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Glossary of Real Estate Terms

Key Terms in Commercial Real Estate, Explained

Navigating commercial real estate can be complex, especially with so many industry-specific terms. This glossary is designed to help you understand the language of the industry — whether you're reviewing a lease, evaluating a portfolio, or planning a strategic move.

1031 Exchange

A tax deferral that lets you reinvest proceeds from a business or investment property sale into another similar property without paying capital gains tax right away.

Abatement

Often and commonly referred to as free rent or early occupancy and may occur outside or in addition to the primary term of the lease.

Above Building Standard

Upgraded finishes and specialized designs necessary to accommodate a tenant’s requirements.

Acre

A measure of land equal to 43,560 square feet.

Adjusted Basis

The original basis plus improvement costs minus the depreciation of the property.

American with Disabilities Act (ADA)

A federal law requiring buildings to be accessible to people with disabilities. New construction and major remodels must comply to get permits, with updates like ramps, wider stalls, and handrails.

Amortization

The gradual repayment of a loan through scheduled payments that include both principal and interest.

Anchor Tenant

The major or prime tenant in a shopping center, building, etc.

Annual Percentage Rate (APR)

The actual cost of borrowing money, expressed in the form of an annual interest rate.

Appraisal

An expert’s estimate of a property’s market value, typically based on cost, income, or comparable sales.

Appreciation

An increase in the value or price of a property or asset over time.

As-is Condition

The acceptance by the tenant of the existing condition of the premises at the time a lease is consummated, including any physical defects

Assessment

A fee imposed on property, usually to pay for public improvements such as water, sewers, streets, improvement districts, etc.

Assignee

Individual to whom a contract is assigned.

Assignor

An individual who transfers a contract to another individual.

BOMA

Building Owners and Managers Association

BOMA Standard

A nationally published standard of measuring office space. Standards are published by other organizations and can affect how the size of space is calculated.

Base Rent

A set amount used as a minimum rent in a lease with provisions for increasing the rent over the term of the lease.

Base Year

The year used as a benchmark for taxes and operating expenses in a lease, typically the year the lease begins.

Below-grade

Any structure or a portion of a structure located underground or below the surface grade of the surrounding land.

Blanket Mortgage

A mortgage covering more than one property of the mortgage.

Build Out

The construction or improvements of the interior of a space, including flooring, walls, finished plumbing, electrical work, etc.

Build-to-suit

(1) A method of leasing property whereby the developer/landlord builds to a tenant's specifications. (2) An approach taken to lease space by a property owner where a new building is designed and constructed to the tenant's specifications.

Building Classifications

Buildings are typically rated Class A, B, C, or sometimes D based on factors like age, location, construction quality, and amenities. Class A buildings are usually newer, high-end, and well-located. Ratings are subjective and can vary by market, with lower classes generally commanding lower rents.

Building Permit

Written government permission to develop, renovate, or repair a building.

Building Standard

The project specifications set out by the owner, usually in conjunction with the project architect. Details the type, quality and color selection available with respect to carpet, paint, light fixtures, wall coverings and other project finishes.

Buyer's Broker

Agent who takes the buyer as a client, and is obligated to represent their interest above all others, and owes specific fiduciary duties to the buyer.

CAP Rate

Abbreviation for Capitalization rate. This is the financial rate of return an investor would receive if the property continues to perform in perpetuity. For example, a 10% CAP rate means an investor would receive $10 every year, in perpetuity, if they paid $100 for the building. It is supposed to measure the degree of risk of the investment which would include quality of income stream, probability of continuing, and the overall market.

CPI

Consumer Price Index. Sometimes used to index rental rate escalations.

Cap

The maximum allowable increase, for either payment or interest rate, for a specified amount of time on an adjustable rate mortgage.

Capital Gain

(1) Taxable profit on the sale of an appreciated asset. (2) Capital gain is calculated as follows: total selling price of the relinquished property, less exchange expenses, less the relinquished property’s adjusted basis. The adjusted basis is the original cost, plus the cost of capital improvements, less depreciation or cost recovery deductions. Capital gains may be subject to depreciation recapture and other rules of the internal revenue service.

Capital Improvement

Any major physical development or redevelopment to a property that extends the life of the property. Examples include upgrading the elevators, replacement of the roof, and renovations of the lobby.

