Commercial Real Estate Terms

Cash-on-Cash Return

Before Tax Cash Flow (BTCF = CFO - Debt Service) divided by the total equity contribution to date, expressed on an annual basis as a percentage. CoC = BTCF / Total Equity Contribution to Date While Cash-on-Cash Return (CoC) does not account for taxes and does not take into account the time value of money, it is a useful screening tool used by investors when evaluating potential investments. The Cash-on-Cash Return of an investment is especially important to core investment strategy investors more interested in stable cash flow that asset appreciation. The CoC Return is typically used along side other return metrics such as the Equity Multiple, Internal Rate of Return and Free and Clear Return.

Generally Warranty Deed

Common in residential real estate and not generally used in CRE, a general warranty deed guarantees that the seller has the right to sell the property and this it is free of any encumbrances such as debt, liens or any adverse claims. A general warranty allows the grantee (buyer), or new owner of the property, the ability to sue the grantor (seller) for damages if any such legitimate challenges to title or unknown encumbrances emerge.

Core Plus (investment strategy)

Core Plus assets are properties that are otherwise core assets, but with some component of risk (opportunity) attached to it. It may be a high street retail building with a tenant that takes 10% - 15% o the space vacating in two years and the space needs to be upgraded and re-leased. Or it could be an otherwise core office tower located a bit outside of the prime office submarket with a lease or two that is a bit below market. A levered IRR for this risk profile could be between ~8% - ~13%.

Fixed Costs

Costs that do not change based upon the property's level of operation. For example, the landlord's monthly insurance premiums will generally remain fixed regardless of whether the property is 50% or 80% occupied. In some real estate financial models, the user is given the option to choose what % of a given expense is fixed with line items such as insurance and taxes deserving 100% fixed treatment.

FF&E

Furniture, Fixtures and Equipment. In real estate analysis, FF&E is most often found as a line item in development budgets and operating statements. It can generally be defined as any easily moveable object not permanently affixed to the building. Examples: Chairs, Beds, Couches, Curtains, Desks, Tables

Grantor

In a real estate sale transaction, a grantor is the seller of the property. In a sale transaction, the grantor conveys, or transfers, title through a deed to the grantee.

Grantee

In a real estate transaction, a grantee is the buyer of the property. In a sale transaction, the grantor conveys, or transfers, title through a deed to the grantee.

General Vacancy and Credit Loss

In real estate underwriting, General Vacancy and Credit Loss is an adjustment to Gross Potential Income (Rental Revenue + Other Income) on the pro forma income statement. It is used to factor in likely vacancy loss due to market conditions and expected credit loss due to tenants' failure to pay.

Bargain and Sale Deed

A bargain and sale deed guarantees that a grantor (seller) has title to the property, but does not guarantee that is is free of encumbrances. It also doesn't guarantee that the title is free of any defects. It is not uncommon for bargain and sale deeds to come with or without covenants.

Forward Sale

A binding contract between two parties to enter into a purchase and sale agreement at a fixed future date, the terms and conditions of which are agreed upon today.

Full Service Gross Lease

A commercial lease where the tenant pays a base rent and the landlord pays for all operating expenses related to the tenant's occupancy of the space such as common area maintenance, utilities, property insurance, and property taxes. Full Service Gross (FSG) leases generally include and Expense Stop, or expense ceiling, above which any additional expenses are passed through to the tenant. FSG leases contrast with net leases, wherein the tenant pays for some or all operating expenses.

Cost Plus Contract

A contract whereby the contractor is reimbursed for all the construction costs, in addition to an agreed upon % of such costs covering the contractor's overhead and profit. These contracts are typically used when the scope of work is unclear, however, they require additional owner supervision (in comparison to Fixed Price Contracts) as the contractor is less incentivized to exercise prudent cost controls.

Deed of Trust

A deed of trust is an agreement between a lender (mortgagee) and borrower (mortgagor) whereby the mortgaged property is conveyed to a neutral third-party, usually a title company, to be used as collateral while there is an outstanding mortgage. The mortgagor still holds equitable title, while the trustee hold legal tile.

