease commences. Used for calculations and comparisons such as increased rent and increased expenses.

Capitalization (Cap) Rate

A ratio used to estimate the value of income-producing properties. The cap rate is not a discount rate. Net Operating Income / Market Value\= Cap Rate

Cash Flow

Cash flow is the net measure of the inflow of cash and the outflow of cash. Examples of cash inflows include selling products and service, selling an asset like a building or collecting on receivables, Examples of cash outflows include paying routine business expense or purchasing a building. Positive cash flow does not mean profit.

Common Area

Non-rental areas of a property that the landlord owns intended for use by all tenants, groups of tenants, invitees, and adjacent areas. The landlord retains control and liability for this area. Examples of common areas include: hallways, restrooms, foyers, parking, sidewalks, plazas, recreational areas, mail rooms, elevators, vending areas, janitorial, mechanical, and electric rooms.

Common Area Maintenance (CAM) Expenses

Portion of operating expenses incurred by the landlord to maintain common areas.

Comparative Method

Also known as Market Method. An appraisal method which bases the value of the subject property on the price of similar properties which have sold recently.

Cost Approach

Formerly called the summation approach. A method of appraisal which determines the value of a property by adding the market value of the land to the cost of replacing the existing building. The determination of the value of a property can be estimated by summing the land value and the depreciated value of any improvements. Appraisers use replacement cost and then deduct a factor for any functional disutility associated with the age of the subject property. The cost approach method is a hybrid of the cost and sales comparison approaches considering the replacement cost to construct a building and comparable data to determine labor, material, and other costs and analysis of comparable data for land values and depreciation.
The cost approach is considered reliable when used on newer structures, but the method tends to become less reliable for older properties. The cost approach is often the only reliable approach when dealing with special use properties (e.g. public assembly, marinas). This method is also used during economically depressed times to evaluate the market value of a building compared to its replacement cost.

Cost of Capital

The rate of return that must be earned on new investments having the same average risk as the firm's existing assets to provide all investors in the firm with fair market rates of return.

Debt Coverage Ratio (DCR)

Also known as Debt Service Coverage Ratio (DSCR). Ratio of net operating income to annual debt service (amount paid toward the interest and principal of the mortgage as stated in the loan documents). Measures the ability of a property to meet its debt service out of net operating income.

Deferred Maintenance

Physical deterioration that has not been addressed but can be corrected, indicating the need for immediate expenditures. Does not necessarily mean inadequate maintenance in the past. Examples: stained or slightly damaged carpets, walls, ceilings; need for resurfacing parking lots.

Depreciation Expense

Periodic cost of owning depreciable assets - those subject to wear and tear such as buildings and equipment. No depreciation expense can be taken on land. Depreciation expense is a method of accounting for the initial cost of an asset in its subsequent periods of use.

Direct Expenses

Portion of operating expenses relating directly to tenant's leased space. Examples include cleaning and utilities associated with tenant's space. See also Operating Expenses.

Discount Rate

Interest rate used to convert future payments or receipts into present value. Depending on how it is extracted from the market or used in analysis, the discount rate may or may not be the same as the internal rate of return (IRR) or yield rate.

Discounted Cash Flow (DCF) Analysis

Performed on either lease-by-lease or aggregate basis to a set of projected income streams and a reversion. DCF can be applied with any yield capitalization technique with specified quantity, variability, timing, and duration of income streams along with quantity and timing of reversion and discounts to present value all at a specified yield rate.

Easement

Limited right of use of another's land by a landowner for the benefit of his land. The land receiving the benefit is called the dominant tenement and the land granting the benefit is called the servient tenement.

EBITDA

Earnings Before Interest, Income Taxes and Depreciation and Amortization (EBITDA).
Net income adjusted for the effects of interest expense, depreciation and amortization, income taxes and minority interests.

Economic Development

Economic development is the process or efforts to improve the economic well-being and quality of life for a community by creating and/or retaining jobs and supporting or growing incomes and the tax base.

Eminent Domain

Right of the government to take private property for public use upon payment of just compensation.

Encumbrance

A judgment, mortgage, lien, or any other claim which is registered against the title to property.

Equity

Difference between a property's current market value or purchase price and the current debt incurred to purchase the property.

Escalation Clause

Also known as Expense Recovery Clause. Provision in a lease that provides for periodic adjustment of rent based on some event or index. Escalation payments are often based on increased operating expenses or changes in local wage rates or index such as the Consumer Price Index (CPI), inflation index.

