The NNN or Triple Net Commercial Lease

There are a number of structures for commercial leases, one being the NNN lease.  The acronym is for Triple Net.  It is unlike a gross lease in which the tenant pays the monthly rent and the landlord pays all other costs associated with ownership and care of the property.  The NNN lease is set up with the tenant paying all costs associated with the property.  The “triple part” indicating:

  • property taxes;
  • insurance; and
  • property maintenance.

The NNN lease is more commonly used for retail space.  Let’s break out the three “N”s and the pros and cons of each for the tenant and the landlord.

  • Property Taxes:  the tenant would be responsible for paying the property taxes each year whendue.
    • Tenant:  this is a minor inconvenience, accepting the mailed tax notice from the landlord and sending in amounts when due.  However, because the tenant is locked into this lease, ever-hungry municipalities can keep raising taxes to fund careless spending.
    • Landlord:  the landlord needs to be concerned about the tenant paying taxes on time, as penalties and interest can be severe.  Getting notices of unpaid taxes, sometimes accompanied by a lien on the property, is something the landlord doesn’t want to experience.
  • Insurance:  the tenant pays all insurance, their own for operations and liability, plus liability and property damage for the facility.
    • Tenant:  generally the tenant must pay deductibles on claims, as well as pay for any uninsured damages.
    • Landlord:  the landlord needs to be aware of coverage levels and on-time payments.  Tenants can skimp on coverage in order to save money, and the landlord could ultimately suffer if the property is not fully repaired after a claim.
  • Property Maintenance:  this would include janitorial, landscaping, and all repairs.
    • Tenant:  with a new property, this can be a favorable situation.  With older properties the repair bills can be excessive, and the tenant often has no history which they can use to develop a risk profile.
    • Landlord:  the landlord must be concerned with the tenant deferring maintenance that could bite the landlord later.  Also, the tenant can cut costs with sub-standard repairs that could result in greater damage after they’re long gone.

Example Triple Net Lease

Let’s use Olivia’s Clothing Boutique as our example retail company entering into a triple net lease with the landlord for their free-standing building.  Here are the basic terms:

  • Base Rent:  this is lower due to the NNN structure, set at $1,000/month.
  • NNN:  tenant pays all taxes, maintenance and insurance costs.
  • Rent is automatically escalated for inflation by 4% per year, and the lease is for 5 years.

So, here are the current numbers:

  • Base rent of $1,000/month +
  • Taxes this year of $4,800, or $400/month
  • Maintenance variable, but last year came to $3,600, or $300/month.
  • Total monthly is $1,700/month.

Next year the rent will increase by 4%, or $40/month.  As governments do, they assess property values annually for commercial property.  The second year the property was valued higher, and taxes rose by $50/month, or $600.  There was a compressor failure in the heat pump system, which brought annual maintenance up to $4,800.  So, the second year’s rent would be:

  • Base of $1,040/month (with inflation factor) +
  • Maintenance now breaks out to $400/month +
  • Taxes rose by $50/month to 450/month +
  • New monthly rent amount for year 2 is $1,890/month.

This could be perfectly fine with both tenant and landlord.  However, now you know how the NNN or triple net lease works, so you can make some intelligent decisions about entering into your next commercial lease.

The Commercial Space Tenant Improvement Allowance (TIA)

Though companies engaged in the same types of business have similar lease space needs, such as retail clothing sales or grocery stores, they are each unique in certain ways.  There are also commercial real estate needs that are very specialized, possibly requiring work stations, special equipment accommodations or built-in modifications to the lease space.

Generally, things that aren’t attached, such as free-standing shelving or equipment, are considered trade fixtures and not an improvement to the property.  Your landlord will generally leave these trade fixtures up to you and you’ll install them at your expense.  Changes or additions that are attached are generally considered leasehold improvements, and your landlord will want some control over what you do and how you do it.

Improvements remain after you’re gone, so naturally the landlord wants to know that they will not damage the value of the property or impair the ability to lease it out.  If you need to make improvements to the property to accommodate your business operations, your landlord will want to know what you need and to negotiate how the improvements will be done, by whom, and who is paying for them.

One approach is to just negotiate into the lease that the landlord will do the required work at their expense, a turnkey approach.  Of course the tenant has no control over costs, and the landlord will certainly cushion their lease amount to cover possible cost overruns.  Often the best approach is the TIA, Tenant Improvement Allowance.

The Tenant Improvement Allowance – What it Is – Pros and Cons

The TIA is a monetary allowance from the landlord to the tenant for improvements to accommodate the business in the space.  This can be allocated on a per-square-foot basis or a lump sum amount.  In some cases it can be a trade-off for free rent as well.

