Glossary of Commercial Real Estate and Commercial Real Estate Finance Terms

As far as vocabulary goes, there are hundreds of important terms to know to be on the level of a seasoned commercial real estate professional.

This page contains the exhaustive set of Key Terms included across all of the individual chapter pages. You can click on any term to be taken to the associated chapter page.

To search, scroll down, or use Ctrl+F or Cmd+F.

 

Prerequisite I: Discounted Cash Flow & Net Present Value Analyses

 

Time Value of Money

States that a dollar amount received today (referred to as Time 0) is worth more than that same nominal dollar amount received tomorrow or at any other point in the future.

 

Discounted Cash Flow Analysis (DCF)

Postulates that the value of a property is equal to its expected future cash flows discounted to present dollars; premised upon two basic concepts: 1) the only source of value for a property is its ability to generate future cash flows, 2) a dollar received today is more valuable than a dollar received tomorrow.

 

Present Value

Value in the present of a future projected amount of money, reduced by the appropriate discount rate.

 

Future Value

How much a dollar amount today is expected to be worth some time in the future.

 

Risk-Adjusted Return

A present value amount that appropriately takes into account the inherent risk in a cash flow stream.

 

Compound Return

The rate of return, usually expressed as a percentage, that represents the cumulative effect that a series of gains or losses have on an original amount of capital over a period of time.

 

Discount Rate

The required expected annual rate of return that is used to reduce future projected cash flows to their present values.  The discount rate for a property is theoretically composed of four factors: the long-term risk-free rate (approximated by the yield on a 10-year U.S. Treasury bond), expected economy-wide inflation, the risk premium associated with unexpected outcomes in the property’s N.O.I., and the risk premium associated with the property’s illiquidity relative to a 10-year Treasury bond.

 

Discount Factor

A factor which, when multiplied by a predicted future cash flow from a loan or some other form of debt, gives its present value.

 

Discounted

Future cash flows are valued at less than par value because of the time value of money.

 

Unlevered Cash Flows

Property-level cash flows irrespective of the financing structure.

 

Equity Value

The value of a property when all of its liabilities are subtracted.

 

Reversion / Terminal Value / Residual

Estimated property sale value; theoretically captures the value of all future cash flows beyond the point of sale; to estimate the sale value you will generally apply a cap rate to a stabilized N.O.I.

 

Risk Premium

The return in excess of the risk-free rate of return an investment is expected to yield; an asset’s risk premium is a form of compensation for investors who tolerate the extra risk, compared to that of a risk-free asset, in a given investment.

 

Gordon Growth Model

Also known as the Gordon Model, converts perpetuity DCF analysis for a cash stream growing at a constant rate into a simple cap rate approximation by dividing stabilized N.O.I. by the difference between the property’s discount rate (r) and the N.O.I. growth rate (g).

 

Net Present Value (NPV)

The present value of the cash flows the investment generates minus your initial investment.

 

 

 

Prerequisite II: Internal Rate of Return

 

IRR

The IRR, or internal rate of return, is the annual rate of return that generates a NPV of zero for a stream of expected (or actual) cash flows; that is, the present value of the expected income exactly equals the present value of the investment.  Generally thought of as the average annual return to equity over an investment period, as measured after exit.  Can be measured on an unlevered or levered basis, the former assuming no use of debt financing, and the latter assuming use of debt.

 

Levered IRR

Also known as the equity IRR, this is the single discount rate, expressed as a percentage, that sets the NPV of expected future equity cash flows equal to zero. Generally thought of as the average annual compounded return to equity as measured after exit.

 

Unlevered IRR

Also known as property-level IRR, this IRR assumes no use of debt financing in an investment. It is the annual rate of return that generates a NPV of zero for a stream of expected (or actual) cash flows.  Generally thought of as the average annual return to equity over an investment period, as measured after exit.

Prerequisite III: Amortization Fundamentals

 

Amortization

The repayment of principal borrowed from a lender.

 

Principal

The capital amount borrowed from a lender.

 

Loan Maturity

The length of time over which loan principal can be outstanding. Also known as the loan term.

 

Loan Term

The length of time over which principal can be outstanding. Also known as the loan maturity.

 

Interest-Only Loan

Also known as a zero-amortization loan or bullet loan, a loan on which only interest is paid on the outstanding principal until the time of the final monthly payment, at which point the entire principal balance is also repaid.

 

Bullet Payment

If the loan term exceeds the amortization term, a final debt service payment that repays all remaining principal.

 

Positive Amortization

Repayment of the loan principal with each loan payment, which reduces lender repayment risk; results in the loan balance decreasing with each payment.

 

Amortization Schedule

The contractual schedule of principal and interest payments owed by the borrower to the lender for the principal borrowed.

 

Annuity Factor

The interest rate- and amortization term-based factor whose reciprocal is the mortgage constant. The mortgage constant is the percentage of the original loan principal amount that when multiplied by the loan principal amount, gives you the annual constant payment (comprised of both principal and interest).

 

Mortgage Constant

The percentage of the original loan principal amount, that when multiplied by that full principle amount, produces the constant annual loan payment amount inclusive of interest and principal.  The mortgage constant is solved for by taking the reciprocal of the interest rate- and amortization term-based annuity factor.

 

Fully-Amortizing Loan

A loan for which the term and amortization schedule are equal; the loan is fully repaid over the course of the term through the monthly payments.

 

Hybrid Amortization Schedule

A loan amortization schedule that is not constant throughout the entire loan term (e.g., an amortizing loan with a front-end interest-only period).

 

Constant Amortization Loan

A loan in which the annual amortization dollar amount remains constant but the total payment amount changes.

 

Construction Loan

A short-term loan provided by a lender for the purpose of new property construction.  The principal amounts needed for incurred project costs are borrowed monthly (through a loan draw request) and loan interest accrues (accumulates) and is added to the loan principal balance. As such, a construction loan is a form of a negative amortization loan.

 

Draw Request

A periodic request from a construction loan borrower that the lender advance funds, based on project costs incurred for which the borrower has been invoiced or for which they have already paid.

 

Accrued Interest

Construction loan interest amounts that are charged but allowed to accrue (accumulate) and be added to the loan principal balance, instead of being paid current each month. Also known as capitalized interest.

 

Capitalized Interest

Construction loan interest amounts that are charged but allowed to accrue (accumulate) and be added to the loan principal balance, instead of being paid current each month. Also known as accrued interest.

 

Current-Pay Interest

Interest payments made monthly.

 

Negative Amortization Loan

A loan in which the outstanding principal balance increases over time instead of decreases.

 

Funded Interest Reserve

The portion of the overall negative amortization loan amount that is reserved for the eventual total interest amount.

 

 

Chapter 2 | What is Real Estate and Who Owns It?

 

Greenfield Land

Never-developed land, existing as farmland or pasture.

