CRE Terms Flashcards
Absorption
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.
Active income
Income from salary, wages, tips, commissions, and activities in which the taxpayer
materially participates. Also see passive income.
Add-on factor
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
Add value
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.
Adjusted basis
The original cost basis of a property plus capital improvements, less total accumulated cost
recovery deductions, and partial sales taken during the holding period.
Agglomeration economies
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.
Amortization
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,
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.
Annuity
Regular fixed payments or receipts over a designated period of time.
Assessed value
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.
Averaging method
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.
Balloon payment
The final payment of the balance due on a partially amortized loan.
Basis
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.
Break-even point
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.
Breakpoint
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.
Buy/rent threshold
The point at which there is a recognizable shift of expenditure allocations away from owneroccupied
housing and to the rental housing market (or vice-versa) as a result of changing
market conditions.
Capital expenditures
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.
Capital gain
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.
Capitalization rate
A percentage that relates the value of an income-producing property to its future income,
expressed as net operating income divided by purchase price.
Capital tax
Any tax on a change in capital value (including capital gains tax, estate tax, or inheritance
tax); as distinguished from a tax on income.
Cash flow after tax/es (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.
Cash flow before tax/es (CFBT)
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.
Cash-on-cash rate
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.
Class life
The useful economic life of an asset set by the Internal Revenue Service.
Close
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.
Common area
For lease purposes, the areas of a building (and its site) that are available for the nonexclusive
use of all its tenants, such as lobbies, corridors, and parking lots.
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.
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).
Cost approach
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 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.
Cost recovery
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
noncorporate 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.
Cross-over chart
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.
Customer-spotting approach
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.
Debt-coverage ratio (DCR)
Ratio of net operating income to annual debt service. Expressed as net operating income
divided by annual debt service.
Depreciation
The loss of utility and value of a property.
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.
Disaggregating demand
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).
Disaggregating supply
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).
Discount rate
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.
Discounting
The process of reducing the value of money received in the future to reflect the opportunity
cost of waiting to receive the money.
Displaced sales
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).
Drain information
Information (substantiated and rumored) regarding inventory that is to be removed from
the market by the forecast period.
Drive-time approach
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.
Due diligence
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.
Dynamic system
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.
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.
Economic obsolescence
The reduction in a property’s value due to external circumstances such as legislation or
changes in nearby property use.
Efficiency percentage
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:
Efficiency % = Useable square feet / Rentable square feet
Equilibrium point
The price at which the quantity supplied equals the quantity demanded.
Equity lease
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.
Exchange
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).
Expansion
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).
Expenditure patterns
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.
Expense stop
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.
External economies
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.
External obsolescence
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.
Financial leverage
The use of borrowed funds to acquire an investment.
Fixed expenses
Costs that do not change with a building’s occupancy rate. They include property taxes,
insurance, and some forms of building maintenance.
Fully amortized mortgage loan
A method of loan amortization in which equal periodic payments completely repay the loan.