Pros of the Tenant Improvement Allowance

  • Gives some negotiated control to the tenant of the process, contractors used, and work to be performed.
  • The tenant has more incentive to control costs than the landlord in most cases.
  • Can provide the tenant with better control of the outcome and usability of the improvements.
  • Allows the tenant to select some or all materials and make quality decisions.

Cons of the Tenant Improvement Allowance

  • The tenant is normally responsible for any cost overruns exceeding the negotiated TIA amount.
  • The tenant may have less buying power than the landlord, raising costs for work and materials.
  • Liability and damage can fall to the tenant to remedy.
  • The tenant will spend more of their time in planning and execution, though the results can justify it.

The Tenant Improvement Allowance is a popular way to handle improvements necessary to adapt the lease space to the tenant’s business operations, but care should be taken in negotiating the details.

How Do I Use the Tenant Improvement Allowance and Who Does the Work?

There are several very important negotiated items in a Tenant Improvement Allowance.  The landlord will want some control over what is done to be sure that the property’s future value isn’t negatively impacted by your modifications.  An example might be cutting a new stairwell between floors, a major modification that can have code or future tenant desirability considerations.

The landlord will almost certainly want to approve the major changes to be done, but then may leave the work to you and your selected contractors.  There will also definitely be requirements for you to verify proper bonding, insurance and licensing of all work and contractors.  Sometimes the negotiated terms will split certain work between the contractor and the tenant, especially when major modifications require changes to the structure’s envelope, utilities or safety features.  When work is split between the tenant and landlord, extra care must be taken in negotiating the relative responsibility for costs or unexpected overruns due to structural issues not known ahead of time.

How Do I Get the Best Negotiated Deal on my Tenant Improvement Allowance?

First, keep in mind that landlords didn’t get where they are by being naive business people.  They have a pretty good handle on all of their costs and operating expenses, and you can rest assured that any money or considerations they allow you in a Tenant Improvement Allowance are all factored into the rent over the term of the lease.  It’s best to negotiate your TIA before any lease is signed, and some of the important points to consider include:

  • Is the landlord charging any overhead or administrative fees, even if you’re doing and paying for the work?
  • If you come in under budget, make sure you get to keep the balance of the TIA, which can be a trade-off for free rent.
  • Get broad discretion over what you can spend the TIA money for, such as architect, attorney, or consultant fees, as well as permit and inspection costs.
  • If cost overruns are due to unknown structural problems there before your tenancy, who is to pay for them?

There are other items, many varying considerably with the type of business and the space to be rented.

You Need Experienced Negotiating Help

Owners of commercial buildings, malls, strip centers and industrial properties are often assisted by a team of investment advisors, attorneys and others in the management of their business.  You will be in negotiations with this team, and they are very good at covering their interests and maximizing their return on investment.

Don’t go it alone.  Rodney McNabb with MainStreet Realty Services has been on the tenants’ side of these Tenant Improvement Allowance and lease negotiations.  Take advantage of his experience and skills in getting you the best deal possible.  It’s your future profits for the entire lease term, so get the best.

What is the Difference Between Net Lease & Gross Lease?

It is easy to get confused with all of the commercial real estate lingo out there.  Two such examples are Net Lease and Gross Lease.  Understanding the differences between the two can equate to a substantial savings when negotiating commercial real estate lease terms.

Gross Lease

A gross lease is an agreement whereby the Tenant pays a fixed rental rate and the Landlord pays all of the operating expenses.  This means that the Landlord pays expenses such as insurance, real estate taxes, utilities and common area maintenance (CAM).  The Tenant would then be responsible for the rent and any specific business-oriented expenses.  Due to the Landlord assuming inflation risks by allowing the Tenant to pay a fixed sum every month, many commercial real estate landlords have abandoned the gross lease – with the exception of some smaller office leases.

Net Lease

In a net lease, the Tenant pays rent, plus a portion of expenses associated with the building being rented.  The expenses may include insurance, real estate taxes, utilities and common area maintenance.  There are basically three categories of a net lease.  They are single, double and triple net.  These types of leases put the burden of increasing expenses on the Tenant and remove them from the Landlord.

Single Net Lease

A single net lease is an agreement in which the tenant pays the rent and certain expenses.  In this situation, the Tenant is usually expected to pay all or part of the property taxes in addition to the rent.  This type of lease is more common in older buildings with shared utilities.

Double Net Lease

With a double net lease, the Landlord is responsible for structural repairs to a building, while the Tenant is responsible for taxes, building insurance, utilities and maintenance costs.

