Resources > Glossary of Real Estate Terms
Investing in commercial real estate can be an intimidating process, and those of us involved in real estate on a daily basis often use terminology not frequently encountered in “normal” life. The following glossary provides definitions for some of words and phrases commonly encountered in the investment real estate business. Be assured, however, that we are here to answer your questions, so please call and ask any of the Capstone professionals if the definitions below do not clarify a particular term for you, or if you have questions about other words, phrases or concepts applicable to the world of commercial real estate investment. We are eager to answer your questions, and we trust that by utilizing our experience and representation, you will learn how exciting and profitable real estate investment can be.
Assessment: (1) An estimate of property value for the purpose of imposing taxes. (2) A fee imposed on property, usually to pay for public improvements such as streets and sewers.
Base Rent: A set amount used as a minimum rent in a lease which also employs a percentage or other allocation for additional rent.
C.A.M.: Common Area Maintenance
Capitalization: A process of determining the value of real property in which project income is divided by a predetermined annual rate (capitalization rate). For example, a building with annual project income of $100,000 is worth $1,000,000 at a 10% capitalization rate ($100,000/10%= $1,000,000). (See “Capitalization Rate.”)
Capitalization Rate: The rate that is considered a reasonable return on investment (on the basis of both the investor’s alternative investment possibilities and the risk of the investment). Used to determine and value real property through the capitalization process. Also called “free and clear return.” (See “Capitalization.”)
Common Area: The total area within a commercial building that is not designed for rental to tenants but that is available for common use by all tenants or groups of tenants, their invitees, and adjacent stores. Parking, malls, sidewalks, landscaped areas, public toilets, truck and service facilities, and the like are included in the common area.
Common Area Charges: Include income collected from tenants for operating and maintaining items pertaining to common areas. Commercial leases usually contain a clause requiring the tenant to pay its share of operation and maintenance on common areas and defining the basis on which charges are made and the type of cost items allocable to maintenance of the common area. Of the ways to prorate the charges among tenants, the most common are (1) a prorated charge based on a tenant’s leased area as a portion of the total leasable area of the center or the linear exposure in store frontage, (2) a fixed charge for a stated period, and (3) a variable charge based on a percentage of sales.
Comparables: Recorded sales of properties similar in size, use, construction quality, age, and often located within the same sub-market used as comparisons to determine the fair market value of another particular property.
Depreciation: (1) Decrease in the usefulness, and therefore value, of real property improvements or other assets caused by deterioration or obsolescence. (2) A loss in value as an accounting procedure to use as a deduction for income tax purposes.
Effective Rent: The rental rate actually achieved by the landlord after deducting the value of concessions from the base rental rate paid by a tenant, usually expressed as an average rate over the term of the lease.
Escalation Clause: A clause in a lease providing for increased rent at a future time. May be accomplished by several means such as (1) Fixed increase– a provision that calls for a definite, periodic rental increase; (2) Cost of living– A cost that ties the rent to a government cost of living index, with periodic adjustments as the index changes; or (3) Direct Expense– Rent adjustments based on changes in expenses paid by the landlord, such as tax increases, increased maintenance costs, etc.
Expense Stop: Provision in a lease establishing the maximum level of operating expense(s) to be paid by the landlord. Expenses beyond this level are to be reimbursed by the tenant. May be applied to specific expenses only (e.g. property taxes or insurance).
Fair Market Value: A term usually found in appraisals that attempts to determine the cash price that would likely be negotiated between a willing seller and willing buyer in a reasonable amount of time. For a sale to be considered a reflection of “Fair Market Value”, it must meet all the conditions of a fair sale whereby: (1) both buyer and seller act prudently, knowledgeably and under no necessity to buy or sell i.e., other than in a forced or liquidation sale, (2) the property must be offered on the open market for a reasonable amount of time, taking into consideration the property type and local market, and (3) payment is made in cash or terms equivalent to cash. When a sale is unlikely, i.e., when it is unlikely to be completed within 12 months, the appraiser must discount all cash flows generated by the property to ascertain the estimate of Fair Value.
Flex Space: A one or two story building with little or no common areas, high ceilings, load-bearing floors and loading dock facilities. Usually configured to allow a small amount of office space in combination with light assembly or warehouse/distribution uses.
Gross Lease: A lease that provides that the landlord pays all expenses of the leased property, such as taxes, insurance, maintenance, utilities, etc.
HVAC: The acronym for Heating Ventilating and Air-Conditioning. Refers to the equipment used to heat and cool a building.
Like-Kind Property: A tax term used in certain real property exchanges. Property must be exchanged for like kind property and the tax consequences postponed pursuant to Section 1031 of the Internal Revenue Code.
Market Value: The most probable price a property should bring a competitive and open market under all conditions requisite to a fair sale, the buyer and seller, each acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby: (1) buyer and seller are typically motivated, (2) both parties are well-informed or well-advised, and acting in what they consider their own best interests, (3) a reasonable time is allowed for exposure in the open market, (4) payment is made in terms of cash in U.S. dollars or in terms of financial agreements comparable thereto, and (5) the price represents the normal consideration for the property sold unaffected by special or creative financial or sales concessions granted by anyone associated with the sale.
Net Lease: A lease in which the tenant pays, in addition to rent, certain costs associated with a leased property, including property taxes, insurance premiums, repairs, utilities, and maintenance. There are also “net-net” (double net) and “net-net-net” (triple net) leases, depending upon the degree to which the tenant is responsible for operating costs. See also “Gross Lease.”
Operating Expenses: The actual cost of operating income-producing property, including utilities and similar day-to-day expenses, taxes, insurance and reserves for the replacement of items that wear out.
Percentage Lease: A lease, generally on a retail business property, in which the rent is calculated as a percentage of sales. There is usually a minimum or “base” rent in the event of poor sales.
Tenant Improvements: Improvements to land or buildings to meet the needs of tenants. May be new improvements or remodeling, and may be paid for by the landlord, the tenant, or shared.
Triple Net (NNN) Rent: Rent stipulated in a lease in which a tenant agrees to pay a share of the landlord’s operating expenses or real estate taxes for the building proportionate to the amount of space it occupies.