Delaware Statutory Trust (DST)

A distinct legal entity used by real estate investors seeking to defer their capital gains taxes through the use of a 1031 tax deferred exchange. The primary advantage of the DST is the trust's ability to obtain favorable financing terms compared to other ownership structures (such as Tenants in Common) because the lender views the entity as only one borrower.

Breakup Fee

A fee paid to one party in a real estate transaction by a counter-party when the counter-party backs out of the transaction. A breakup fee is generally a percentage of the purchase price or mortgage loan amount and is used to compensate the damaged party for time and resources spent on the transaction.

Promote

A financial interest provided to the sponsor (investment manager) as an incentive to maximize performance. This is typically an outsized share of the profits, payable once the investors have received back their initial capital contributions and achieved certain profit thresholds (i.e. preferred return). Also referred to as the promoted interest, or carried interest.

Debt Service Coverage Ratio (DSCR)

A financial metric used in real estate to measure the property's ability to cover its debt obligations. The DSCR is calculated by dividing the NOI by the Debt Service Payment and is often expressed as a multiple (x). DSCR = NOI / Debt Service The DSCR is used by banks to determine the maximum loan amount offered to a borrower and to assess the probability that a borrower might default on a loan.

CPI Rent Escalations

A form of contractual rent increases determined by changes in the Consumer Price Index, a common index used to measure inflation in the United States. Most long-term leases in CRE include periodic rent increases. These rent increases are included in leases, in part, to ensure that the value of the lease does not diminish over time due to inflation. Generally, the amount of percentage of the increase is pre-defined (ex. 2.00%/year). However, in some cases the landlord and tenant agree to use the change in Consumer Price Index to determine the periodic increase.

Full Service Hotel

A hotel that has a dedicated F&B (Food and Beverage) component and offers a full range of amenities such as concierge service, bars and restaurants, pool and spa, etc. Full service hotels have high fixed costs and appeal to the more affluent casual and business travelers who are able to afford the higher than average room rate.

Earn-out

A provision in the loan agreement that allows the borrower to receive additional funds from the lender upon completion of certain events (such as receiving a Certificate of Occupancy or surpassing pre-defined operating performance thresholds). Earn-outs are structured using holdback agreements.

Catch Up Provision

A provision included in certain real estate partnership agreements, whereby a special distribution tier is included in the equity waterfall that allows the general partner (GP) to "catch up" with the limited partner's (LP) cash flow distributions. The reason for why the general partner's distributions might lag, or the amount that must be made up with the "catch up" tier depends on the terms of the partnership structure. Catch up provisions are most common to structures where the limited partner receives 100% of distributions until it achieves some preferred return requirement, at which point the GP receives 100% of the excess cash flow thereafter until some equitable balance between the LP and GP distributions is achieved. Ex: A limited partner contributes 100% of required capital to a real estate venture in return for a 12% return and 50% of all excess cash flow above that threshold. The agreement states that the limited partner will receive 100% of all cash distributions until it has earned a 12% IRR, at which point the GP receives 100% of cash distributions until both partners have received 50% of profit distributions. Once the GP has caught up with the LP, both partners receive any remaining excess cash flow 50/50.

Clawback Provision

A provision included in certain real estate partnership agreements, whereby a special distribution tier is included in the equity waterfall that allows the limited partner (LP) to "clawback" cash flow previously distributed to the GP. Reasons for including the clawback provision vary, but are generally related to instances where the GP is distributed cash flow before the LP reaches a preferred return hurdle. In the event that at the end of the venture the LP has not achieved some preferred return, the GP must give back some or all distributions previously made to the GP until such point that the LP hits its preferred return.

Floor Area Ratio (FAR)

A ratio expressing the relationship between a building's floor area (currently built or permitted) and the land on which the property is located. A higher FAR ratio indicates a higher density (i.e. the more square feet legally permissible to be built on the land). For example, if a plot of land is 10,000 SF and there is a FAR of 6. The allowable buildable square footage is 60,000 SF (10,000 SF x 6)

Core (investment strategy)

A real estate investment strategy categorized by low risk and commensurately low, stable returns. Core investment strategies typically involve longer hold periods, lower levels of leverage, and higher quality assets. Core investments are generally stabilized properties, with high occupancy rates and predictable cash flows. Investors of core real estate investments value stable, reliable and consistent cash flows over price appreciation.