Triple Net Lease

A triple net lease is an agreement in which the tenant pays for maintenance, operating expenses, taxes and insurance.  In this situation, the Tenant is responsible for repair and maintenance of any common areas.  This form of net lease is typically used with freestanding buildings and multi-unit structures where multiple Tenants share the maintenance costs of the common areas.

Conclusion

While Tenants may perceive the best deal is to go with a gross lease, this is not always the case.  The terms and price of the lease agreement can affect the overall  value of the lease arrangement.  For example:

If the average gross lease in your area is $18.00 per square foot, while a net lease is calculated at $12.00 per square foot and expenses calculated at an additional $4.00 per square foot, the next lease in this instance will save the Tenant about $2.00 per square foot over the gross lease.  This savings needs to be weighed carefully against variable expenses and any potential increases that may go along with them.

Are you looking for representation in negotiating either a gross or net lease?  If so, let Rodney McNabb w/MainStreet Realty Services assist in weighing the costs and potential risks for you.  You can contact him via email at Rodney(at)MainStreet-Realty.net or by calling (919) 322-3960 ext. 7

Commercial Real Estate Terms

INDUSTRIAL BUILDING CLASSIFICATIONS

Flex:  Flex buildings provide occupants with flexibility in the utilization of space.  Configuration often allows for a mix of the following categories:  office, showroom, warehouse, quasi-retail and laboratory space.  Flex buildings typically have one or more drive-in doors (whether operational or sealed), ceiling heights of 16 feet or less and 20 percent or more of the space built out as office.

Industrial:  Industrial buildings are used for manufacturing, assembling, processing, warehousing, distribution and maintenance of materials and products.  They typically feature ceiling heights of 16 feet or higher, and dock-high or drive-in doors.

 

OFFICE BUILDING CLASSIFICATIONS

Class A:  Class A properties are typically multi-story office buildings situated in highly desirable locations.  Most are newer buildings or have been substantially renovated, including building mechanical systems, restrooms, common areas and fixtures.  They feature high-quality finishes with the most aesthetically pleasing designs, well-maintained grounds and professional management services.  They compete with the market’s top tier properties, within their specific category, for tenants.

Class B:  Class B properties are typically older office buildings that have not been renovated but are in desirable locations, as well as newer single-story and smaller multi-story buildings that are not in as desirable locations as their competitors.   They have fairly high-quality construction and finishes, though they may be somewhat dated aesthetically and well-maintained mechanical systems, common areas and restrooms.

Class C:  Class C properties typically combine a greater number of the following attributes:  older office buildings, in secondary locations, lacking in updated finishes, common areas, restrooms and/or mechanical systems and featuring the market’s lowest price point.

 

RETAIL BUILDING CLASSIFICATIONS

Strip Center:  Strip Centers typically range from 5,000 to 50,000 square feet and are constructed with common walls in a strip facing the street.  They contain no dominant anchor stores and often feature convenience-oriented tenants.

Neighborhood Center:  Neighborhood Centers range from 50,000 to 200,000 square feet and feature at least one anchor store, usually two or more, typically including a supermarket and drug store.

Community Center:  Community Centers typically range from 200,000 to 400,000 square feet, and usually feature two or more anchor stores such as a discount department store or category killer such as home improvement, books, electronics, apparel, etc.  They may also include grocery or drug store anchor.

Regional Mall:  Regional Malls typically range from 400,000 square feet to over 1 million square feet.  They provide shopping goods, general merchandise, apparel and home furnishings in full depth and variety.  They are built around the full-line department store as the major drawing power and may include two, three or more department stores for even greater comparative shopping.  They are typically, but not always, enclosed and often include food courts.

Power Center:  Power Centers typically range from 250,000 to 800,000 square feet and feature three or more anchors such as category killer, home improvement, discount department store or warehouse club.  They feature little or no in-line shop space.

Lifestyle Center:  Most often located near affluent residential neighborhoods, Lifestyle Centers cater to the retail needs and ‘lifestyle’ pursuits of consumers in its trading area.  It has an open-air configuration and typically includes at least 50,000 square feet of retail space occupied by upscale national chain specialty stores.  Other elements differentiate the lifestyle center in its role as a multi-purpose leisure-time destination, including restaurants, entertaining and design ambience and amenities such as fountains and street furniture that are conducive to casual browsing.  These centers may be anchored by one or more conventional or fashion specialty department stores.

Specialty:  The Specialty retail class captures all properties that do not fit into the traditional retail categories.  They may include churches, showrooms, entertainment facilities, sports and recreation facilities, etc.

Outlet Center:  Outlet Centers typically feature 50,000 to 500,000 square feet.  Tenants include manufacturer’s outlets selling their own brands at a discount.  They are often located away from major urban areas or in a tourist location.