 

Infill Land

Primarily in urban areas, is generally vacant or undeveloped, and is surrounded by developed parcels of land. Often, infill land has already been developed but is currently vacant.

 

Brownfield Site

A site that formerly had an industrial use that may currently be environmentally impaired.

 

Tax Lots

A parcel of real property on which property taxes are levied.

 

Property Lines

The boundary line between two pieces of property.

 

Titles

A bundle of rights in a piece of property in which a party may own either a legal interest or equitable interest.

 

Strip Retail Center

Also known as a strip center, a commercial property that is comprised of several spaces that can be used for retail stores or services for the public.

• Anchored: the center has one or more large retail stores, such as Walmart, Publix, or Safeway, that attracts customers to the center
• Unanchored: the center lacks large retail stores, and is a combination of small inline stores
• Inline Stores: ranging from 600-10,000 square feet, such as nail salons, Chinese restaurants, clothing boutiques, pet stores, dentists, etc.

 

Stand-Alone Centers

A retail property with a single store such as Walmart, Target, or Kmart and no other stores.

 

Outparcels

A freestanding parcel of commercial real estate located in the front of a larger shopping center or strip mall.

 

Community Retail Centers

Generally 150,000-350,000 square feet; have several anchors such as a supermarket and a drug store, as well as several specialty stores such as Foot Locker and smaller inline stores; include restaurants to; can be laid out as a single center or as two or three contiguous strip centers; located on local artery roads.

Power Center

Has 3-5 major “big box” retailers such as a Walmart, Home Depot, Fresh Foods, or Staples, but few inline stores; center may also contain outparcels, individually-owned shops.

 

Common Area Maintenance (CAM)

Upkeep of shared landscaping, sidewalks, and parking areas.

 

Regional Malls

Generally 400,000-2,000,000 square feet (more than 30 football fields) and usually have 2-6 anchor stores such as Nordstrom and Macy’s; inline stores located between the anchors.

 

Clear Height

The lowest vertical space which exists without any obstruction such as lights or support beams.

 

Superflat Floors

Industrial facility floors that have strict transverse and longitudinal tolerances.

 

Light Assembly

An industrial property that combines warehouse, product assembly, and office space, and may be multi-tenanted; usually fairly simple structures that allow easy reconfiguration.

 

Dropped Ceilings

A secondary ceiling hung below the main (structural) ceiling; often used to conceal the building’s infrastructure, such as electric wiring, piping, etc.

 

Flex Building

An easily convertible industrial building structure.

 

Bulk Warehouses

Very large buildings that range from 50,000-1,000,000 square feet; located near major transportation hubs for ease of truck access; concerned with cubic square footage, as stacking height is critical; must be able to accommodate multiple trucks entering and exiting the building loading docks.

 

Central Business District (CBD)

The downtown or center of commercial activity in a city.

 

Highrise

Relating to or being a tall building that is equipped with elevators and usually has at least six stories.

 

Class A

These buildings represent the highest quality buildings in their market; generally the best looking buildings with the best construction, and possess high quality building infrastructure; well-located, have good access, are professionally managed.

Class B

Compared to Class A, less well located, smaller, older, fewer modern amenities, and is of a lesser design.

 

Class C

Space comprises the remainder of the properties that aren’t Class A or B.

 

Chevron

V-shaped corner design.

 

Midrise Apartments

5-9 stories, steel framed, and tend to be an urban infill product; have 30-110 units and are elevator serviced.

 

Subleasing

Leasing of unused leased space by the tenants; sometimes forbidden by the landlord.

 

Direct Vacant Space

Inventory that is not currently occupied; subtenant space is excluded from calculation.

 

Condominiums

Each suite is individually owned (generally by the tenant of the space).  Typically residential in the U.S., but some commercial condominiums do exist, such as the ground floor retail of a mixed-use building, or the suites of a medical office building.

 

Suburban Garden Apartments

Typically 3-4 story wood structures, with 50-400 units, without elevators, and with surface parking; middle units least desirable.

Full Service Hotels

Includes urban CBD and resort properties at high price points; provide room service, restaurants, banquet space, convention services, and food and beverage services; also, spas and limited retail.

 

Limited Service Hotels

Usually boutique properties; they are smaller, and do not offer amenities such as room service, restaurants, banquet service, or convention space.

 

Extended Stay Hotels

Larger rooms, small kitchens, and provide limited services; designed for people staying a week or more, and attempt to make guests feel like they are at home.

 

Climate Controlled Structures

Self storage properties that provide conditioned space. They are more expensive to build, operate, and rent, compared to non-climate controlled structures.

 

Non-Climate Controlled Structures

Self-storage spaces that are not temperature controlled.

 

Gross Square Footage

Abbreviated as GSF, refers to the total area of a building, usually measured from inner wall to inner wall, with no deductions for obstructions or non-leasable space.

 

Rentable Square Footage (RSF)

Also known as Net Leasable Square Footage (LSF), refers to the floor area that can be leased.

 

Loss Factor

The difference between gross and net leasable footage.

 

Efficiency Factor

The proportion of a property’s rentable square footage to its gross square footage. Equal to 1 – Loss Factor.

 

Floor Area Ratio (FAR)

The ratio of a building’s above-grade gross floor area (both vertically and horizontally) to the area of the lot upon which the building is constructed.

 

Floor Space Index (FSI)

Analogous term for FAR used in Europe. The ratio between the area of a covered floor (built up area) to the area of that plot (land) on which a building stands.

 

Setback Restrictions

Building restrictions on the distance which a building or other structure is set back from a street or road, a river, or other stream, flood plain, or any other place which is deemed to need protection.

 

Economic Occupancy

The percentage of leasable space that is currently generating rent.

 

Physical Occupancy

The percentage of space that is physically occupied, whether or not the space generates rent.

 

Stacking Plan

A visual representation of an office building’s leases.

 

 

 

Chapter 3 | International Real Estate Investing

 

Currency Hedge

the purchasing of a contract to protect against fluctuations in currencies detrimentally impacting an international property investment prior to closing on the property, or relating to the property’s local currency operating cash flows.

 

 

Chapter 4 | The Fundamentals of Commercial Leases

 

Lessor

The owner/landlord of a property.

 

Lessee

The tenant of leased space at a property.

 

Variable Expenses

Property operating expenses that change in proportion with the level of building occupancy. Examples include:

– electricity
– telephone service
– sewer rents and charges
– water and oil/gas
– repairs and maintenance
– janitorial and cleaning supplies and service
– elevator maintenance contracts
– shuttle bus service and maintenance
– fitness center equipment maintenance and replacement
– accounting fees for reimbursements
– common area snow removal (variable due to unpredictability)
– common area landscaping and plants.