Adaptive Reuse

A repositioning strategy in real estate whereby the investor converts the use and/or design of an existing building into something new. Typical scenarios include the conversion of industrial buildings, schools and churches into other building types such as residences, museums or art galleries.

Financing Memorandum

A request for mortgage financing given to lenders by commercial real estate borrowers (or their representatives) for the lenders' investment consideration.

Interest Reserve

A reserve account held by the lender of a construction loan and used by the borrower to cover loan interest shortfalls during construction and lease up. The interest reserve is funded via the initial proceeds from the construction loan, and is calculated based on either expected future draws or by means of a simple average estimate of the outstanding loan balance throughout the loan period.

HUD Home

A residential property owned by the Department of Housing and Development (HUD). If a foreclosed home was acquired using proceeds from an FHA-insured loan, the FHA will payout the lender for the balance due and ownership of the property will transfer to HUD.

Equity Multiple

A return metric which shows how much an investor's capital has grown over time. The equity multiple (EMx) is calculated by dividing the sum of all capital inflows (capital distributions) by the sum of all capital outflows (capital contributions). EMx = Capital Inflows (distributions) / Capital Outflows (contributions) While the equity multiple does not account for the time value of money, it does describe the total cash returned to the investors and is thus often utilized alongside the IRR in real estate investment analysis. The Equity Multiple is typically used in conjunction with other returns metrics such as IRR, Cash-on-Cash Return, Free and Clear Return, and Average Rate of Return, among others. The equity multiple can be calculated before and after taxes and on a unlevered (without debt) or on a levered (with debt) basis.

Construction Financing

A short-term loan, typically with a floating interest rate, issued by a lender to finance the construction of a real estate project. The loan is paid out to the borrower in draws as construction progresses. After construction is complete and the property is fully leased and/or sold, the loan is repaid using permanent loan proceeds or proceeds from the sale of the property.

Adjusted Funds from Operations (AFFO)

A superior metric compared to Funds from Operations (FFO) when evaluating a REIT's performance. AFFO is used in order to account for any additional expenses the landlord is expected to incur over the life of the asset (such as TIs, CAPEX, leasing commissions, etc.) Calculated as: AFFO = FFO - Maintenance Costs - CAPEX - Straight Line Rent Adjustments AFFO is comparable to the Net Operating Income metric.

Floor Plate

A term commonly used in CRE to refer to an entire floor of a building. The term is commonly used when discussing square footage and/or various variations in size and shape of floors within a building. Example: There are two different floor plates in this building that should accommodate various users. The bottom third of the tower has 30,000 SF floor plates that are rectangular, while the upper two thirds of the building consist of 20,000 SF floor plates that are square.

Common Area Maintenance (CAM)

A term used in CRE leases that is meant to address the cost of building operations that all tenants benefit from and will pay for. Tenants usually pay a portion of CAM as determined by the negotiated agreement, but often times it is the tenant's pro-rata share. What's included in CAM costs varies, but common CAM items may include janitorial services, landscaping, comma area electricity, security, trash removal, and snow removal.

Guaranteed Maximum Price (GMP)

A type of cost plus contract whereby the contractor is reimbursed for all construction related costs, plus a fixed fee. The agreed upon cost and fee are capped, transferring risk of cost overruns to the contractor, whilst any saving resulting from cost underruns may either be a point of negotiation between the GC and the owner or completely realized by the project owner.

Curtailment

A type of prepayment which reduces a mortgage loan's outstanding principal balance. Curtailment can be done by either increasing one's monthly payments or repaying a lump sum amount, both of which would shorten the loan maturity period.

Acre

A unit of land that equals 43,560 SF

Funds from Operations (FFO)

A widely accepted metric used to analyze the performance of a REIT. Funds from Operations, or FFO, accounts for the fact that net income on a REIT's income statement may be an inaccurate representation of the REIT's true performance. As such, net income is adjusted as follows to arrive at FFO: FFO = Net Income + Depreciation + Amortization - Gain/Loss on Sale of Properties FFO is comparable to the Cash Flow from Operations metric, used in analyzing individual properties.

Good News Money

Additional funds paid out to the borrower by a mortgage lender upon the occurrence of certain "good news" events. These events include the owner concluding a lease agreement with a major tenant in the building or reaching some pre-determined NOI. Such additional funds are added to the outstanding loan balance and are generally subject to the same terms as the underlying loan.

