Commercial Real Estate Glossary Definitions

Glossary of 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.
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
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.
See annual debt service.
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.
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,
©2001 CCIM Institute. All rights reserved. Version 10/01.
©2002 National Association of REALTORS®. All Rights Reserved.
Annual percentage rate (APR) continued
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. (Encyclopedia of Real
Estate Terms 2nd Edition, Damien Abbott)
Regular fixed payments or receipts over a designated period of time.
An investment’s increase in value.
Appreciation potential
The possibility or probability that a real estate investment will increase in value during the
holding period.
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.
— B
Balloon payment
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.
Base rent
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.
Basic employment
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
Before-tax investment value
The sum of the present values of the mortgagor and mortgagee of property.
©2001 CCIM Institute. All rights reserved. Version 10/01.
©2002 National Association of REALTORS®. All Rights Reserved.
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. (Encyclopedia of Real Estate
Terms 2nd Edition, Damien Abbott)
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.
Business risk
The uncertainty associated with the possible profit outcomes of a business venture.
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.
— C
See common area maintenance.
CAM cap
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.
Cap rate
See capitalization rate.
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
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.
Capital market
The supply and demand for resources to invest in real estate and other investments.
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. Also referred to as cap rate.
©2001 CCIM Institute. All rights reserved. Version 10/01.
©2002 National Association of REALTORS®. All Rights Reserved.
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. (Encyclopedia of Real Estate Terms 2nd
Edition, Damien Abbott)
Cash flow
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/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.
Net operating income
– Interest
– Cost recovery
– Amortization of loan points
Real Estate taxable income
× Investor’s marginal tax rate
Tax liability (savings)
Net operating income
– Annual debt service
Cash flow before taxes
– Tax liability (savings)
Cash flow after taxes
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.
©2001 CCIM Institute. All rights reserved. Version 10/01.
©2002 National Association of REALTORS®. All Rights Reserved.
Cash-on-cash rate
A return measure that is calculated as cash flow before taxes divided by the initial equity
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).
Class life
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
Commercial real estate
Any multifamily residential, office, industrial, or retail property that can be bought or sold in
a real estate market.
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. (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.
Community center
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
©2001 CCIM Institute. All rights reserved. Version 10/01.
©2002 National Association of REALTORS®. All Rights Reserved.
Community center (continued)
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.
Comparative advantage
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.
Competition (retail)
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
Compound interest
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).
Contract rent
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.
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. [Appraisal Institute]
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. (Encyclopedia of Real Estate Terms 2nd Edition, Damien Abbott)
Cost recovery
An annual deduction based on the class life of an asset.

The world of commercial real estate is as intriguing as it is complex. When it comes to buying, selling, leasing, managing, or financing a commercial real estate project, the assignment could be as small as a retail shop or as large as a high-rise office building. No matter the size, however, there’s always a process to complete and common industry terms to know in order to be successful.

Here are 25 terms that we believe are important:

Broker: A person who represents another person or a company during a buying or selling process.

Build-to-Suit: A property developed specifically for a certain tenant to occupy, with structural features, systems, or improvement work designed specifically for the needs of that tenant.

Cap Rate: Short for “capitalization rate,” the cap rate refers to the ratio of Net Operating Income (NOI) to property asset value. (e.g. A building with a NOI of $10,000 valued at a 5% Cap is worth: 10,000/0.5 = $200,000)

CBD: Central Business District

Delivery/Delivery Date: The time when a building completes construction and receives a certificate of occupancy.

Full-Service (FS) Rental Rate: A rental rate that includes all operating expenses such as utilities, electricity, janitorial services, taxes, and insurance.

Landlord: The owner of a property that is rented or leased to a tenant.

Landlord Representation: When a broker represents an owner/landlord in a typical lease transaction between an owner/landlord and a tenant.

LOI: Letter of Intent

Modified Gross (MG) Rental Rate: A rental rate that includes some of the operating expenses such as electricity, utilities, taxes, janitorial services, and insurance, but not all. Often the tenant will pay for janitorial and utilities while the other operating expenses will be included in the rental rate. It is important to clarify this with the owner or broker.

Preleased Space: Space that has been leased to a tenant and announced for future development but is not yet under construction.

PM: Property Manager. An individual who oversees all operational aspects of a building. Once a tenant signs a lease, it is the Property Manager who will assist the tenant with any questions, the build-out of the space, and any on-going issues once they have moved in.

PSF: Per Square Foot

Punch List: A final checklist of work that needs to be done to a property before the end of construction.

RFP: Request for Proposal

ROI: Return on Investment

RSF: Rentable Square Feet

Second Generation Space: Space that has had a prior tenant and therefore has modifications (such as walls, doors, ceiling treatments, etc.) that can often be used by a subsequent tenant.

Shell Space: A building space that has an unfinished interior and requires improvements.

Sublease/Sublet Space: Space that has been leased by a tenant and is being offered for lease back to the market by that tenant.

Tenant: A person, business, or group that pays rent to an owner or landlord for the right to use/occupy a property or space.

Tenant Representation: When a broker represents a tenant in a typical lease transaction between a tenant and an owner/landlord.

TI: Tenant Improvement

Triple-Net (NNN) Rental Rate: A rental rate that excludes all operating expenses such as electricity, utilities, taxes, janitorial services, and insurance. These expenses are expected to be paid directly by the tenant.

Vacancy Rate: The percentage of physically vacant space divided by the total amount of existing inventory.

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