Commercial Real Estate Definitions
AAA rating
The highest credit rating given to businesses by credit reporting agencies such as Dun & Bradstreet; useful when determining a commercial rental prospect’s financial status. Also used as a basis for credit underwriting.
abandonment
A relinquishment or surrender of property or rights. In real estate management, abandonment of leased premises refers to the relinquishing of the premises by the tenant before the lease expires without consent of the owner/landlord. The term is also applied to personal property left behind be a tenant, a situation that has additional legal implications regarding the removal and storage or disposition of such property.
accrual-basis accounting
The method of accounting that involves entering amounts of income when they are earned and amounts of expense when they are incurred, even thought the cash may not be received or paid; also called accrual accounting. All certified audits must use accrual accounting. Compare cash-basis accounting.
abatement
In real estate, a reduction of rent, interest, or an amount due. Also an environmental term meaning partial or complete reduction of the intensity or concentration of a contaminant.
absorption rate
The amount of space of a particular property type that is leased compared to the amount of that same type of space available for lease within a certain geographic area over a given period of time, accounting for both construction of new space and demolition or removal from the market of existing space. Also used in reference to the rate at which a market can absorb space designed for a specific use.
accrued depreciation
In accounting, for tax purposes, the amount of depreciation expense claimed to date for a depreciable asset; accumulated depreciation. In appraisal, the difference between an improvement’s replacement cost new and the present value of the improvement; sometimes referred to as diminished utility.
after-tax cash flow
The money remaining for an investor after income taxes have been deducted; a real estate owner’s net profit.
agency
the legal relationship between two parties in which one party represents the interest of the other in transactions with a third party. In real estate, when one person or entity (the agent) represents the interest of another person — a seller, lessor, or property owner (the principal) — in financial dealings with others, the agent is also called a fiduciary.
agency management
Management of property owned by another by an agent duly authorized to do so.
agent
A person who enters a legal, fiduciary, and confidential arrangement with a second party (the principal) and is authorized to act on behalf of that party.
amendment
Revision of a legal document. A written revision of a contract specifying changes to the basic document that have been agreed to by the parties to the contract. Also applies to revision of a governing document of a condominium.
amortization
Gradual reduction of a debt by periodic payments which include interest and a portion of the principal over the term of the loan.
asset management
A specialized field of real estate management that involves the supervision of an owner’s real estate assets at the investment level.
asset manager
One who is charged with supervising an owner’s real estate assets at the investment level. In addition to real estate management responsibilities that include maximizing net operating income and property value, an asset manager may recommend or be responsible for or participate in property acquisition, development, and divestiture. An asset manager may have only superficial involvement with day-to-day operations at the site. Compare to property manager.
assignment
The transfer, in writing, of an interest in a bond, mortgage, lease, or other instrument. The transfer o one person’s interest or right in a property to another. Also, the document by which such an interest or right is transferred. Specifically, the document used to convey a leasehold is called an assignment of lease. Compare sublease.
base rent
The minimum rent as set forth in a lease, excluding pass-throughs, percentage rents, and other additional charges.
base year
In a commercial lease, the stated year that is to be used as a standard in determining rent escalations. In subsequent years, operating costs are compared with the base year, and the difference determines the tenant’s rent adjustment.
bridge loan
A type of short-term, interim financing used to bridge the time gap between the end of one loan and the beginning of another, as between a construction loan and permanent financing.
broker
An agent with a real estate license who acts as a representative for an owner or tenant, within specific limits of authority. Also, an agent who buys, sells, or leases for a principal on a commission basis without having title to the property.
brokerage firm
An agency operated by a licensed real estate broker that employs licensed real estate personnel who bring in business by canvassing the territory for prospective tenants or for listings on properties. A full-service real estate brokerage firm may also provide property management services in addition to handling real estate sales and rentals.