Future Value Factor

Also called the Future Amount of One or FV Factor, the Future Value Factor is a formula used to calculate the Future Value of 1 unit of money, n number of periods into the future. The FV Factor is equal to (1+i)^n where i is the rate (e.g. interest rate or discount rate) and n is the number of periods. So for example at a 12% interest rate, $1 USD invested today would be worth (1+12%)^5 or $1.7623 USD five years from now. One use for the FV Factor in real estate is to estimate future rent based on today's rent, grown at some growth rate. So if an apartment unit rents for $1,000 per month today and rent is expected to grow 3% per year for the next 5 years, five years from now the same apartment unit will be expected to rent for (1+3%)^5 * $1,000 or $1,159.27/month

Effective Gross Revenue

Also referred to as Effective Gross Income, EGR or EGI. Effective Gross Revenue is the sum of total rental revenue and total other income, less and adjsutments for general vacancy and credit loss. EGR = Total Rental Revenue + Total Other Income - General Vacancy & Credit Loss

Adverse Possession

Also referred to as Squatter's Rights. Adverse Possession enables a person living on or using someone else's property to legally take ownership of said property if the original owner has abandoned and/or not claimed ownership over a certain period of time. The law came in effect to encourage land/property upkeep and utilization.

Average Life

Also referred to as Weighted Average Life or WAL The Average Life of a mortgage loan refers to the number of periods (commonly denoted in years) in which half the time-weighted principal has been paid. Lenders use this metric to price the loan (i.e. as part of the benchmark calculation to arrive at an appropriate interest rate) and to compare the risk of two loans with similar loan maturity.

Guarantee of Non-Recourse Carve-Outs

Also referred to as a "Bad-Boy Guarantee", a Guarantee of Non-Recourse Carve-Outs is a guarantee provided by an individual or entity which covers the extent of the recourse liability arising from any non-recourse carve-out.

Construction-Perm Loan

Also referred to as a "Rollover Loan", a construction-perm loan is one that immediately converts into permanent debt financing once construction of the project is finalized.

Bridge Loan

Also referred to as mini-perm, a bridge loan is a short-term loan typically provided to developers and value-add real estate investors and is used to "bridge" periods during which the property is not eligible for permanent financing. The term of the bridge loan can be anywhere from a few months to several years, and generally carries a higher interest rate commensurate with the higher risk to the lender.

Stabilized Pro Forma

Also sometimes referred to as the Economic Pro Forma, the stabilized pro forma is used to evaluate the value of a property at the inception of the analysis period. The stabilized pro forma seeks to estimate the net operating income at time zero. The stabilized pro forma is used by acquirers to help determine acquisition price and by debt originators to calculate loan-to-value.

Institutional Investor

An institutional investor is a large company or organization with substantial capital and an allocation to real estate investments. Pension Funds, Life Insurance Companies, Investment Banks, Sovereign Wealth Funds, and endowments are examples of institutional investors. Most often, the institutional investor acts as the limited partner in a real estate partnership, providing the equity capital while relying on the general partner (sponsor) for geographic and property type expertise. Given their size and ready access to the capital markets, institutional investors tend to have a lower cost of capital than their non-institutional counterparts, allowing them to pay more for real estate assets.

Discounted Cash Flow (DCF)

An investment analysis tool used regularly by real estate professionals to make buy, sell, hold and development investment decisions. The discounted cash flow is a process by which the real estate professional forecasts the future cash flows of an investment (rents, expenses, CAPEX, debt service, sale price, etc.), and then discounts those cash flows to present to arrive at time value of money return metrics such as Internal Rate of Return (IRR) and Net Present Value (NPV). The estimated cash flows from the DCF can also be used to calculate other risk and return metrics such as DSCR, Breakeven Occupancy, Debt Yield, Cash-on-Cash Return, Equity Multiple, etc. as well as perform other analysis such as sensitivity analysis.

Cold Shell

Any building/rentable area that consists of only bare, unimproved shell. i.e. no interior finishes, HVAC, pluming, lighting or elevators, etc.