Free-Standing Retail:  A Free-Standing Retail building is a single-tenant retail building with a retail tenant.

Urban Retail:  Urban Retail includes retail space in the lower levels of downtown office buildings as well as other street-oriented retail space.  The parking is not in front, as in a strip center.  Rather, it is usually in back, in nearby garages or on the street.

 

A

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.

Absolute Net: Lease requiring tenant to pay in addition to base rent all costs associated with the operation, repair and maintenance of the building, all real estate taxes, and utilities including repair and maintenance of the building’s structure and roof. Often the tenant is directly responsible both for all such costs and for the active handling of the items themselves. Distinguished from the Triple Net by tenant’s responsibility for maintenance and repair of the building structure and roof.

Absorbed Space:  Net change in leased space between two dates.

Absorption:  The amount of inventory or units of a specific commercial property type that become occupied during a specified time period (usually a year) in a given market, typically reported as the absorption rate.

Absorption Period:  The number of months required to convert vacant space into leased space assuming no new delivered space.  Computed by dividing the average monthly absorbed space during a recent period into the current vacant space.

Accumulated Cost Recovery:  Total cost recovery deductions taken throughout the holding period of a property.

Active Income:  Income from salary, wages, tips, commissions, and activities in which the taxpayer materially participates. Also see passive income.

ADA:  The acronym for ‘Americans with Disabilities Act.’  No individual may be discriminated against on the basis of disability with regards to the full and equal enjoyment of the goods, services, facilities, or accommodations of any place of public accommodation by any person who owns, leases (or leases to), or operates a place of public accommodation.  ‘Public accommodations’ include most places of lodging, recreation, transportation, education, and dining, along with stores, care providers, and place of public displays, among other things.

Addendum: Something Added. A list or document or other material added to a document, lease, contract, letter, etc. IE: Legal description; List of FF&E; Survey; Map; Improvements to be made; etc.

Add-On Factor:  Considered a loss factor, the percentage of gross rentable square footage that is lost to the tenant’s physical occupancy.

Add Value:  Fourth stage of four-stage transaction management process pertaining to a transaction manager’s planning, effort, and continual contact with key decision-makers, investors, and users, as well as contact with ancillary professionals. This ongoing process allows for feedback, establishes a network for problem solving, provides a means to offer additional services to the client, and enhances the transaction manager’s preparedness for the next assignment.

Adequate Rate Covenant:  An agreement often required in revenue-bond financed projects; guarantees the operator will charge adequate rates to produce revenue necessary to cover principal and interest payments.

Adjusted Basis:  The original cost basis of a property plus capital improvements, less total accumulated cost recovery deductions, and partial sales taken during the holding period.

ADS:  See Annual Debt service.

Ad valorem:  (According to value) Used in reference to general property tax, which is usually based on the official valuation of a property.

Agent: One who is authorized to act for or represent another usually in business matters. Authority may be express or implied.

Agglomeration Economies:  Cost reductions or savings that come about from efficiency gains associated with the concentration or clustering of firms/producers or economic activities and the formation of a localized production network.

Alienation Clause:  A type of acceleration clause where a debt becomes due in its entirety upon the transfer of ownership of a secured property.

Allowance Over Building Shell:  One of three arrangements often used for financing tenant improvements (finishing out office space to accommodate a tenant such as walls, doors, carpeting, etc.)  Often used in yet-to-be-built building, this arrangement caps the landlord’s expenditure at a fixed dollar amount over the negotiated price of the base building shell.  This arrangement is most successful when both parties agree on a detailed definition of what construction is included and at what price.  Tenants may ask for a contingency in the event that the actual build-out costs are less than the allowance, requiring the landlord to return the savings in the form of rent abatement or other concession.

Amendment: A document to reflect a change either to correct an error or alter a part of an agreement without changing the principal idea or essence.

Americans with Disabilities Act: The Americans with Disabilities Act (ADA) requires all businesses that are open to the public or that employ more than 15 people to have premises that are accessible to disabled people. The Lease should state who would pay for any needed modifications, such as adding a ramp or widening doorways to accommodate wheelchairs.

Amortization:  The repayment of loan principal through equal payments over a designated period of time consisting of both principal and interest.

Anchor:  The tenant that serves as the main draw to a commercial property, usually the largest tenant in a shopping center (i.e. a grocery store, movie theater, department store, etc.)

Annual Debt Service (ADS):  The total amount of principal and interest to be paid each year to satisfy the obligations of a loan contract.

