Chapter 16

Lease Escalation Clause

A contract provision allowing for one to pass an increase in costs to another party. Escalation clauses are usually related to influences beyond both parties control, such as inflation.

Anchor Stores

A key tenant in retail. Typically one of the larger stores in a shopping mall, usually a department store or a major retail chain (Macys, Nordstrom, etc.).

Cash on Cash Return

A percentage return on money invested in a property by an investor. Formula: Cash Flow / Down Payment

Rate of Return

A profit on an investment over a period of time, expressed as a proportion of the original investment.

Pro-forma Statement

An accounting statement that forecasts income and expenses for a period of time, typically five or more years. Pro-forma statements are typically used by investors to estimate their rate of return for a particular property.

Debt Service

Annual amount to be paid by a debtor on an obligation to repay borrowed money.

Tax Shelter

Any method of reducing taxable income resulting in a reduction of the payments to tax collecting entities, including state and federal governments.

Net Operating Income

Equal to the Gross income minus expenses (and sometimes debt service). Also referred to as cash flow.

Usable Square Footage

Space that can be used or occupied by a tenant. Typically does not include elevators, stairs, mechanical spaces, etc.

Common Areas

Spaces in a commercial building shared by the tenants or residents of the building. Common areas include lobbies, corridors, stairs, elevators, etc.

Time Value of Money (TVM)

The idea that money available at the present time is worth more than the same amount in the future due to its potential earning capacity.

Before Tax Cash Flow

The net profit/loss calculated by subtracting expenses from income before taxes are paid.

After Tax Cash Flow

The net profit/loss realized after taxes are deducted.

Capitalization Rate

The percentage which is the sum of the discount rate, the effective tax rate and the recapture rate representing the relationship between net operating income and present value. Formula: Value = Income / Rate

Gross Income

The total amount collected from rents and other income producing opportunities (washing machines, storage, etc.)

Leverage

The use or borrowed capital (mortgage) to increase the potential return of an investment.

Rentable Square Footage

Usable area that can be leased/rented to a tenant.