Cash Flow

The revenue remaining after all cash expenses are paid

Certificate of Occupancy

The government issues this official form, which states that the building is legally ready to be occupied.

Circulation Factor

Interior space required for internal office circulation not accounted for in the Net Square Footage.

Commencement Date

A date which Landlord and Tenant agree the lease actually started. This may be different than the occupancy or lease date. Often, a lease document has a commencement date exhibit that both parties sign. The commencement date often triggers the start of rent and acceptance of the property condition.

Common Area

There are two components of the term common area. If referred to with the Load Factor calculation, the common areas are those areas within a building that are available for common use by all tenants of groups of tenants and their invitees. On the other hand, the cost of maintaining parking facilities, malls, sidewalks, public toilets, service facilities and the like are included in the term "common area" when calculating the tenants pro-rata share of building operating expenses.

Common Area Maintenance (CAM)

This is the amount of additional rent charged to the tenant, in addition to the base rent, to maintain the common areas of the property shared by the tenants and from which all tenants benefit. Examples include: snow removal, outdoor lighting, parking lot sweeping, insurance, property taxes, etc. Most often, this does not include any capital improvements that are made to the property.

Concessions

Cash or cash equivalents expended by the landlord in the form of rental abatement, additional tenant finish allowance, moving expenses, cabling expenses or other monies expended to influence or persuade the tenant to sign a lease

Condemnation

The taking of private property for public use by a government unit, against the will of the owner, but with payment of just compensation under the government's power of eminent domain. Condemnation may also be a determination by a governmental agency that a particular building is unsafe or unfit for use.

Contiguous Space

Multiple suites/spaces within the same building and on the same floor that can be combined and rented to a single tenant, or a block of space located on multiple adjoining floors in a building

Default

Failure to make mortgage payments or violations other provisions of the mortgage note.

Demising Walls

The partition wall that separates one tenant's space from another or from the building's common area such as a public corridor.

Depreciation

Decrease in value to real property improvements due to wear and tear, adverse changes in the neighborhood, or any other reason.

Easement

A right-of-way created by grant, reservation, agreement, prescription or necessary implication which one has in land owned by another.

Eminent Domain

A government right to acquire private property for public use by condemnation and the payment of just compensation.

Encroachment

Unauthorized intrusion of a building or improvement such as a wall, fence, etc. onto another's land.

Escalations

Refers to how much a Tenants rent or obligation for expenses will increase. Usually quoted as a rate per foot per year,or as an annual percentage. Some are tied to the CPI. Others are just negotiated up front. Not all leases have these.

Escrow

The deposit of instruments and/or funds into the care of a neutral third party with instructions to carry out the provisions of an agreement or contract once all instruments and/or funds have been deposited. Many closings are handled by escrow agents. In this situation, the seller deposits the deed and the buyer deposits the funds necessary with the escrow agent. Once all requirements of the purchase contract are in the control of the escrow agent, the money and deed are distributed accordingly.

Fair Market Value

The likely selling price as defined by the market at a specific point in time.

Fee Simple

Highest possible degree of ownership of land. The estate allows owners to have unrestricted powers to dispose of property, and which can be left by will or inherited.

Fee simple interest

When an owners owns all the rights in a real estate parcel.

Fiduciary

A person in a position of trust or responsibility with specific duties to act in the best interest of a client. Real estate brokers and mortgage brokers are fiduciaries.

Fixed Costs

Costs, such as rent, which do not fluctuate in proportion to the level of sales or production.

Flex Space

A building providing its occupants the flexibility of utilizing the space. Usually provides a configuration allowing a flexible amount of office or showroom space in combination with manufacturing, laboratory, warehouse etc.

Foreclosure

A proceeding in or out of court to extinguish all rights, title and interest of the owner (s) of a property in order to sell the property and satisfy a lien against it.

Full Disclosure

Revealing all known facts which may affect the decision of a buyer or tenant.

Full Service Lease

A term used to describe a lease in which the stated rent amount being paid to the Landlord includes all the expenses of the building (electricity, water, gas, janitorial, RE taxes, insurance, etc..). Usually the tenant may have to pay for the overages (see term) that occur as years unfold.