 

Fixed Expenses

Property operating expenses that do not change based on the level of building occupancy. Examples include:

– management fees
– management office rental value
– common area electricity
– supplies, uniforms, dry cleaning
– insurance premiums
– security
– concierge
– painting of common areas
– building employee wages and benefits
– payroll taxes
– legal fees
– window cleaning
– maintenance contracts for boilers, HVAC and other mechanical, plumbing and electrical equipment
– emergency generator service and maintenance
– licenses and permits
– trash removal/recycling
– pest control.

 

Cost Recoveries (Reimbursements)

Tenant repayment to the landlord for tenant suite-specific expenses initially borne by the landlord.

 

Base Year

The year in the lease at which base levels of operating expenses are set, and above which increases in expenses may be borne by the tenant.

 

Base Rent

The initial year’s rent for leased space.

 

Base Rent Escalations

How the base rent changes during the life of a lease; may be based upon inflation measures; may grow at specified dollar or percentage increments over the lease; or there may be no rent escalations in the lease at all.

 

Percentage Rent/Overage

A form of additional rent that specifies the percentage of the tenant’s gross sales revenue that the landlord receives in addition to the base rent and escalations; helps to align retail tenant interests with those of the landlord.

 

Additional Rent

Any rent obligation of the tenant to the landlord under the terms of a lease other than base rent and base rent escalations. Percentage rent is a form of additional rent.

 

Common Areas

Property spaces available for use by all tenants, such as the lobby, hallways, roof deck, parking and outdoor landscaped areas.

 

Common Area Maintenance (CAM)

Upkeep of shared spaces such as the lobby, sidewalks, parking areas and outdoor landscaped areas.

 

Expense Caps

An upper bound specified in the lease that limit the extent to which operating expense items can rise during any single year, or over the term of the lease. These caps may be negotiated for any component of operating costs, including utilities, property taxes, and insurance.

 

Expense Stops

The defined base year operating expense amount above which increases in expenses may be borne by the tenant.

 

Tenant Improvements

Also known as T.I., interior construction performed to make a tenant’s space fully operational.

TI Allowance

The landlord’s cash contribution to the tenant’s approved scope of work; typically quoted in $ per square foot.

 

Free Rent/Rent Abatement

No rent is paid during the first weeks, months, or years of the lease. A negotiated concession used to induce a tenant to agree to other lease terms.

 

Net Rent

Rent after all operating costs are paid.

 

Triple Net Lease (NNN)

A lease structure, most common in retail properties, in which the tenant pays all operating (and frequently capital) costs, including insurance, utilities, and property taxes in addition to the contractual base rent and escalations.

 

Net Leases

Leases that make the tenant bear the cost of certain operating and capital items, shifting the risk of increases in such costs from the landlord to the tenant, altering the ownership risk of the property.

 

Net Effective Rent

Annual rent, net of: unrecovered maintenance and operating costs (property taxes, insurance, utilities, etc.), the amortized value of free rent, the amortized value of leasing commissions, and the amortized value of TIs.

 

Going Dark

When a tenant vacates a space but still pays their rent. This prevents potential competitors from moving into the space.

 

Expansion Rights/Option

The lease or purchase option of additional future space near or adjacent to the tenant’s current location in order to satisfy the tenant’s growth at the same location.

 

Non-Compete Clause

A lease term that prevents landlords from leasing to competitors of the lessee.

 

Co-tenancy Clause

A clause that states a tenant will only lease if other named tenants remain in the center.

 

Radius Restrictions

Restrictions imposed by the landlord that prohibits the tenant from opening other stores within a certain distance of the subject property.

 

 

Chapter 5 | Property-Level Pro Forma Analysis

 

Gross Potential Revenue (GPR)

The revenue you would receive if a building’s leasable space was 100% occupied, and all square footage was leased at market rent.

 

Net Base Rental Revenue

GPR net of vacancy.

 

Stabilized Property / Stabilized N.O.I.

A property at full occupancy, except for an expected “systemic” level of vacancy, whose N.O.I. is flat or growing relatively smoothly year-over-year. For instance, an apartment building with 4% yearly vacancy and 2.5% yearly N.O.I. growth.

 

Tenant Turnover

Churn in property occupancy when a tenant lease expires and they vacate.

 

Ancillary Income

Income generated from all other activities conducted at the property other than rental of suite square footage.

 

Sensitivity Analyses

Financial analyses that change one or more assumptions to explore the impact of these changes on calculated outputs.

 

Base Rent

The first year’s rent for a leased space.

 

Percentage Rent / Overage

A form of additional rent that specifies the percentage of the tenant’s gross sales revenue that the landlord receives in addition to the base rent and escalations; helps to align retail tenant interests with those of the landlord.

 

Breakpoint (Revenue Threshold)

A predetermined revenue threshold over which a percentage of incremental sales are paid to the retail landlord.

 

Total Rental Income

Net base rental revenue plus any percentage rent.

 

Expense Reimbursements / Tenant Reimbursements / Recoverable Expenses / Cost Recoveries / Pass-Throughs

Payments defined in the leases, made by tenants to the landlord for specified property expenses such as insurance, property taxes, security, and utilities.

 

Common Area Maintenance / CAM costs

The costs associated with the operating and maintenance of areas and services that benefit all tenants such as the lobby, hallways, parking areas, security and snow removal.

 

CAM billings

The portion of CAM costs that are billed to tenants.

 

Assessed tax value

The local government’s valuation of a property, to which they apply a millage rate to determine your real estate tax obligation.

 

Property tax billings

The portion of property taxes billed to tenants.

 

Credit Loss (“Bad Debt”)

The anticipated non-payment of rent and other revenues; usually 1-2% of the Expected Gross Income; rises in a weak economic environment or as your tenant quality profile deteriorates.

 

Total Operating Income

Gross Income less Credit Loss.

 

Operating Expenses

The costs required to effectively operate and maintain the property.

 

Reimbursable Expenses

Operating expenses initially borne by the landlord that are paid for at least in part by one or more tenants.

 

Millage Rate

The amount per $1,000 used to calculate real estate taxes.  The millage rate is multiplied by the property’s assessed tax value to generate the tax liability.

 

Assessed Tax Value

The dollar value assigned to a property to calculate applicable real estate taxes.

 

Non-Reimbursable Expenses

Operating costs without the negotiated right to reimbursement from tenants.

 

Total Operating Expenses

The sum of all reimbursable and non-reimbursable operating expenses.

 

Net Operating Income (N.O.I.)

Total Operating Income less Total Operating Expenses; summarizes the property’s ability to generate income, irrespective of capital structure.

Capital and Leasing Costs (Capital Items)

The collection of property-related expenditures critical to attracting and retaining target tenants, and to maintaining both a high property operating standard and the integrity of the physical plant. Examples include roof repair, elevator replacement, boiler replacement, and parking structure repair.