Excess Land

Land that does not serve or support the existing improvement; land not needed to accommodate the site's primary highest and best use. Could be vacant with plans for future expansion or have its own highest and best use.

Feasibility Analysis

Cost-benefit study of relationships involved in an economic endeavor.

Floor Area Ratio (FAR)

Also known as land-to-building ratio or plot ratio. The built area floor area in comparison to area of the plot (physical land dimensions). Pertains to building codes and planning and zoning, FAR is often expressed as a decimal (i.e., 0.2 indicates the permissible buildable area of a building is one-fifth the total land area).

Furniture, Fixtures, and Equipment (FF&E)

Movable property that frequently wears out or becomes outmoded more quickly than other components of a property.

Future Value

It is the value of an asset at a future date which takes into account the time value of money.

Government Incentives

Governmental incentives can play a role in location decisions. Such incentives can come in the form of free land, tax rebates, assistance in locating and training labor and expedited construction and can be provided by regional, state, provincial or city governments.

Gross Building Area (GBA)

Total floor area of a building including below-grade and basement space but excluding unenclosed areas. Measured from the exterior of walls.

Gross Leasable Area (GLA)

Total floor area designed for occupancy and exclusive use of tenants - includes basements and mezzanines. Measured from the center of interior partitioning to outside wall surfaces.

Gross Lease

Also known as Full Service Lease. The landlord receives the rent and discloses the cost of and pays all or most of the property's operating expenses and real estate taxes.

Hazard Insurance

Protection for damage caused to property by fire, windstorms, and other hazards. Does not typically include damage by floods.

Highest and Best Use (HABU)

An appraisal process to determine the use of the property which produces the highest value for the land, as if vacant. Vacant land or improved property that result in the highest value by: reasonably probable and legal use, physically possible, appropriately supported or financially feasible.
In more complex appraisal assignments (e.g., contract disputes, litigation, brownfield or contaminated property valuation), the determination of highest and best use may be much more complex, and may need to take into account the various intermediate or temporary uses of the site, the contamination remediation process, and the timing of various legal issues. Highest and Best Use can change overtime based upon economic conditions and local growth patterns.

Improvements

Any buildings, additions and enhancements to increase the value of a property.

Income Approach

Also known as Income Capitalization Approach. Value derived for an income-producing property by direct capitalization of expected income.
Calculated: Value \= Net Operating Income (NOI) divided by the Capitalization Rate. Procedures for deriving value involve converting anticipated benefits (cash flows and reversion) into property value.
Used to value commercial and investment properties to directly reflect or model the expectations and behaviors of typical market participants. When sufficient market data exists, this appraisal approach is generally considered the most applicable valuation technique for income-producing properties by determining value. Revenue multipliers or capitalization rates are applied to the first year Stabilized Net Operating Income (see Stabilized Net Operating Income) or multiple years of net operating income can be valued by a discounted cash flow analysis (DCF) model to value larger and more expensive income-producing properties, such as large office towers. This technique applies market-supported yields (or discount rates) to future cash flows (such as annual income figures and typically a lump reversion from the eventual sale of the property) to arrive at a present value indication.

Income Statement

The income statement is one of the three key financial statement produced by the organization and is also known as the profit and loss statement. It describes the revenues and expenses and net profit or loss of the organization over time.

Insurable Value

Value of assets or asset group or real property covered by an insurance policy; generally, does not include site value but usually covers allowances for debris removal or demolition less deterioration and non-insurable items.

Insurance

Property/casualty coverage for property to cover loss or damage to the property caused by perils of fire, lightning, extended coverage, vandalism, malicious mischief and possibly flood and terrorism coverage.

Internal Rate of Return (IRR)

The internal rate of return is the discount rate that results in an investment having a present value equal to zero. It is used in evaluating competing investment or project alternatives. The project with the higher internal rate of return would generally be considered the better project from a financial perspective.

Investment Duration

A measure of capital at risk in real estate. The longer the duration, the more capital at risk.

Investment Value

Value of property to one particular investor; usually higher than the market value of a property.

Lease

Instrument granting exclusive possession of property to another for a specified term, usually for a rent. The individual who grants the lease is called the Landlord (or Lessor). The individual to whom it is granted is called the Tenant (or Lessee).

Lessee

Also known as Tenant. The individual to whom a lease is granted is called the Tenant (or Lessee).

Lessor

Also known as landlord. The individual who grants a lease is called the Landlord (or Lessor).