Building Owners and Managers Association® (BOMA®) International
Membership organization of real estate professionals and others involved in all facets of commercial real estate, primarily serving the interests of the office building industry.
capital gain
The excess over market or book value at purchase that is or may be realized from the sale of a capital asset such as stocks or real property. Capital gain (loss) has income tax implications for the profit (loss) on securities or a capital acquisition held for a set period as defined in the U.S. Internal Revenue Code.
capital improvement
A structural addition or betterment to real property that increases its useful life or productivity or extends the life of a building or its equipment. The improvement must have a life in excess of one year in order for the cost to be recovered (depreciated) for income tax purposes. The use of capital for a betterment that did not exist before.
capitalization rate
A rate of return used to estimate a property’s value based on that property’s net operating income (NOI). This rate is based on the rates of return prevalent in the marketplace for similar properties and intended to reflect the investment risk associated with a particular property. It is derived from market data on similar, recent, sales. (NOI ÷ property value or sales price = capitalization rate.)
carve outs
Items defined in loan agreements for nonrecourse loans that a borrower will be liable for in the event of default including, but not limited to, unpaid real estate taxes, costs for cleanup of environmental contamination, and security deposit balances.
cash-basis accounting
The method of accounting that recognizes income and expenses when money is actually received or paid; also called cash accounting. Compare accrual-basis accounting.
cash flow
The amount of spendable income from a real estate investment. The amount of cash available after all payments have been made for operating expenses, debt service (mortgage principal and interest), and capital reserve funds; also called pre-tax cash flow to indicate that income taxes have not been deducted.
cash-on-cash return
A measure of the productivity of an investor’s initial investment that compares the yearly cash flow of a property with its initial investment base: cash flow ÷ initial investment base. The result is given as a percentage.
CCIM® Institute
Organization of commercial investment real estate brokers, developers, asset managers, and others involved in commercial investment properties; an affiliate of the National Association of REALTORS® (NAR).
certificate of occupancy
A document issued by an appropriate governmental agency certifying that the premises complies with local building codes and/or zoning ordinances.
Certified Commercial Investment Member® (CCIM®)
Professional designation conferred by the CCIM Institute. CCIMs have completed a designation curriculum that covers essential CCIM skill sets including ethics, interest-based negotiation, financial analysis, market analysis, user decision analysis, and investment analysis for commercial investment real estate. CCIMs have completed a portfolio demonstrating the depth of their commercial real estate experience. Finally, they have demonstrated their proficiency in the CCIM skill sets by successfully completing a comprehensive examination.
Certified Property Manager® (CPM®)
The professional designation conferred by the Institute of Real Estate Management® (IREM®) on individuals who distinguish themselves in the areas of education, experience, and ethics in property management.
common area
Areas of a property that are used by all tenants or owners.
common area maintenance (CAM) charges clause
Used in commercial leases to state the amount that a tenant will pay to maintain the common areas of the property (landscaping, parking areas, sidewalks, roadways). In leases for office buildings and industrial properties, CAM costs may be paid along with other property operating expenses as pass-through charges. More specifically, a provision in a retail lease that stipulates how much the tenant will pay for maintaining the common area of a shopping center or mall.
consideration
Something of value exchanged for a promise or for performance of a service that makes an exchange legally binding, such as paying rent in exchange for use of a property.
construction loan
A short-term, usually interest-only loan made to finance the cost of new construction or rehabilitation, that may be funded by one or more commercial banks or other sources of capital or by the permanent lender. Money is normally released to the builder or borrower in stages as costs are incurred during construction.
Consumer Price Index (CPI)
A way of measuring consumer purchasing power by comparing the current costs of goods and services to those of a selected base period; formerly cost-of-living index. Sometimes used as a reference point for rent escalations in commercial leases (as a measure of inflation). The CPI is published monthly by the U.S. Department of Labor, Bureau of Labor Statistics.
controllable expense
An operating expense for which management has defined responsibility and over which it has control (advertising, energy consumption, maintenance and repairs, and purchase of supplies).
conventional loan
A real estate bank loan that is not insured (FHA) or guaranteed by a governmental agency.
debt-coverage ratio
Used by lenders as a measure of financial risk. A measure of the amount of debt service that can be carried on a property pledged as collateral for a loan. The ratio is calculated: annual net operating income ÷ annual debt service payment (principal plus interest), and the result is written as a decimal (e.g., 1.55). The closer the resulting value approaches to one (1.0), the riskier the loan.
deduction
Any expense or cost set off against revenue. For income tax purposes, any expense or cost that can be used to offset revenue, such as the operating costs of an investment rental property and the paper cost of depreciation or cost recovery.
deed
The legal document that transfers ownership (title) of a property.
default
Failure to fulfill an obligation when it is due. The nonperformance of a duty, such as those required in a lease or other contract.
deferred maintenance
Ordinary maintenance of a building that, because it has not been performed, negatively affects the use, occupancy, and value of the property. Also, an amount needed for repairs, restoration, or rehabilitation of an asset, but not yet expended.