Gross Lease

A lease of property whereby the landlord (i.e., lessor) pays for all property charges usually included in ownership. These charges can include utilities, taxes, and maintenance, among others.

HVAC

Heating, Ventilating and Air Conditioning

Hard Cost

The cost of actually constructing property improvements.

Holdover Tenant

A tenant who remains in possession of leased property after the lease term expiration.

Lease

A contract whereby the landlord grants the tenant the right to occupy defined space for a set period at a specific price (i.e., rent).

Leasehold

The estate or interest a tenant has as stated in the tenant's lease.

Lessee

One who possesses the right to use or occupy a property under lease agreement.

Lessor

One who holds title to and conveys the right to use and occupy a property under lease agreement.

Letter of Credit

A commitment by a bank or other person that the issuer will honor drafts or other demands for payment upon full compliance with the conditions specified in the letter of credit. Letters of credit are often used in place of cash deposited with the landlord in satisfying the security deposit provisions of a lease.

Letter of Intent

A formal method of stating that a prospective developer, buyer or lessee is interested in property.

Lien

An encumbrance against property for the payment of debt; a lien may be a mechanic's lien, mortgage, unpaid taxes or judgment.

Like Kind Property

The properties involved in a tax deferred exchange must be similar in nature or characteristics. Like kind real estate property is basically any real estate that isn’t your personal residence or a second home.

Load Factor

The common area calculation used to convert usable square foot measurements (usually, the physical space actually occupied by the tenant) to rentable square foot calculations. Usually includes a pro rata share of restrooms, lobby and common hallways.

Loss Factor

What percentage of the gross area of a space is lost due to walls, elevator, etc. Rule of thumb in Manhattan is approximately 15%.

Market Price

The actual selling or leasing price of a property.

Market Value

The expected price that a property should bring if exposed for lease in the open market for a reasonable period of time and with market savvy landlords and tenants.

Mechanics Lien

A lien created by statute for the purpose of securing priority of payment for the price or value of work performed and materials furnished in construction or repair of improvements to land.

Modified Gross Lease

Contrasted with a full service lease, a modified gross lease has the tenant paying directly some of the expenses. Typically, it is where the electric and water are seperately metered and the tenant pays directly to utility. This may be favorable in controlling expenses for frugal lessees. In comparing lease rates, make sure you consider who is responsible to pay for what.

Mortgage

A lien or claim against real property given as security for a loan. It is a two party agreement as apposed to the three-party agreement of a deed of trust.

Mortgagee

The lender of money or the receiver of the mortgage document.

Mortgagor

The borrower of money or the giver of the mortgage document.

Net Lease

Also called triple net lease. The lessee pays not only a fixed rental charge but also expenses on the rented property, including maintenance.

Net Operating Income (NOI)

A before-tax computation of gross revenue less operating expenses and an allowance for anticipated vacancy. It is a key indicator of financial strength.

Net Present Value (NPV)

Net present value usually is employed to evaluate the relative merits of two or more investment alternatives. It is calculated as the sum of the total present value of incremental future cash flows plus the present value of estimated proceeds from sale. Whenever the net present value is greater than zero, an investment opportunity generally is considered to have merit.

Non-Disturbance Agreement

The tenant signs this to prevent himself from being evicted if the property owner does not pay its mortgage to the bank.

Operating Expenses

The actual costs associated with operating a property including maintenance, repairs, management, utilities, taxes and insurance.

Option

A right given to purchase or lease a property upon specified terms within a specified time. If the right is not exercised, the option holder is not subject to liability for damages. If the holder of the option exercises it, the grantor of option must perform the option's requirements.

Options to Renew

The right of a tenant to extend their occupancy beyond the original term. The rental rate may or may not be pre-set. Can be useful for a Tenant so they are not forced to relocate.

Original Basis

The purchase price of a property. It is used to calculate capital gains or losses for tax purposes.

Parking Ratio

The number of parking spaces divided by the total size of the building. A ratio of 1:250 means there is one parking space for every 250 square feet in the building. The lower the ratio, the more parking spaces there are, the happier the tenants are.

Pass Throughs

Refers to expenses that are incurred on the property that are passed from the Landlord to the tenant. Both Tenant and Landlord should have a lease that is clear on who pays what, when.