 

Capital Reserves (Replacement Reserves)

Funds set aside that provide for the periodic major repair or replacement of building components that wear out more rapidly than the building itself. Senior lenders require minimum capital reserves be set aside and maintained to ensure continued property competitiveness.

 

Tenant Improvements

Also known as T.I., interior construction performed to make a tenant’s space fully operational.

 

TI Allowance

Tenant improvement scope of work budget provided by the landlord.

 

Leasing Commissions (LCs)

The fees the landlord pays to a broker or leasing company that leases their space.

 

Capital Expenditures

Abbreviated as Cap Ex, dollars spent by the landlord for the repair or replacement of major property elements not located in tenant premises, such as the boiler in the basement, the air conditioning chiller on the roof, elevators, and the parking structure. Capital expenditures reflect the property’s actual wear and tear, for which you must spend money to keep the property in competitive condition.

 

Unlevered Cash Flow

N.O.I. after the deduction of capital and leasing costs; “unlevered” refers to the lack of impact of any debt financing in the calculation of the cash flow, and as such, like N.O.I., unlevered cash flow also reports property performance irrespective of capital structure.

 

N.O.I. After Normal Reserves

Also known as Adjusted N.O.I., this is unlevered cash flow in a forward-looking financial modeling context, where the adjustment to N.O.I. references the deduction of normal reserves for capital items.

 

Depreciation

An IRS-based allocation mechanism providing the multi-period schedules on which you are allowed to deduct the cost of capital expenditures for income tax calculation purposes.

 

Income Tax Shield

An accounting method that reduces taxable income based on IRS rules, such as depreciation of capital expenditures.

 

Income Tax Liability (Tax Liability)

What the property owner will owe in annual income tax.

 

Before-Tax Levered Cash Flow

Unlevered cash flow minus total debt service (interest payments and any amortization).

 

Taxable Income

The income amount to which the tax rate is applied. Calculated as before-tax levered cash flow less depreciation, plus TIs and cap ex and loan principal amortization, less loan points amortization.

 

Depreciable Value

The amount of the property purchase price that can be depreciated. Land is not depreciable in the U.S.

 

Depreciable Life

The amount of time over which an asset can be depreciated: 27.5 years for residential properties and 39 years for all other property types. Land is not depreciable in the U.S.

 

Cost Segregation Analysis

An analysis of all of the unique depreciable elements of a property that tracks the individual depreciation amounts based on the appropriate schedules.

 

Levered Cash Flows

The expected before-tax and after-tax cash flows exclusively to equity.

 

Loan Points (Origination Costs)

The fee paid to the lender to compensate for the lender’s underwriting costs.

 

Pass-Through Entity

A legal entity structure, such as a Limited Liability Company (LLC) or Limited Legal Partnership (LLP), that allows for the tax liability of a property to be passed through to the individual members of the entity.

 

Loss Carry-Forward

The ability for a property owner can use a prior year cumulative Taxable Losses to offset subsequent year tax liabilities.

 

 

Chapter 6 | Financial Modeling

 

Financial Modeling

The systematic projection and analysis of expected outcomes for an investment.

 

Key Performance Indicators (KPIs)

Transaction KPIs include net cash flow (net profit), internal rate of return (average compounded annual return), net present value (value created in discounted dollars), multiple on equity (a.k.a. equity multiple and multiple on invested capital; KPIs are viewed in concert with one another; each KPI tells you something different about the performance of your invested capital.

 

Multiple on Equity / Equity Multiple / Multiple on Invested Capital

An equity KPI that tells you how many times you get your investment back. A multiple on equity of 1.0x means you simply broke even and did not make any profit. A multiple of 2.0x means you doubled your money.

 

Landlord Concessions

Marketing techniques that property owners employ to get a tenant to sign a lease, such as free rent, lower security deposits, free toasters, etc.

 

Net Base Rental Revenue

Property gross revenues less vacancy.

 

Debt Service Expense

Periodic (typically monthly) principal and interest payments made on a loan.

 

Debt Service Coverage Ratio (DSCR)

Annual N.O.I. divided by annual Debt Service Expense.

 

Variable Operating Expenses

Property operating expenses that change in proportion with the level of building occupancy. Examples include:

– electricity
– telephone service
– sewer rents and charges
– water and oil/gas
– repairs and maintenance
– janitorial and cleaning supplies and service
– elevator maintenance contracts
– shuttle bus service and maintenance
– fitness center equipment maintenance and replacement
– accounting fees for reimbursements
– common area snow removal (variable due to unpredictability)
– common area landscaping and plants.

Fixed Operating Expenses

Property operating expenses that do not change based on the level of building occupancy. Examples include:

– management fees
– management office rental value
– common area electricity
– supplies, uniforms, dry cleaning
– insurance premiums
– security
– concierge
– painting of common areas
– building employee wages and benefits
– payroll taxes
– legal fees
– window cleaning
– maintenance contracts for boilers, HVAC and other mechanical, plumbing and electrical equipment
– emergency generator service and maintenance
– licenses and permits
– trash removal/recycling
– pest control.

 

Replacement Reserves (Capital Reserves)

Funds set aside that provide for the periodic major repair or replacement of building components that wear out more rapidly than the building itself. Senior lenders require minimum capital reserves be set aside and maintained to ensure continued property competitiveness.

 

After-Tax Cash Flow

Before-Tax Levered Cash Flow less Income Tax Liability.

 

Residual Value / Reversion / Terminal Value

Estimated property sale value; theoretically captures the value of all future cash flows beyond the point of sale; to estimate the sale value you will generally apply a cap rate to a stabilized N.O.I.

 

Gross Sales Price / Gross Sales Proceeds

The negotiated property sale price before any potential deductions.

 

Exit Cap Rate / Sale Cap Rate

The cap rate, expressed as a percentage, at which a property’s sale is valued, which is equal to the year 1 N.O.I. yield on the Purchase Price. Also known as the going-out cap rate or residual cap rate.

 

Going-out Cap rate / Residual Cap rate

The cap rate, expressed as a percentage, at which a property’s sale is valued, which is equal to the year 1 N.O.I. yield on the Purchase Price. Also known as the exit cap rate or sale cap rate.

 

Going-in Cap Rate / Purchase Cap Rate

A property buyer’s year 1 yield of N.O.I. on the Purchase Price.

 

Net Sales Proceeds

Property sale proceeds remaining after Selling Costs, Income Tax Liability, and any outstanding mortgage balance have been deducted from the Gross Sales Price.

 

Selling Costs

Primarily comprised of the sales Brokerage Commission, but also include jurisdictional property transfer and recordation taxes.

 

Net Sales Price

A property’s Gross Sales Price less Selling Costs.

 

Brokerage Commission

The commission an investment sales broker receives for closing a property purchase and sale transaction.