Hard Costs

Any development costs associated with the physical construction of a building. These costs are easy to quantify and typically include items such as raw materials, labor and interior finish, etc. Hard Costs are also referred to as direct costs.

Concession

Any preferential financial treatment offered by one party to another in a real estate transaction. In the case of a lease agreement, a concession most often takes the form of free rent for a period of time or an agreement made by the landlord to waive certain charges such as parking charges or pet fees. These concessions are meant to induce the tenant to sign the lease. Concessions are most often used during the initial lease-up (i.e. when a building first delivers) or during tenant-friendly periods in the market cycle to maintain rents.

In-Place Rent

See Contract Rent. In-Place Rent is the rent being charged/collected on existing leases at a property. In contrast to Market Rent, in-place rent is not based on market conditions but rather is based on the lease contract signed between the landlord and the tenant.

Contract Rent

Sometimes referred to as "In-Place Rent", Contract Rent is the rent being charged/collected on existing leases at a property. In contrast to Market Rent, contract rent is not based on market conditions but rather is based on the lease contract signed between the landlord and tenant.

Internal Rate of Return (IRR)

The discount rate at which the net present value of an investment is equal to zero. The IRR is a time value of money metric, representing the true annual rate of earning on an investment. In real estate practice, IRR is used together with other return metrics, such as equity multiple, cash-on-cash return, and average rate of return to compare real estate investments and make investment decisions. Unlevered IRR or unleveraged IRR is the internal rate of return of a string of cash flows without financing. Levered IRR or leveraged IRR is the internal rate of return of a string of cash flows with financing included. The IRR is arrived at by using the same formula used to calculate Net Present Value (NPV), but by setting the net present value to 0 and solving for discount rate r. In Excel, IRR can be calculated by using the IRR(), XIRR(), or MIRR functions.

Balloon Payment

The final payment on a loan. In CRE, the balloon payment is the entire outstanding balance of the loan as of the loan maturity date. A balloon payment is only due when the loan has not fully amortized.

Hangout and Hangout Risk

The hangout is the expected outstanding loan balance owed to the lender by the borrower at the end of the lease term of a key tenant. The hangout risk is the risk to the lender associated with the borrower's ability or inability to repay said loan. This is an especially important consideration in investments with a single tenant, the hangout risk is determined by comparing the hangout's dark value (value of the vacant real estate) to determine whether or not the borrower will be able to repay the loan. This risk can be quantified by dividing the hangout by the dark value. Example: A borrower secures a $100,000, 20-year loan against a property leased to WalBlues for 15 years. At the end of year 15, the outstanding loan balance is expected to be $50,000. The lender projects the value of the vacant property in year 15 to be $50,000. Therefore, the hangout risk is high, as represented by the expected LTV at the end of the lease term ($50,000 / $50,000 = 100%), since the borrower will need to re-lease the property before year 20 to be able to refinance the property to repay the lender.

Floor to Ceiling Height

The height between each floor plate in a building measured from the top of a floor to the surface of the ceiling.

Floor to Floor Height

The height between each floor plate in a building measured from the top of a floor to the top of the floor above

Expansion Rights

The legal right given by a landlord to a tenant to occupy additional leaseable area in a building. These rights constrain the landlord's ability to lease the building and are thus typically only seen when tenants have a high degree of negotiation leverage.

Breakeven Occupancy

The occupancy at which effective gross income is equal to the sum of the operating expenses plus debt service. EGI = OPEX + DS; also when DSCR = 1.00x Breakeven occupancy is an important metric for lenders, developers, and operators as it is the point at which the property shifts from an operating deficit to an operating surplus. Real estate owners will often use rent concessions to speed up the investment to breakeven.

Cap Rate

The percentage derived from a stabilized asset's annual NOI divided by its purchase price. Cap Rate = NOI / Purchase Price (or Value) Investors often look to cap rates that have been set in the market to begin getting a ballpark idea of what they might pay for an asset they are looking to invest in. For example, an investor is looking at a Class A office in X market. Class A office buildings in X market have been trading between a 5% - 6% cap rate over the past 6 months, so an investor may look to his or her first year projected NOI and divide that by the cap rate of somewhere between 5% - 6% to ge an idea of the price he or she might need to pay.