Annual Percentage Rate (APR):  The true annual interest rate payable for a loan in one year taking account of all charges made to the borrower, including compound interest, discount points, commitment fees, mortgage insurance premiums. It also takes into account the time at which the principal is repaid (especially when payments of principal are made in installments throughout the year, but interest is charged at the beginning of the year), but not the actual expenses incurred by the lender in making the loan and recharged to the borrower. (Encyclopedia of Real Estate Terms 2nd Edition, Damien Abbott)

Annuity:  Regular fixed payments or receipts over a designated period of time.

Anticipatory Breach:  Occurs when one party to a contract, prior to time of performance, informs the other of his or her intent not to perform.  Example:  The buyer informs the seller before the closing date of his or her intent not to buy.

Appraisal:  An estimate of opinion and value based upon a factual analysis of a property by a qualified professional.

Appreciation:  An investment’s increase in value.

Appreciation potential:  The possibility or probability that a real estate investment will increase in value during the holding period.

Arbitration: Alternative to the judicial system, the arbitrator will make a decision about the case and it may be binding. The system is not a court proceeding but it may seem like one, and the arbitrator may be a retired judge or lawyer. This process si usually faster and less costly than the judicial system.

“As-Is” Condition:  The acceptance by the tenant of the existing condition of the premises at the time the lease is consummated.  This would include any physical defects.

Asking Rent: The dollar amount asked by landlords for direct available space (not sublease), expressed in dollars per square foot per year in most parts of the country and dollars per square foot per month in areas of California and selected other markets. Buildings will have an average asking rent for available space. Usually a point of departure for negotiations between landlords and tenants.

Assignment:  A transfer by lessee of lessee’s entire rights in the property to a sub-lessee.

Assessed Value:  The value of real property established by the tax assessor for the purpose of levying real estate taxes.

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.

Asset-Based Lender: A lender who loans money based primarily on the values of an asset  – accounts receivable, inventory, a piece of equipment, real estate – rather than on the financial strength of the business, which is the primary criterion for banks.

Assignment:  A transfer between parties of title to any property, real or personal, or of any rights or estates in the property.  Common assignments include leases, mortgages, and deeds of trust.

Attachment:  Legal procedure to aid in the collection of a debt.  Usually the court issues a writ to seize the property of a debtor and holds it pending the outcome of a lawsuit, keeping the property available for sale to pay any money judgment entered in such lawsuit.

Attorn:  To turn over or transfer to another money or goods.  To agree to recognize a new owner of a property and to pay him rent.

Automatic Renewal: The Lease continues based on the current terms until either the Tenant or the Landlord gives notice to the other party, usually in writings, that they will be terminating the lease.

Available:  Space that is being marketed now but will not be ready for occupancy until a future date, i.e. space being marketed in a building still under construction or space that is still occupied by a tenant but will be returned to the landlord in the near term.

Average Annual Effective Rate:  The average annual effective rent divided by the square footage.

Average Annual Effective Rent:  The tenant’s total effective rent divided by the lease term.

Averaging Method:  A simple technique used to forecast next period’s/year’s vacancy rate by averaging previous years’ vacancy rates; especially effective where vacancy rates have remained relatively flat or show little variability over time.

B

Balloon Payment:  A large principal payment that typically becomes due at the conclusion of the loan term.  Generally, it reflects a loan amortized over a longer period that that of the term of the loan itself (i.e. payments based on a 25 year amortization with the principal balance due at the end of 5 years).

Base (in lease terminology):  A face, quoted, dollar amount representing the rate or rent in dollars per square foot per year and typically referred to as the base rate.

Base Rent:  The minimum rent due to the landlord. Typically, it is a fixed amount. This is a face, quoted, contract amount of periodic rent. The annual base rate is the amount upon which escalations are calculated.

Base Year:  The year upon which a direct expense escalation of rent is based.

Basic Employment:  Employment that is considered to be export-oriented or export-driven, associated with activities that generate income from the sales of products and services in markets outside the local economy.

Basis:  The total amount paid for a property, including equity capital and the amount of debt incurred.

Before-Tax Investment Value:  The sum of the present values of the mortgagor and mortgagee of property.

Below-Grade:  Any structure or a portion of a structure located underground or below the surface grade of the surrounding land.

Bio Tech/Lab:  Most office and flex shell space can be adapted for Bio Tech or Lab use.  Typically space is built out with wet lab space and other improvements to accommodate the needs of prospective tenants.

Breach of Warranty:  The failure of the seller of real property to pass title as either expressed or implied by law in the conveyance document.

Break-Even Point:  The stage at which an investment produces an income that is just sufficient to cover recurring expenditure. For an investment in real property, the point at which gross income is equal to normal operating expenses, including debt service (the stage at which the next cash flow becomes positive). Also known as the default point.

Breakpoint:  The sales threshold over which percentage rent is due. It is calculated by dividing the annual base rent by the negotiated percentage applied to the tenant’s gross sales.