deficiency judgement
A personal judgment levied against the mortgagor when the foreclosure sale does not produce sufficient funds to pay the mortgage debt in full.
deflation
An economic condition occurring when the money supply declines in relation to the amount of goods available, resulting in lower prices.
demising wall
A partition or wall separating the leased space of one tenant from that of another tenant and from common areas.
depreciation
Loss of value. In real estate, decline in value of a property resulting from physical deterioration, functional obsolescense, an/or economic obsolescense. In accounting, the gradual process of converting a fixed asset into an expense.
discounted cash flow (DCF)
Financial analysis using the time value of money to determine how much an investment held for several years into the future would be worth in present dollars.
discount rate
Any rate used to translate a future dollar amount into an equivalent present value. Also, the interest rate the Federal Reserve Bank charges commercial banks.
dual agency
A situation in which a single agent, with disclosure to each party, represents both parties to a transaction.
easement
An interest in or right to land that is owned by another person. A legal right to use land owned by another person or business for a specific purpose. An easement may be granted by a deed or created as a result of actual use that was not prohibited.
effective gross income
The total amount of income actually collected during a reporting period; the gross receipts of a property. Gross potential rental income less vacancy and collection losses plus miscellaneous or unscheduled income.
effective interest rate
The actual rate of interest paid on a loan, which may include adjustments.
effective rent
The amount of rent a commercial tenant actually pays after base rent is adjusted for concessions, pass-through charges, and tenant improvements. The effective rent differs from the quoted base rent set forth in the lease.
encroachment
A building or some portion of it, or a wall or fence, that illegally extends beyond the owner’s land onto another’s land or a street or alley.
encumbrance
Any lien, such as a mortgage, tax lien, or judgment lien; also, an easement, a restriction on the use of land, or an outstanding dower right which may diminish the value of property.
entity
Something that has separate or independent existence, as a human being or a corporation.
environmental impact statement (EIS)
An analysis of the anticipated effects of a development or action on its surroundings. Such analysis may be required prior to development under federal or state law. An EIS can reveal impediments to development
equity
The value of real property in excess of debt. The interest or value that an owner has in real estate over and above the mortgage and other liens against it; outright ownership.
escalation clause
In a Lease, the provision for increases in rent based on increases in operating costs, changes in a standard economic index such as the Consumer Price Index (CPI), or an agreed-upon schedule stated in the lease, commonly used to account for inflation over the lease term or to maintain the rent at market levels. A provision in a mortgage or loan agreement under which the entire amount of the debt becomes due immediately in the even of a specified occurrence such as missing a set number of monthly payments or other default.
eviction
A legal process to reclaim real estate from a tenant or someone holding a mortgage who has not performed under the agreed-upon terms of the lease or mortgage.
exclusive
A right granted to the tenant that restricts the owner from leasing space in the same shopping center to other retailers that sell similar merchandise or provide similar services, usually defined in an exclusive use clause.
exclusive agent
An agent with exclusive rights for a fixed period of time to sell or lease property owned by another.
exclusive authorization to lease
A document stating that the agent will receive a commission for any prospect who signs a lease within a certain time period, regardless of who actually negotiated the transaction.
fiduciary
One charged with a relationship with trust and confidence, as between a principal and agent, trustee and beneficiary, or attorney and client, when one party is legally empowered to act on behalf of the other.
inflation
An economic condition in which the money supply increases, in relation to the amount of goods available, resulting in substantial and continuous increase in prices. Inflation is associated with increasing wages and costs and decreasing purchasing power.
nonrecourse
Having no personal liability. In the case of having a loan that is nonrecourse, the lender must rely solely on the property pledged as collateral for payment in the event of default by the borrower; other assets of the borrower cannot be taken.
pass-through charges
In commercial leasing, operating expenses of a property that are paid by the tenants, usually on a pro rata basis in addition to base rent, including real estate taxes, insurance on the property, and common area maintenance (CAM) costs.
property manager
A knowledgeable professional who has the experience and skills to operate real estate and understands the fundamentals of business management. The person who supervises the day-to-day operation of a property, making sure it is properly leased, well maintained, competitive with other sites, and otherwise managed according to the owner’s objectives. The chief operating officer or administrator of a particular property or group of properties.
sublease
A lease given by a tenant or lessee to another entity to use or occupy part or all of the tenant’s leased premises for the duration (remainder) of the original tenant’s lease term. The original tenant may retain some rights or obligations under the original lease and remains liable to the owner in case of default by the subtenant.