Bid and Award Process

The period during which the owner solicits bids from the numerous subcontractors within trades needed to build the project. Once the subs have responded to the bid requests, the general contractor may request additional information or conduct interviews and will award a contract to the selected group. High quality construction documents are crucial at this stage in order to ensure contractors are able to accurately take off material estimates and make realistic project bids.

Design Development

The period following the schematic design whereby all design team consultants work together to further refine the project details. In this phase, the design team begins to select systems and materials and looks carefully at the coordination of all the components.

Cash-Out Refinance

The process by which a borrower takes out a new mortgage with sufficient loan proceeds to pay off the existing mortgage plus return all or part of the borrower's invested capital in the investment. The Cash-Out Refinance is sought by owners of real estate, because it provides them an opportunity to reduce their risk in the property while simultaneously freeing up capital to invest in new opportunities.

Hold/Sell Analysis

The process of analyzing whether to continue holding (owning) income-producing real estate, or whether to sell the real estate to reinvest the proceeds in an alternative opportunity. Many professional real estate asset and portfolio managers perform this analysis on a regular basis, so as to optimize the overall returns of their respective portfolios and beat their target benchmarks. Real estate professionals use analysis tools such as real estate discounted cash flow models to calculate the return on the hold scenario, and then compare that to the projected returns on the sell and invest scenario to make a more informed investment decision.

Defeasance

The process of releasing a borrower from its debt obligation (mortgage loan) and substituting the lien on the property with acceptable replacement collateral (typically treasury bonds). This replacement collateral is expected to general a comparable substitute cash flow, which would otherwise be required on the existing debt were it not repaid.

Entitlement Process

The process through which a real estate developer or land owner seeks the right to develop (or redevelop) property with government approvals for zoning, density, design, use and occupancy permits. Upon securing all necessary entitlements from the applicable government(s), the real estate developer is thus entitled to build what was proposed and approved.

Average Daily Rate

The average revenue generated per paid occupied room per day. Calculated by dividing room revenue by the number of rooms sold. The ADR is commonly used in the hospitality industry together with the RevPAR metric to assess the property's performance.

Economic Vacancy

The difference between the gross potential rent at a property and the actual rent collected. An example would be an apartment complex with a 2-week preparation period for new tenants new tenants and a 50% annual tenant turnover. Assuming the property was 100% occupied (i.e. physical vacancy of 0%), there would still be an economic vacancy of 1.85% (2/54 weeks x 50%) whereby the property owner would only receive 98.15% of his annual cash flow.

Development Spread

The difference, denoted in basis points, between the market cap rate and the yield on cost. The Development Spread measures the "development pop" or value-added by taking on the construction and lease-up risk. The greater the development spread, the more likely a development project will be deemed financially feasible. Scenario: A real estate investor has the option to either a) acquire a fully-built and stabilized asset at some market cap rate or b) construct and lease up a brand new property at some yield-on-cost. In order to make the latter worthwhile, a benefit commensurate with the risk must be gained, otherwise there is no incentive to take on the development risk. One way the developer and its capital partners measure the potential benefit is by looking at the difference in yield between the two options, or the development spread.

Conceptual Design

A pre-design phase where the owner and A & E team work together to bring shape to the project and outline its function and form. The conceptual design promotes an open dialogue between the architect and the owner, with concept sketches often being used to illustrate and communicate ideas and expectations.

Ground Lease

A lease structure where a real estate investor rents the land (i.e. ground) only. In the case of a ground lease, generally one party owns the land (i.e. Fee Simple Interest) while a separate party owns the improvements (leasehold interest). In most cases, the owner of the land leases the land to the owner of the improvements for an extended period of time (20-100 years). When the ground lease predates a mortgage on the leasehold interest, the ground lease generally has priority over that mortgage unless the ground lease is expressly subordinated to the mortgage. Thus a ground lease is often thought of and valued as a form of financing. The ground lease is a common vehicle used by generational families to generate cash flow from well-located parcels of land without having to operate the property nor give up ownership in the property. For instance, the Martinez family owns a 10-acre parcel at the corner of main and main. They lease the parcel for $100,000 per year to Jennifer's Bakery for 50 years, who in turn builds a bakery on the property. Jennifer's Bakery operates a bakery on the property for the next 50 years and at the end of the ground lease term, return the land together with any improvements on the land to the Martinez Family.