Brokerage Commission:  A fee that is paid to a licensed real estate broker in accordance to the terms of a commission agreement.  A brokerage commission (‘fee’) is typically due to the real estate broker when a real estate transaction is leased or sold.

Buffer:  A strip of land established as a transition between distinct land uses.  May contain natural or planted shrubs, walls or fencing, singly or in combination.

Building Code:  A set of laws, usually enacted by a city ordinance or other local jurisdiction, regulating the design, materials, and construction of buildings.

Building Standard:  A list of construction materials and finishes used in building out office space for a tenant that the landlord contributes as part of the tenant improvements.  Examples of standard building items are doors, partitions, lights, floor covering, telephone outlets, etc.  May also specify the quantity and quality of the materials to be used and often carries a dollar value.

Building Standard Plus Allowances:  One of three arrangements often used for financing tenant improvements (finishing out office space to accommodate a tenant such as walls, doors, carpeting, etc.)  Under this arrangement, the land lists in detail all materials and costs to make the premises suitable for occupancy and provides a negotiated allowance for the tenant to customize or upgrade materials.

Build-Out:  The space improvements put in place per the tenant’s specifications.  Takes into consideration the amount of Tenant Finish Allowance provided for in the lease agreement.

Build-to-Suit:  Build-to-Suit construction is designed for a specific tenant, often because the tenant is unable to locate suitable space in the speculative market.  Sometimes a build-to-suit projecs includes specific design features not commonly found in the speculative market, compelling the tenant to have a special facility built.  The build-to-suit project is usually contracted with a developer who then owns the completed facility occupied by the tenant or sells the facility to a third-party investor.  Generally, a build-to-suit project becomes a single-tenant building upon completion.

Bullet Loan:  Also known as a Construction Loan, any of a variety of short-term (generally five to seven years) financings provided by a lender to a developer to cover the costs of construction and lease-up of a new building with the expectation that it would be replaced by long-term (or ‘permanent’) financing provided by an institutional investor once most of risk involved in construction and lease-up has been overcome, resulting in an income-producing property.

Business Risk:  The uncertainty associated with the possible profit outcomes of a business venture.

Buy/Rent Threshold:  The point at which there is a recognizable shift of expenditure allocations away from owneroccupied housing and to the rental housing market (or vice-versa) as a result of changing market conditions.

C

CAM:  See common area maintenance.

CAM Cap:  The maximum amount for which the tenant pays its share of common area maintenance costs. The owner pays for any CAM expenses exceeding that amount.

Cap Rate:  See capitalization rate.

Capital Expenditures:  Property improvements that cannot be expensed as a current operating expense for tax purposes. Examples include a new roof, tenant improvements, or a parking lot—such items are added to the basis of the property and then can be depreciated over the holding period.  Distinguished from cash outflows for expense items such as new paint or plumbing repairs (operating expenses) that can be expensed in the year they occur. Also see operating expenses.

Capital Gain:  Taxable income derived from the sale of a capital asset. It is equal to the sales price less the cost of sale, adjusted basis, suspended losses, excess cost recovery, and recapture of straight-line cost recovery.

Capitalization:  A method of determining value of real property by considering net operating income divided by a predetermined annual rate of return.  Example:  a cap rate of 10 percent, an income stream of $100,000 per year is worth $1,000,000.  $100,000 divided by 10 percent = $1,000,000.

Capitalization Rate:  The rate that is considered a reasonable return on investment.  Used to determine and value real property through the capitalization process.  Simply, a cap rate is an expression of risk.  A percentage that relates the value of an income-producing property to its future income, expressed as net operating income divided by purchase price. Also referred to as cap rate.

Capital Market:  The supply and demand for resources to invest in real estate and other investments.

Capital Tax:  Any tax on a change in capital value (including capital gains tax, estate tax, or inheritance tax); as distinguished from a tax on income.

Carrying Charges: Various costs that are incidental to property ownership (e.g. taxes, insurance costs, and maintenance expenses).

Cash Flow:  The net cash received in any period, taking into account net operating income, debt service, capital expenses, loan proceeds, sale revenues, and any other sources and uses of cash.

Cash Flow After Tax/es (CFAT):  For properties, it is the result of first calculating the net operating income, less mortgage and construction loan interest, less cost recovery for improvements and personal property, less amortization of loan points and leasing commissions to arrive at real estate taxable income. Next, real estate taxable income is multiplied by the applicable marginal tax rate to result in the tax liability (savings). Then, from the net operating income, annual debt service is subtracted to equal the cash flow before taxes (CFBT). Finally, the cash flow after taxes (CFAT) is calculated from the CFBT, less the tax liability (savings), plus investment tax credit. The Cash Flow Analysis Worksheet can be used to calculate a property’s gross operating income, net operating income, real estate taxable income and tax liability or (savings), CFBT, and CFAT.