Lien

A charge or claim by one party on the property of another as security for the payment of a debt. Claim could include obligations not met or satisfied, judgments, unpaid taxes, materials, or labor.

Listing Agent

Agent representing the seller. See Tenant Representative for comparison

Market Analysis

Study of market conditions for a specific type of property or identification and study of the market for a particular economic good or service.

Market Rent

Used for appraisal purposes. The rental income a property would be expected to command in an open market. Determined by current rents paid or asked for in comparable space.

Market Value

Also known as Open Market Value or Fair Value. Most probable price at which an asset would trade in a competitive setting. Estimated amount for which a property should exchange on the date of valuation between a willing buyer and a willing seller transacted after effective marketing and where both parties acted knowledgeably, prudently, and without compulsion.

Measures-Financial

Debt Service Coverage - Combined NOI and Debt Service Coverage - EBITDA
These measures divide either combined NOI or EBITDA by the sum of interest expense and scheduled principal amortization on mortgage loans for continuing and discontinued operations.Fixed Charge Coverage - Combined NOI and Fixed Charge Coverage - EBITDA
These measures divide either combined NOI or EBITDA by the sum of (1) interest expense on continuing and discontinued operations, (2) dividends on preferred shares and (3) distributions on preferred units in the Operating Partnership not owned by the Registrant.
Combined NOI as a Percentage of Combined Real Estate Revenues and EBITDA as a Percentage of Combined Real Estate Revenues
These measures divide either Combined NOI or EBITDA by total real estate revenues from continuing and discontinued operations.
General and Administrative Expenses as a Percentage of EBITDA or Combined Real Estate Revenues
These measures divide general and administrative expenses by the applicable measure.
Recurring Capital Expenditures as a Percentage of Combined NOI
This measure divides recurring capital expenditures by NOI.

Mortgage

Legal document from buyer to lender pledging property as security for payment of a loan and lien or claim against real property.

Mortgage Note

Written agreement to pay a loan, secured by a mortgage as proof of indebtedness and with terms under which it shall be paid.

Net Cash Flow

Net operating income minus capital expenditures.

Net Operating Income (NOI)

Company's operating income. Calculated after operating expenses are deducted, but before income taxes and interest are deducted. When NOI is a positive value, it is referred to as net operating income, while a negative value is called a net operating loss (NOL).

Net Operating Loss (NOL)

Company's net operating loss. Calculated after operating expenses are deducted, but before income taxes and interest are deducted. When this is a negative value it is called a net operating loss (NOL), while a positive value is referred to as net operating income (NOI).

Net Present Value (NPV)

A property's net present value (NPV) is based on cash flow that an asset generates for a specific owner under a specific use. Compare to Value-in-use which is the value to one particular user, and usually below the market value of a property

Net Rentable Area (NRA)

Area on which rent is computed; measured to inside finished surface of the dominant portion of the permanent outer building floor without deducting for columns and projections and including restrooms, lobby, and other space such as that used for maintenance.

Net Sales Proceeds

Proceeds from the sale of an asset or part of an asset, less brokerage commissions, closing costs, legal and marketing expenses.

Occupied Space

Also known as Total Occupied Space. Space occupied by a tenant, subtenant, or owner. The calculation for Occupied Space is: Amount of Inventory less Amount of Vacant Space. The term Direct Occupied Space should be used if excluding sub-tenant space. Statistics on Occupied space should include disclosure of owner-occupied buildings.

Offer

Proposal to purchase property at a specified price and terms.

Operating Expenses

Recurring expenses required for operations and maintenance of a property that may be broken down into Common Area Maintenance (CAM) expenses and direct expenses - those directly related to the tenant's leased space (also called direct expenses). Operating expenses do not include real estate taxes, insurance, mortgage payments, capital expenditures, and depreciation.

Payback Period

The length of time required to recover the project's initial investment.

Potential Gross Income (PGI)

Total income attributable to real property at full occupancy and before vacancy and operating expenses are deducted.

Pre-leased Space

Space leased prior to construction completion or certificate of occupancy (C of O) date. Recommended that data/statistics of pre-leased space be disclosed for proposed or planned projects.

Prepayment

Payment of mortgage loan, or part of loan, prior to the due date. Mortgage agreement may include restrictions on pre-payment and associated penalty to prevent early pre-payment.

Present Value (PV)

The discounted value in today's dollars of a sum or sequence of sums paid or received in the future. How much a future amount of money is worth today.