Deed

A legal written document that transfers possession of real property from one entity to another. Deeds are recorded at time of sale and when purchasing real estate, it is important to have a title search done where, among other things, the title company will review all the public records to see the chain of title, meaning they will review all the previous deeds recorded in connection with a property and if there were and breaks and gaps.

Average Rate of Return

A measure of the profitability of a real estate investment or a type of return metric. Calculated as the total net profit of an investment (total cash inflows - total cash outflows) divided by the length of the investment, divided by the invested capital. = Total Net Profit / Length of Investment / Invested Capital The main drawback of this return is that is doesn't factor in the time value of money.

Gross Asset Value

A measure used to describe the market value of a property. The value includes debt and equity positions but excludes any acquisition/closing costs.

Expense Stop

A mechanism in a Full Service Gross Lease, the expense stop is a fixed amount of operating expense above which the tenant is responsible to pay. Thus, the landlord is responsible to pay for all operating expenses below the expense stop, while the tenant is responsible for any amount above the Expense Stop. Expense stops can take the form of an agreed upon amount, typically expressed in an amount per square foot or a base year stop. A base year stop sets the expense stop equal to the actual operating expenses in the first year of the lease. So for instance, if the actual operating expenses in the first year amounted to $9.50/SF, the Expense Stop would be set at $9.50/SF and the tenant would be responsible to reimburse the landlord for any expenses above the $9.50/SF in any subsequent year.

Development Yield

A metric used in real estate development, Development Yield is calculated as the project's NOI at stabilization divided by the total project cost. Development Yield = NOI at Stabilization / Total Project Costs Also referred to as Yield-on-Cost

Buildup Rate

An alternative method for arriving at a capitalization rate for a real estate investment. The buildup rate is the sum of all risk of an investment (denoted in %) plus the risk-free interest rate. Ex: Risk-Free Rate (i.e. 10-yr UST): 2.25% + illiquid nature of an investment: 0.75% + credit risk of tenants: 1.25% + inflation risk: 1.00% = Buildup Rate: 5.25%

Floor Plan

An architectural drawing that depicts a floor layout of a specific floor or room of a building in two dimensions and from a top looking down vantage point.

General Contractor

An entity that oversees the execution of a construction project on behalf of the ownership of a property. The General Contractor (GC) manages the day to day operations on site and oversees all the subcontractors.

Assignee

An entity that receives the rights to a property from an assignor. A mortgagee is an example of an assignee.

Assignor

An entity that transfers the right they have to a property to a third party. A mortgagor is an example of an assignor.

Contingency Cost

An estimated amount set aside by the developer and/or the contractor in order to account for any unknown risks associated with the project. These costs are designed to cover unforeseen expenses which are not precisely known at the time of estimate but which the contractor expects will occur based on statistical probabilities and personal experience.

Capital Expenditure (CAPEX) - Def 1

An expenditure with a useful life greater than one year. CAPEX are depreciated over their useful life (e.g. $100,000 expenditure with a 10 year useful life = $10,000 depreciation each year for 10 years) In contrast, operating expenses are fully depreciated in the year they occur. In real estate modeling, CAPEX fall below NOI due to their volatile nature. Basic RE Set Up: Effective Gross Income (EGI) - Operating Expenses (OpEx) = Net Operating Income (NOI) - Capital Expenditures (CapEx) = Cash Flow from Operations (CFO)

Capital Expenditure (CAPEX) - Def 2

An expense used to upgrade a property which is expected to result in a long-term (longer that 1 year) improvement. Typical CAPEX include roof repairs, HVAC replacement and other expenses generally related to the structural improvement of the building. For tax purposes, CAPEX are capitalized and depreciated over a period of years with the length of the depreciable life varying depending on the capital item.

Hotel "Flag"

An informal term used to denote an operating brand within the hotel industry. Marriott, Hilton, and Best Western are examples of "Flags" used by owners of hotel properties.

Earnest Money Deposit

An initial deposit paid by the buyer as a show of good faith to the seller. The money is typically held in escrow until the transaction closes and all suspensive conditions have been fulfilled, following which the earnest money is used to offset the initial purchase price paid by the buyer. However, if the seller defaults and the deal falls through, the the deposit is returned to the buyer.