 

Comparable Transactions

Generally referred to as comps, transactions used in a valuation method for a subject property in which one or more recently sold similar assets help determine the value of the subject property.

 

 

Chapter 7 | Real Estate Due Diligence Analysis

 

Due Diligence

The investigation made by a prospective financial stakeholder prior to putting their capital at risk.

 

Estoppel Certificates

A signed statement by a tenant certifying that a lease exists, confirming certain lease terms such as reimbursement obligations, and stating that there are no defaults, and that rent is paid to a certain date.

 

Property Title Search

The process of retrieving documents evidencing events in the history of a piece of real property to determine relevant interests in and regulations concerning that property.

 

Title Surveys (reports)

A comprehensive investigation and evaluation of significant factors affecting and influencing boundary locations, ownership lines, rights of way and easements within or immediately surrounding a certain lot, parcel, or quantity of real estate.

 

Encumbered

Encumbered real estate has a lien, charge, or other financial liability attached to the property.

 

Unencumbered

When a property is free and clear of any encumbrances such as creditor claims or liens; an unencumbered asset is much easier to sell or transfer than one with an encumbrance.

 

Lien

A right to keep possession of property belonging to another person until a debt owed by that person is discharged.

Security Interest

An enforceable claim or lien on a property created by a security agreement such as a mortgage.

 

Easement

A right to cross or otherwise use someone else’s land for a specified purpose.

 

Appurtenant Easement

The right for someone to cross through the property for transportation, ingress, or egress purposes.

 

Superfund Law

U.S. federal environmental law that states that a property’s current owner is liable for the environmental damage on the site regardless of whether the current owner was the source or not.

 

Possible Maximum Loss Test (PML)

A test of a building’s structural integrity. The higher the building’s score, the worse its structural integrity.

 

Reassessment

The act of having the jurisdiction re-evaluate a property’s current assessed value given new information or circumstances related to the property.

 

Capital Expenditure Reserves

The cash amounts set aside for funding future capital projects such as major renovations or roof or elevator replacement

 

Installment Sale

Payment of a property’s purchase price in a piecemeal manner over time.

 

Assumable Debt

Debt on a property that can be transferred from the current owner to a new owner along with the transfer of title.

 

Trade Area Analysis

A study conducted for contemplated retail developments to determine whether the area is “over-retailed” (over-served by other retail properties) or “under-retailed” (under-served by retail).

 

 

Chapter 8 | Analyzing Metropolitan Long-Term Growth Patterns

 

Agglomeration Economies

the benefits that come when firms and people locate near one another together in cities and industrial clusters.

 

 

 

Chapter 9 | The Use and Selection of Cap Rates

 

Income Multiple Analysis / Cap Rate Valuation

Estimates the value of a property by multiplying next year’s “stabilized” N.O.I. by the price-to-N.O.I. multiple for which comparable properties are selling today. The price-to-N.O.I. multiple is the reciprocal of the cap rate.

 

Capitalization Rate

More commonly referred to as a cap rate, a property’s “stabilized” N.O.I. divided by its value (purchase price, either actual or anticipated), expressed as a percentage. The cap rate is the inverse (reciprocal) of the income multiple.

 

Stabilized Property

A property at full occupancy, except for an expected “systemic” level of vacancy, whose N.O.I. is flat or growing relatively smoothly year-over-year. For instance, an apartment building with 4% yearly vacancy and 2.5% yearly N.O.I. growth.

 

Stabilized N.O.I.

N.O.I. for a stabilized property (a property at full occupancy, except for an expected “systemic” level of vacancy, where the N.O.I. is flat or growing relatively smoothly year-over-year, e.g., an apartment building with 4% yearly vacancy and 2.5% yearly N.O.I. growth).

 

Normalized Reserves / Normal Reserves

An approximate “normal” level of capital reserves for an operating property.

Adjusted N.O.I.

Unlevered cash flow where the adjustment to N.O.I. is the deduction of normal reserves.

 

Replacement Cost

The hypothetical amount it would take to acquire the land and construct an existing property today, including the cost of the LCs and TIs needed to attain the exact same tenant profile.

 

Perpetuity

A hypothetical never-ending cash flow stream.

 

Gordon Growth Model

Also known as the Gordon Model, converts perpetuity DCF analysis for a cash stream growing at a constant rate into a simple cap rate approximation by dividing stabilized N.O.I. by the difference between the property’s discount rate (r) and its N.O.I. growth rate (g).

 

Discount Rate

The required expected annual rate of return that is used to reduce future projected cash flows to their present values.  The discount rate for a property is theoretically composed of four factors: the long-term risk-free rate (approximated by the yield on a 10-year U.S. Treasury bond), expected economy-wide inflation, the risk premium associated with unexpected outcomes in the property’s N.O.I., and the risk premium associated with the property’s illiquidity relative to a 10-year Treasury bond.

 

Risk Premium Spread Over Treasury Yields

The margin of property cap rates above the 10-year U.S. Treasury. The spread increases when investors seek safety in government bonds, driving their prices up and yields down, and it decreases when investors perceive a decline in risk associated with real estate cash flows, causing them to move from government bonds into real estate positions.

 

REIT-implied Cap Rate

Public company REIT yield calculated as the trailing 12 months’ reported NOI adjusted for non-recurring items, divided by the market capitalization and outstanding debts, less the value of non-income producing assets.

 

Cash Flow Cap Rate

A proxy for property income yields after normalized reserves are deducted for tenant improvements, leasing commissions, and capital expenditures.

 

Property Market Fundamentals

Operating cash flows driven by rent and occupancy levels.

 

 

Chapter 10 | Development Pro Forma Analysis

 

Speculative (“Spec”)

Development of a property without any contracts for pre-sold or pre-leased space.

 

Interim Income

The relatively little revenue that may be generated during the initial stages of real estate development but is expected to terminate at the start of construction.

 

Land Acquisition Costs

The purchase price of the site and associated transfer costs.

 

Hard Costs

Costs relating to construction such as materials, labor, and construction contractor services.

 

Soft Costs

Broadly defined as indirect costs (costs that are not land or hard costs); includes the costs of architects, engineers, and construction loan interest, as well the costs of legal services, insurance, and consultants.

 

Construction Loan

A short-term loan provided by a lender for the purpose of new property construction.  The principal amounts needed for incurred project costs are borrowed monthly (through a loan draw request) and loan interest accrues (accumulates) and is added to the loan principal balance. As such, a construction loan is a type of negative amortization loan.

 

Development Overhead

Development company expenses such as project management salaries, back-office work, and accounting fees.

 

Rezoning

Changing the zoning classification of or the allowable uses on a site.

 

Land Purchase Option

The paid exclusive right to purchase a site at a future point in time at a pre-negotiated price.

 

Certificate of Occupancy

Document issued by a local government agency or building department certifying a building’s compliance with applicable building codes and other laws and indicating it to be in a condition suitable for occupancy.