Cash Flow Before Tax/es (CFBT):  For properties, it is the result of calculating the effective rental income, plus other income not affected by vacancy, less total operating expenses, less annual debt service, funded reserves, leasing commissions, and capital additions. The Annual Property Operating Data form can be used to calculate a property’s effective rental income, gross operating income, total operating expenses, net operating income, and cash flow before taxes.

Cash Flow Model:  The framework used to determine the cash flow from operations and the cash proceeds from sale.

Cash-on-Cash Rate:  A return measure that is calculated as cash flow before taxes divided by the initial equity investment.

Cash Proceeds From Sale:  The sales price less sales costs, mortgage balance, and tax liability on sale. Also known as sales proceeds after tax.

Central Place Theory:  A location theory that accounts for the size, distribution, and organization of settlements, places, market areas, and establishments in a competitive and interdependent urban system, to explain differences in the locational tendencies and preferences of businesses as they seek to maximize market accessibility, sales, and profits.

Certificate of Occupancy (“C of O”):  A document presented by a local government agency or building department certifying that a building and/or the leased premises (tenant’s space), has been satisfactorily inspected and is/are in a condition suitable for occupancy.

CFAT:  See cash flow after tax.

CFBT:  See cash flow before tax.

City:  An urban settlement or system containing various functions, agents, institutions, and components which interact and work together to satisfy the wants and needs of its inhabitants (as well as a portion of the population in surrounding rural areas).

Class Life:  The useful economic life of an asset set by the Internal Revenue Service.

Clear Span Facility:  A parking structure with vertical columns on the outside edges of the structure and a clear span between columns, making it unnecessary for vehicles to maneuver between columns.

Close:  Third stage of four-stage transaction management process pertaining to bringing the parties together and consummating an agreement. The acronym CLOSE represents the contingencies, legal instruments, obstacles, signatures, and execution involved in the close stage.

Commencement Date: The date on which a lease begins. This typically but not always the day on which the tenant takes possession of the leased space, which usually occurs upon substantial completion of the tenant improvements.

Commercial Real Estate:  Any multifamily residential, office, industrial, or retail property that can be bought or sold in a real estate market.

Common Area:  For lease purposes, the areas of a building (and its site) that are available for the nonexclusive use of all its tenants, such as lobbies, corridors, and parking lots.

Common Area Maintenance (CAM):  This is the amount of Additional Rent charged to a tenant, in addition to the established base rent to maintain the common areas of the property shared by the tenants, HOA’s and from which all tenants benefit.  Examples include:  snow removal , outdoor lighting, parking lot sweeping, insurance, property taxes, etc.  CAM is one portion of the triple net expenses, NNN.

Community Center:  A community center is a retail property type that typically offers a wider range of apparel and other soft goods than the neighborhood center does. Among the more common anchors are supermarkets, super drugstores, and discount department stores. Community center tenants sometimes contain off-price retailers selling such items as apparel, home improvement/furnishings, toys, electronics, or sporting goods. The center is usually configured as a strip, in a straight line, “L”, or “U” shaped. Of the eight center types, community centers encompass the widest range of formats. For example, certain centers that are anchored by a large discount department store refer to themselves as discount centers. Others with a high percentage of square footage allocated to off-price retailers can be termed off-price centers.

Comparables:  Lease rates and terms of properties similar in size, construction quality, age, use and typically located within the same sub-market and used as comparison properties to determine the fair market lease rate for another property with similar characteristics.

Comparative Advantage:  The principle that cities or regions tend to produce those items or support those activities for which they have the greatest advantage over other areas as defined by the factors of production, demand, supporting industries, and quality of life considerations, as defined in relation to human, financial, and physical resources, and opportunity costs—costs expressed in terms of opportunities foregone.

Competitive Space:  Space in office buildings that contain or are intended to contain more than one occupant.  In addition to the multiple tenant criterion, typical characteristics of Competitive Space include tenants generally have short-term leases (10 years or less) and the interior of the building is not designed with one organization in mind but rather to accommodate the widest variety of tenants.

Competition (Retail):  A market condition or setting in which numerous firms compete for a share of the retail market in a given geographic area; a term which is also used to denote rivals or competitors.

Completed:  Newly constructed or renovated buildings are considered completed once they have received a certificate of occupancy.