Pro-rata Share

An amount calculated by dividing the square foot of the Tenants space by the entire building size. A 1,000 sq ft Tenant would have a 10% pro-rata share of a 10,000 sq ft building. Attention should be paid to variances in occupancy levels, particularly as it relates to expense overages.

Punch List

An itemized list documenting incomplete or unsatisfactory items after the contractor has notified the owner that the tenant space is substantially complete

Quiet Enjoyment

The right of an landlord or tenant to use the property without disturbances.

Real Property

Land and any capital improvements (e.g., buildings) erected on the property.

Rentable Square Feet

Usually the space measurement which incorporates both the "usable square foot" measurement as well as the common area. The difference between usable and rentable is generally between 10% - 15%.

Right of First Refusal

A lease clause giving a tenant the first opportunity to lease additional space that may become available in a property at the same price and under the same terms and conditions as those contained in a third party offer that the owner has expressed willingness to accept.

SIOR

Society of Industrial and Office Realtor. One of the oldest professional commercial designations in the United States. Approximately 1,500 members worldwide. Emphasis on corporate office and industrial real estate.

Sale-leaseback

An arrangement by which the owner occupant of a property agrees to sell all or part of the property to an investor and then lease it back and continue to occupy space as a tenant.

Setback

The distance a building must be set back from the property lines in accordance with local zoning ordinances or deed restrictions.

Site Plan

A detailed plan which depicts the location of improvements on a parcel of land which also contains all the information required by zoning ordinances.

Slab

The exposed wearing surface laid over the structural support beams of a building to form one of the floor(s) of the building or laid slab on grade in the case of non-structural ground level concrete slab.

Soft Cost

The portion of an equity investment other than the actual cost of the improvements themselves that may be tax-deductible in the first year.

Space Plan

A graphic representation of a tenant's space requirements, showing all wall and door locations, room sizes, and sometimes furniture layout.

Stacking Plan

Schematic illustrating tenancies on a floor-by-floor basis. Useful in forecasting how to accommodate growth tenants and identifying larger blocks of space.

Sublease

A rental agreement or lease between a tenant and a new tenant (called a sublessee) who will either share the rental or take over from the first tenant. The sublessee pays rent directly to the tenant. The tenant is still completely responsible to the landlord for the rent and for any damages, including those caused by the sublessee. Most landlords prohibit subleases unless they have given prior written consent.

Subletting

The leasing of space from one tenant to another tenant.

Survey

The process by which a parcel of land is measured and its boundaries and contents are ascertained.

Tax Base

The assessed valuation of all real property that lies within a taxing authority's jurisdiction. When multiplied by the tax rate, it determines the amount of tax due.

Tax Lien

A statutory lien for nonpayment of property taxes that attaches only to the property upon which the taxes are unpaid.

Tenant Improvement (TI) Allowance

Defines the fixed amount of money contributed by the landlord towards tenant improvements.

Tenant Improvements

Improvements made to the leased premises by or for a tenant.

Tenant Representation

A service in which a tenant/buyer hires a professional real estate agent to represent and negotiate the inner-workings of a transaction on their behalf.

Time is of the Essence

A clause, which if included in a contract, makes failure to perform by a specific date a material breach or violation of the contract.

Triple Net Lease

A lease requiring tenants to pay all utilities, insurance, taxes, and maintenance costs.

Turn Key

Landlord-provided tenant improvements, usually including everything (walls, doors, floor and window coverings, electrical) except telecommunications wiring and tenant furniture.

Usable Square Feet

That space measurement actually contained within the demised premises. If the entire building is occupied by a single user, the rentable and usable square foot calculations may be the same.

Vacancy Factor

The amount of gross revenue that pro forma income statements anticipate will be lost because of vacancies, often expressed as a percentage of the total rentable square footage available in a building or project.

Variance

An exception to a zoning ordinance, usually granted by a local government.

Work Letter

An amount of money that a landlord agrees to spend on the construction of the interior of a space per the lease, usually negotiated.

Zone

An area, delineated by a governmental authority, which is authorized for and limited to specific uses.

Zoning Ordinance

A law by a local governmental authority (e.g., city or county) that sets the parameters for which the property may be put to use.

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