 

Pre-Leasing

The contracting with a future tenant of a new development that obliges the tenant to sign a pre-agreed lease upon construction completion.

 

Pre-Sales

Sale of residential units prior to construction completion; typically pre-sales are priced at a discount to pro forma pricing for completed units.

 

Build to Cap Rate / Build to Return / Return On Cost / Yield on Cost / Going-in Cap Rate

Build to an X means that projected N.O.I. for the property upon stabilization divided by the expected total development cost equals X%; so to build to a 10 means that your stabilized annual N.O.I. return is 10% of the total development cost.

 

Sell to Cap Rate / Going-out Cap Rate

To sell to an X means that stabilized N.O.I. divided by your projected sales price is X%. Synonymous with the going-out cap rate.

 

Gross Development Profit Margin

The formula for Gross Development Profit Margin is the expected going-in cap rate divided by the expected going-out cap rate, minus 1

 

 

Chapter 11 | Development Feasibility Analysis

 

Development Feasibility Analysis

Analysis and evaluation of a proposed project to determine if it is technically feasible, feasible within the estimated cost, and will be profitable.

 

Loss Factor

How much gross square footage of the building is unleasable.

 

Yield

The build to return, expressed as a percentage of total development costs.

 

Replacement Rent

On a per-GSF basis: (Build to Return * Expected Total Cost) + Expected Operating Costs

 

Trending Rents

The tendency to extrapolate recent rental rate data points at the same slope when conducting feasibility analysis.

 

Residual Land Valuation

The process of valuing land with development potential where the land value is equal to the net of total completed project value, total development costs and total required profit.

Floor Area Ratio (FAR)

The ratio of a building’s above-grade gross floor area (both vertically and horizontally) to the area of the lot upon which the building is constructed.

 

Value Engineering

The process of reducing construction cost where possible without destroying the value of the final product.

 

Contingency Reserve

A reserve set aside for unknown but expected project cost overruns.

 

Run Rate

How much is being spent daily (or weekly, or monthly) during development; typically, the run rate is low in the beginning, rising as construction gets into full swing, and then stabilizing upon completion at your interest-carry cost.

 

 

Chapter 12 | Real Estate Company Analysis

 

Corporate General and Administrative Expense (G&A)

Corporate overhead expense related to the day-to-day operations of the company as opposed to the properties it owns.

 

EBITDA

A company’s earnings before interest, tax, depreciation, and amortization; calculated as Property N.O.I. plus noncombined affiliate fee income, plus interest income from non-real estate assets such as bonds, minus company-level G&A expenses.

 

Funds from Operations (FFO)

Funds from core operations available to equity owners on a pre-income tax basis.

 

Adjusted Funds from Operations (Adjusted FFO / AFFO) / Funds Available for Distribution (FAD) / Cash Available for Distribution (CAD)

A real estate company’s cash available for distribution to shareholders without a deterioration of its asset base.

 

Net Asset Value (NAV)

A commonly-used approach to valuing a real estate company that assumes that management neither adds nor subtracts value.

 

 

Chapter 13 | Distressed Real Estate Loan and Bankruptcy Basics

 

Delinquent Mortgage

When the agreed upon debt service payments have ceased being made when they are due.

 

Curing Delinquency

Making all missed payments to bring the loan payments current.

 

Default

When the borrower fails to cure their delinquency.

 

Non-Performing Loan

A loan that is in default. Also referred to as an N.P.L.

 

Loan Restructuring / Loan Modification

Changing the terms of an outstanding loan so that it can once again be current and ultimately be repaid. The interest rate and/or amortization term can be modified to reduce the monthly debt service payment to make it affordable to the borrower; can be done temporarily or undone once the ability to pay in full (per the original terms) has been restored.

 

Short Sale

A property sale whose proceeds are not sufficient to pay back the full amount owed on the mortgage.

 

Real Estate Owned (REO)

Real property that sits on the liability side of a lender’s balance sheet after the lender forecloses on the defaulted borrower.

 

Distressed Loan Investor

A investor that buys distressed mortgage notes from lenders at discounts to the unpaid principal balances.

 

Bankruptcy

Legal protection for borrowers from their creditors; bankruptcy law provides a structured mechanism by which debtors unable to meet the terms of their credit agreements can attempt to resolve their debts and other liabilities

 

Foreclose

When a lender with a first security position takes control of the property from a defaulted borrower.

 

Junior Creditors

Those with positions subordinate to the senior debt.

 

Chapter 7 Bankruptcy

The debtor creases all operations, goes completely out of business, and a trustee is appointed to sell the property and other assets in order to pay off obligations with sale proceeds.

 

Chapter 11 Bankruptcy

Created in 1978 to formalize the business reorganization framework. Codified the view that reorganization of the business is generally preferred to liquidation.

 

Debtor in Possession Financing (DIP)

Allows the defaulting borrower to subordinate existing debt claims to new debt which is taken on to operate the business while it attempts a successful reorganization.

 

Absolute Priority Rule

No junior creditor will receive consideration until all senior creditors are paid in full, and no equity holder will receive consideration until all creditors have been paid in full (including interest).

New Value Exception (to the absolute priority rule)

The debtor proposed contributing fresh capital in exchange for the 100% ownership of the property as it exited bankruptcy.

 

Deficiency Claim

The value of the property is not sufficient to repay the entirety of the creditors’ outstanding debt.

 

Unsecured Debt

Debt not backed up by an underlying asset.

 

Cram Down Rule

The imposition of a bankruptcy reorganization plan by a court despite any objections by certain classes of creditors.

 

Non-Recourse Mortgages

Mortgages for which the creditor can only look to the property to recoup owed principal and interest.

 

Unsecured Deficiency Claim

The difference between the loan value and the collateral value is the deficiency claim against the borrower which becomes part of the unsecured claims pool.

 

 

Chapter 14 | Should You Borrow?

 

Leverage

The use of one or more layers of debt financing in a real estate transaction.

 

Capital Structure / Capital Stack

The mix of debt and equity that comprise a real estate transaction.

 

Total Returns to Equity

The combination of cash flow return and capital appreciation as it relates to equity invested.

 

Capital Appreciation

The return you earn as the building’s value increases (or decreases).

 

Cash Flow Return

The return earned from the cash flows generated by the property, net of any debt service.

 

Compounded Annual Growth Rate (CAGR)

The annualized compounded rate of return earned on an investment.

 

Positive Leverage

When the annual property cash flow yield % (N.O.I. after normal reserves / Purchase Price) is higher than the annual interest rate paid to the lender.

Negative Leverage

When the annual property cash flow yield % (N.O.I. after normal reserves / Purchase Price) is lower than the annual interest rate paid to the lender.

 

Cash-on-Cash Yield

Annual cash flow after debt service divided by cumulative equity investment.