Property Manager

Responsible for the care and maintenance of premises. May also coordinate leasing activities either with the designated leasing agent or directly. Term usually refers to ownership representative. See also Facility Management for comparison.

Property Tax

Enforced charge by state and local government imposed on individuals, property, and income to support public services such as schools. Also see Real Estate Taxes.

Purchase Price

Price including all amounts paid to a seller less adjustments made at closing.

Qualified Buyer

Buyer who demonstrates financial ability to afford the asking price of a property

Real Estate Investment Trust (REIT)

An ownership conduit entity which collectively invests in real estate and avoid corporate taxation on distributed income. Emphasis on long-term real estate investing and payout of 90%+ of all taxable income.

Real Estate Taxes

Also known as Property Taxes. Based on the value as determined by the taxing authority (state, county, and municipality) where the property is located to include all real property (land, improvements, structures, buildings).

Recurring Capital Expenditures

Associated with operating properties - includes capital improvements, tenant improvements and incentives and leasing costs that were not considered prior to acquisition of the property. These expenditures tend to be replacement and not: improvements associated with the expansion of a building or its improvements, renovations to a building intended to change classification of the building - such as industrial to office or Class C office to Class B office or capital improvements that represent the addition of something new to the property rather than the replacement of something such as new HVAC.

Refinance

To obtain a new loan or to pay off an existing loan. Usually done when interest rates have decreased and are lower than the current loan.

Replacement Cost

Estimated cost to construct, at current prices, a building with equivalent utility, using modern materials and current standards, layout, and design.

Reproduction Cost

Estimated cost to construct, at current prices, an exact duplicate or replica of a building using the same materials, construction standards, layout, design, and quality workmanship. Reproduction would replicate all obsolete, deficient, and super adequate features.

Restrictive Covenants

Restrictions on the use of real property created by deed and tied to the property binding existing and future purchasers. Restrictive covenants include limits such as: density of buildings, size of buildings, style or price range.

Sales Comparison Approach

A real estate appraisal method based on the principle of substitution - that a prudent individual will pay no more for a property than it would cost to purchase a comparable substitute property. The Sales Comparison approach compiles data on sales of similar properties called comparable. Adjustments are made based on elements of comparison. It's the most common and preferred method of land valuation when comparable sales data is available.

Sale Leaseback

A change of ownership in which the owner (typically a Corporation) will sell the building to a real estate investor and then lease back the building from the real estate investor for a long period (5 - 10 years).

Scope of Work (SOW)

Description of the amount and type of work to be completed by a service provider in a specific assignment.

Selling Agent

Agent who obtains a buyer, represents the buyer, or operates as a subagent of the seller.

Service Level Agreement

A contract between a service provider and a client that defines the level of service expected from the service provider. SLAs are output-based in that their purpose is specifically to define what the customer will receive.

Site Selection

Site selection or location decision is the process by which the organization determines where to locate a facility. Location decisions are impacted by the needs of the organization (e.g. access to talent or optimization of its supply chain) or external trends (technology, demographics, urbanization, globalization or development of emerging markets).

Survey

LAND: Map or plat of land with elevations, improvements, boundaries and relationship to surrounding tracts of land. Created by a licensed surveyor, the survey is often required by the lender to assure the property and building are aligned with the legal description.
Management Survey: Studies a property and factors that affect it. The survey includes an analysis of the region, the market, the neighborhood, and the property. The study includes the economics of various alternatives, a financial analysis, and a management plan.

Taxes and Insurance

Real estate taxes and property taxes and property/casualty coverage.

Tenant Expenses

Include operating expenses, taxes, and insurance.

Tenant Improvements (TI)

New, fixed, remodeling and associated improvements paid by for the tenant, landlord or part by each that have been defined within the lease. Actual TI amounts may be negotiated in the lease. Also known as Fit Out.

Tenant Representative

Specializes in negotiating for tenants and is not affiliated with the leasing agent (landlord representative).

Time Value of Money

Time literally is money - the value of the money you have now is not the same as it will be in the future and vice versa. Knowing how to calculate the time value of money can help distinguish between the worth of investments that offer you returns at different times.

Title

Lawful ownership of property. Right of ownership supported by title documents as evidence of an ownership interest in real estate.

Title Insurance

Protection against losses arising from title defects such as forged or miss-filed documents. Insurance policy protects lenders against loss of their interest in property due to legal defects in title.

Title Search

Also known as Title Examination. Search into public records to determine the current title is clear, not defective.