Debt Covenants

Debt Covenants are essentially rules written into the loan documents which govern the behavior of a borrower once the debt is issued. There are two general types of covenants which either permit (affirmative covenant) or restrict (negative covenant) the borrower's ability to perform certain actions. Should the borrower break a covenant, the lender typically has the legal right to call back the loan (demand repayment).

Construction Documents

Detailed documents of the development project put together by the architect after the design development phase of the design process. The Construction Documents (CDs) reflect the finalized building design and provide specific details to communicate to the contractor and subcontractors how the project should be constructed. These legally binding documents are using during construction by all the trades and are also initially used to obtain bids from contractors and subcontractors. CDs, at minimum, will include numerous detailed drawing of the project and a specifications manual.

Equitable Title

Equitable title and Legal title are like two parts to a complete title. Equitable title gives an entity beneficial interest in the property or the full use and enjoyment of the property. Legal title provides enforceable legal ownership in court. Legal title is commonly used as collateral when there is debt on a property. When a loan is secured through a mortgage, either the borrower maintains legal title and the lender places a mortgage lien on the property (lien theory states) or the lender takes legal title, while the borrower has equitable title (title theory states). If the borrower is in default, with a mortgage the lender has to go through the courts to foreclose. When the loan is secured through a deed of trust, legal title is given to a neutral third party, or trustee, and the lender can usefully foreclose on the property without going to court.

Contractor Controlled Insurance Program (CCIP)

OCIP and CCIP are broad and all-encompassing insurance policies that usually cover, at a minimum, general liability insurance, worker's compensation, and excess liability insurance for all contractors and subcontractors on a construction project. An OCIP is sponsored and held by the owner, in contrast to a CCIP, which is sponsored and held by the contractor. The sponsor holds and is directly responsible for securing the appropriate and required insurance coverage.

Discount Rate

The rate at which future cash flows are discounted and then added together to create a present value in a discounted cash flow (DCF) model. In real estate valuation models, the discount rate can be interpreted as the Cap Rate plus expected NOI growth, representing the income and growth components of total required rate of return.

Absorption

The rate at which rentable area is leased up over a period of time in a given market. The net absorption figure considers construction of new space, demolition of existing space, and any additional vacancies during that period. It is often used to forecast demand and supply trends and is thus a key indicator for both property owners and developers, significantly influencing their pricing and timing decisions.

Debt Yield

The ratio of Net Operating Income to the mortgage loan amount, expressed as a %. The Debt Yield is useful to lenders as it represents the lender's return on cost were it to take ownership of the property. Among other metrics, lenders use debt yield to determine an appropriate loan amount.

Free and Clear Return

The total unlevered (before debt) pre-tax cash flow of a real estate project divided by the total capital invested, generally expressed as a % on an annual basis. While the free and clear return does not account for taxes and does not take into account the time value of money, it is a useful screening tool used by investors when evaluating potential investments. The Free and Clear Return is the unlevered equivalent of the Cash-on-Cash Return, and thus sometimes referred to as the Unlevered Cash on Cash Return. The Free and Clear Return is especially important to core investment strategy investors more interested in stable cash flow that in asset appreciation. The Free and Clear Return is typically used alongside other return metrics such as the Equity Multiple and IRR to appropriately assess and investment.

Cash Sweep

The use of any free cash (after debt service) to pay down the outstanding loan balance. In real estate, a cash flow sweep is often implemented by a lender when a borrower is unable to payoff the balloon balance upon maturity.

Deed in Lieu of Foreclosure

The voluntary transfer of a title deed by the borrower to the lender in order to satisfy a defaulting loan (thereby avoiding foreclosure proceedings). Also referred to as "giving back the keys" or Jingle Mail.

In Arrears

To pay for services after the work has been done.

Base Year Stop

Upon lease commencement, the building owner will agree to pay the tenant's first year expenses (aka base year expenses) and will continue to pay the same amount in each of the subsequent years while the tenant will pay any additional costs above the amount realized in the first year. The building owner's cost of opex is capped in Year 1.

Balance Sheet Investing

When an investor uses its own funds to invest in a real estate asset. This is in contrast to using 3rd party funds (when referring to equity) or securitization proceeds (when referring to debt)