 

Total Annual Return

The expected average annual cash-on-cash yield plus the expected annualized capital appreciation.

 

Capital Depreciation

Negative capital appreciation i.e., loss of property value.

 

Mezzanine Finance

All types of financing that are not secured by the real estate.

 

Junior Debt / Subordinate Debt

Debt holding the second, seventh, or another unsecured position.

 

Preferred Equity

Equity with specified rights above common equity, but below senior debt.

 

Convertible Debt

Debt that has the right to convert into common equity at specific terms.

 

Participating Debt

Debt that receives an interest payment each year and also participates in any property income above a specified level.

 

Weighted Average Cost of Capital (WACC)

A property’s blended cost of capital across all equity and debt components.

 

 

Chapter 15 | The Use of Debt and Mortgages

 

Fixed Loan Interest Rate

A nominal rate that stays constant for the duration of the loan term.

 

Floating Loan Interest Rate (Variable Rate)

Adjusts with the debt markets; the rate the borrower pays is reset at a negotiated time interval.

 

Interest Rate Cap

A ceiling on how high a variable interest rate can rise.

 

Interest Rate Floor

A limit on how low the interest rate charged on the loan can be.

 

Loan Term

The amount of time over which loan principal can remain outstanding.

 

30 360

The most prevalent loan interest calculation method, which takes the nominal interest rate and divides it by 360 days to get the daily equivalent rate, then multiples this daily rate by 30 to get the monthly rate.

 

Actual 365 (365 365)

A loan interest calculation basis in which the monthly rate is calculated by taking the annual interest rate, dividing it by 365 days and then multiplying that daily rate by the number of days in the current month.

 

Actual 360 (365 360)

A loan interest calculation method in which the annual rate is divided by 360 days (not 365) and then multiplied by either 365 or 366; this is the most expensive basis of calculation for the borrower.

 

Underwrite

The analytical process that a lender uses to assess the risk of a potential loan.

 

Loan-to-Value (LTV)

The principal amount of the loan divided by the estimated property value; the LTV % reflects how much equity cushion the lender believes they have before the loan is “underwater” (the property value falls below the outstanding loan amount).

 

Appraisal

A valuation method for properties based on comparable sales or income capitalization.

 

Loan-to-Cost (LTC)

The amount of construction loan principal as a percentage of total eligible development costs.

 

Eligible Loan Cost

With respect to a construction loan, these are the costs for property development elements that have collateral value to the lender, and, thus, liquidation value in the event of a foreclosure. Eligible loan costs include land, hard costs and non-financing-related soft costs.

 

Debt Yield

A loan sizing ratio that is calculated as the first year’s N.O.I. divided by the loan amount. The debt yield can be thought of as the “lender’s cap rate.”

Interest Coverage Ratio

A loan-sizing ratio that divides the property N.O.I. by the annual interest payment. Indicates how many times N.O.I. can cover the interest obligation and gives the lender an idea of how much of an income cushion the borrower has in terms of their ability to pay the interest on the loan.

 

Debt Service Coverage Ratio (DSCR)

A loan sizing ratio that divides the annual N.O.I. by the annual debt service payment inclusive of both principal and interest.

 

Fixed Charges Ratio

A loan sizing ratio that divides the property annual N.O.I. by all fixed charges incurred annually. Fixed charges include: all debt service payments and other fixed amounts the borrower incurs, including ground lease and operating lease payments and payments on unsecured debt.

 

Loan Covenants

Terms or clauses of loan agreements.

 

Negative Covenants

Under a loan contract, these are the things the borrower cannot do.

 

Positive Covenants

Under a loan contract, these are the things the borrower must do.

 

Loan Acceleration

The act of the lender demanding full principal repayment prior to loan maturity.

 

Prepayment Penalty

A cash penalty levied if mortgage principal is prematurely paid down or paid off in full.

 

Lock-Out Clause

The complete prohibition of early loan principal repayment for a specified period of time.

 

Secured Loan

A loan secured by recourse to the assets of the property; if the borrower fails to repay the loan, the secured lender is entitled to foreclose on the collateral to satisfy their claim.

 

Non-Recourse Loan

A loan solely secured by the property’s assets; the lender only has recourse to the property’s assets and cannot seize any of the borrower’s personal assets to recoup any principal not repaid.

 

Put Option

If the loan is non-recourse, if the property value falls below the loan balance, the borrower can, de facto, sell the property to the lender for forgiveness of the loan balance.  In this way the outstanding balance is essentially a put option for the borrower.

 

Recourse Lending

The lender secures the loan against both the property as well as the personal assets of the borrower. If the borrower does not repay the loan, the lender can look to possess and liquidate the borrower’s personal assets to cover any losses on their own, with the specifics of the process covered by state and federal bankruptcy codes.

 

Guarantees

Within a loan contract, a formal pledge by the borrower promising certain events will occur, such as construction completion and leasing up a new development to a certain level of occupancy.

 

Draw Request

A periodic request from a construction loan borrower that the lender advance funds, based on project costs incurred for which the borrower has been invoiced or for which they have already paid.

 

Pay Requisition

A request from a construction contractor or service provider for payment for work put in place or services rendered.

 

Work Letter

Written statement by a landlord to a tenant defining the scope of their space’s interior construction.

 

Loan Constant

A loan’s constant payment factor relative to the loan amount, given a known interest rate and term of amortization.

 

Balloon Payment

A repayment of the outstanding principal sum made at the end of a loan period.

 

Sweep Provision

A loan clause that allows the lender to take all cash inflows until the borrower’s loan obligations are satisfied.

 

Amortization Schedule

The schedule over which loan principal is repaid.

Loan Points (Origination Fees)

A fee the lender charges for processing the loan.

 

Refinancing

The replacement of one debt facility with another.

 

Excess Loan Proceeds

What remains available as cash to a borrower when they repay an in-place loan with a loan larger than the outstanding balance of the in-place loan.

 

Defeasance

A type of loan prepayment penalty that involves a substitution of the collateral: Treasury bonds for the real estate. It requires that the borrower purchases a portfolio of U.S. Treasuries sufficient to make all of the remaining scheduled loan payments.

 

Yield Maintenance

A loan prepayment penalty in which the lender is made whole on the unpaid interest that they would have received if the borrower had not prepaid.

 

 

Chapter 16 | Sources of Long- and Short-Term Debt

 

Commercial Mortgage-Backed Security (CMBS)

A tradable security that is collateralized by mortgages on commercial properties.

 

Special-Purpose Bankruptcy-Remote Entity (SPE)

A special purpose vehicle that is formed to hold a defined group of assets and to protect them from being administered as property of a bankruptcy estate.

 

Loan Servicer

Service provider responsible for assuring that the borrowers are in compliance with their loan documents and for taking appropriate actions if the borrower is in default.

 

Loan Special Servicer

Service provider that takes control of the administration of any non-performing loans.

 

Tranche

A discrete ownership class within a pool of CMBS mortgages.

 

 

 

Chapter 17 | Ground Leases as a Source of Finance

 

Fee Simple Ownership Interest

The outright purchase of both a building and the land on which it sits.

 

Ground Lease

An agreement in which one is permitted to own a building on a separate landowner’s parcel for a finite lease period, at the end of which all improvements on the land become the property of the landowner.

 

Chapter 18 | Real Estate Owner Exit Strategies

 

Disposition / Sale

Transfer of title of a property from seller to buyer for monetary consideration to seller.

 

Gross Sales Price / Gross Sales Proceeds

The negotiated property sale price before any potential deductions.

 

Capital Gains Tax

U.S. tax on long-term gains on capital assets. There are two components which are taxed: 1) the actual gain you achieve on the building; 2) the property’s accumulated depreciation.

 

Accumulated Depreciation

The amount of a property’s depreciable cost that has been allocated to depreciation expense since the time the property was acquired.

 

Wealth Position

An investor’s net equity position after selling a property and repaying the loan, paying all fees, and paying the IRS.

 

Refinancing

The replacement of one debt facility with another.

 

Minority Interest

Ownership of less than 50% of a property’s equity, providing no voting impact and an illiquid position.

 

Like-Kind Exchange / 1031 Exchange

A legal process codified in IRS section 1031 through which you sell your property free of state and federal income taxes if you purchase a “similar” property within a prescribed period of time, hence forestalling capital gains taxes until you ultimately break the ownership chain.

 

Qualified Intermediary (QI)

An independent specialist who executes a 1031 exchange and helps sell the property.

 

Chapter 19 | Real Estate Private Equity Funds

 

Real Estate Private Equity Fund (Opportunity Fund)

A major source of capital for the real estate industry; among the largest owners of real estate in the country; raise large pools of equity prior to investing to ensure ready access to equity

 

Syndicate

Small investment group (relative to the size of PE funds) that are put together for a single pre-identified real estate transaction.

 

Investment Commitment

A limited partner’s obligation to provide a certain amount of capital to a private equity fund for investments.

 

Capital Calls

When a private equity fund calls for a portion of an investment commitment be transferred to the fund.

 

Fund Sponsor

The company that raises the fund and serves as the general partner (GP) responsible for all operations.

 

General Partner (GP)

The persons in a limited partnership responsible for the actions of the business, with the ability to legally bind the business, and who are personally liable for all the business’s debts and obligations.

 

Limited Partner

Also known as the L.P., a partner in a private equity fund whose liability towards the fund’s debts is legally limited to the extent of the partner’s investment.

 

Investment Cash Flow Waterfall / Return Waterfall

A mechanism for how fund proceeds are split between the investors and the sponsor for the purposes of returning invested capital and paying out profits.

 

Preferred Return (“pref”)

The minimum return to investors to be achieved before a sponsor carry is permitted; this preferred return is typically an IRR-based hurdle rate and is usually 7-11% annually.

 

Hurdle Rate

The profit threshold above which the fund profits are shared according to the carried interest arrangement.

 

Pari Passu

Pro rata/proportionate to the amount of one’s cash investment to the total investment amount.

 

Promote / Carried Interest

The fund sponsor entity’s share of excess profit above the preferred return, with which no cash investment is associated. Also known as “sweat equity.”

 

Residual Split

Only the profits in excess of the preferred return distribution.

 

Look-Back

A method of truing up the payment of IRR-based profit splits based on measuring accrued earned amounts and funding these earned amounts with distributions.

 

Catch-Up

A private equity fund distribution provision that allows for the sponsor to be caught up to the same rate of return as the Limited Partners.

 

Claw-Back

A protection mechanism put in place by Limited Partners that returns any excess share of total profits to “the money” to comply with a percentage cap on distributions received by the sponsor.

 

 

Chapter 20 | Investment Return Profiles

 

Promote / Carried Interest

The fund sponsor entity’s share of excess profit above the preferred return, with which no cash investment is associated. Also known as “sweat equity.”

 

Catch-Up

A private equity fund distribution provision that allows for the sponsor to be caught up to the same rate of return as the Limited Partners.

 

 

Chapter 21 | REITs and Liquid Real Estate

 

Single Taxation

When income is only taxed at a single level, i.e., just at the corporate level, or just at the individual shareholder level.

 

Secondary Equity Offering

Sale of equity shares after the IPO.

 

Double Taxation

When income is taxed at both the corporate and individual shareholder levels.

 

Merchant Builder

Business model of developing a property and selling it upon stabilization.

 

UPREIT

A special REIT structure that is designed to allow a REIT to acquire buildings from partnerships without triggering capital gains taxes for the seller.

Chapter 23 | Corporate Real Estate Decision Making

 

Loss Factor

The difference between gross and net leasable footage.

 

Synthetic Lease

Allows a company with an economic and tax ownership position to hide the ownership (and the accompanying debt) from shareholders.

 

 

Chapter 25 | Real Estate Cycles

 

Real Estate Cycles

Prolonged periods of property supply and demand imbalance.

 

Gross Absorption

The total amount of square footage tenants newly occupy over a given period of time.

 

Net Absorption

Measures the difference between the total newly-occupied square footage and the total square footage vacated over the same period.

 

Speculative

Non-pre-leased or non-pre-sold real estate development.

 

Quantitative Easing

When the Federal Reserve injects money into the banking system.

 

Subprime Residential Mortgages

A type of mortgage that is normally issued by a lending institution to borrowers with low credit ratings.

 

Open Plan

A floor plan layout that makes use of large, open spaces and minimizes the use of small, enclosed rooms such as private offices.

 

Speculative Homebuyers

Investors who purchase single family residences with the intent to sell them quickly (“flip them”) for a profit.

 

Residential Mortgage-Backed Securities (RMBS)

A tradable security that is collateralized by mortgages on single family residential properties.

 

Margin Call

The immediate requirement for a securities holder to produce a significant amount of cash to offset the loss of value in accounts in which they purchased securities using borrowed funds.

 

 

Chapter 26 | There Are a Lot of Right Ways To Do It

 

Accommodation Fee

Under U.S. law, you can pay accommodation fees but are not allowed to pay bribes. The line between the two is fuzzy.

 

Supplemental II | CMBS Case Study

 

Fixed-rate fusion pool

A pool of mortgages in a CMBS offering that is comprised of both relatively small loans (conduit loans) and large loans (greater than $30MM).

 

Conduit loan

A relatively small loan (less than $30MM) in a CMBS pool, made with the objective of placing it into a CMBS offering.

 

Issuer

The company that issues the CMBS offering.

 

Pay rate

The interest rate paid on a CMBS tranche.