Compliance With the Federal Americans with Disabilities Acts: States that the building complies with the ADA. This is important because both the tenant and the landlord are responsible for making the property accessible to disabled persons. The tenant should make sure that the landlord makes this warranty based on an ADA survey or an audit performed by an engineer or architect. In many cases- as older properties become available – they will be required to be made to be in compliance with ADA standards. Some exceptions apply.

Compound Interest:  Interest computed on the original principal and accumulated interest.

Compounding:  A type of calculation in which interest earned is reinvested and earns additional interest.

Concessions:  Cash expended by the landlord in the form of rent abatement, build-out allowance, or other payments to induce the tenant to sign a lease.

Condemnation:  The process by which private property is taken by a governmental agency for public use without the consent of the owner, but only upon payment of just compensation.

Condominiums:  A condominium is one of a group of commercial units where each property owner owns their individual unit space, and all the dwellings share ownership of areas of common use.  Condominium projects are not considered competitive with the general commercial market and should not be included in statistics if 50 percent or more of a project is occupied by individual owners of units.

Confidence Range Method (95%):  A statistical method of estimating a range of vacancy rates with a 95% confidence such that the expected vacancy rate for the next time period falls within that range (using the sample mean vacancy rate and corresponding standard deviation as input).

Consumer Price Index (“CPI”):  Measures inflation in relation to the change in the price of a fixed market basket of goods and services purchased by a specific population during a ‘base’ period of time.  The CPI is commonly used to increase the base rental periodically as a means of protecting the landlord’s rental stream against inflation.

Contiguous Space:  (1) Multiple suites/spaces within the same building and on the same floor which can be combined and rented to a single tenant.  (2) A block of space located on multiple adjoining floors in a building (i.e. a tenant leases floors 6 through 12 in a building).

Contract Rent:  The total rental obligation, expressed in dollars, as specified in a lease. Also known as base rent.

Conveyance:  Most commonly refers to the transfer of title to property between parties by deed.  The term may also  include most of the instruments by which an interest in real estate is created, mortgaged or assigned.

Core Factor:  the Core Factor, also referred to as the Common Area Factor or the Add-On Factor, equals the Rentable Square Feet minus the Usable Square Feet, with the difference divided by the Usable Square Feet ((RSF – USF)/USF).  This figure, stated as a percentage, is used to ‘factor up’ usable square footage to equal rentable square footage.

Cost:  The actual dollar amount paid for a property or the amount needed to build or improve it at a specified time in the future.

Cost Approach:  A method of determining the market value of a property by evaluating the costs of creating a property exactly like the subject.

Cost Approach Improvement Value:  The current cost to construct a reproduction of, or replacement for, the existing structure less an estimate for accrued depreciation from all causes. [Appraisal Institute]

Cost of Capital:  See weighted average cost of capital.

Cost of Occupancy:  Expenditures that are required to assume and maintain occupancy of a space. Such expenditures include rent and/or mortgage payments, and recurring costs, such as real estate taxes, repairs, operating expenses, and other outgoings directly resulting from the use of the property. (Encyclopedia of Real Estate Terms 2nd Edition, Damien Abbott)

Cost Recovery:  An annual deduction based on the class life of an asset.

Cost Recovery Recapture:  According to the Taxpayer Relief Act of 1997, for properties sold after May 6, 1997, a noncorporate taxpayer will have to recapture, or pay taxes on, any straight-line cost recovery taken during the holding period, to the extent there is any gain.

Covenant:  A written agreement inserted into deeds or other legal instruments stipulating performance or non-performance of certain acts or, uses of non-use of a property and/or land.

Covenant of Quiet Enjoyment:  Usually inserted in leases or conveyances whereby landlord or grantor promises that the tenant or grantee shall enjoy possession of the premises in peace and quiet without disturbance.

Cross-Over Chart:  A visual representation of the relationship between the costs of leasing and owning at varying discount rates.

Cross-Over (Office Use) Demand:  Industrial space that is used as office space in order to lower the rental rate of a property.  Also known as flex space.

Cumulative Discount Rate:  A discount factor applied to the rental rate that takes into effect all landlord lease concessions expressed as a percentage of the base rent.

Customer-Spotting Approach:  An approach to estimating the retail trade area (and sales/revenue potential) for a given establishment or center based on the location of existing customers via point-of-sale information (by obtaining customer address or zip code data) or customer surveys (by interviewing customers as they enter the store); data which can later be mapped to determine the extent of the trade area.

D

Data:  Refers to information collected and presented in a form that facilitates processing and analysis.

Data Dispersion:  The amount or degree to which data points in a series are spread or dispersed about their mean (also referred to as variation about the mean).

Debt-Coverage Ratio (DCR):  Ratio of net operating income to annual debt service. Expressed as net operating income divided by annual debt service.

Dedicate:  Transfer of property from private to public ownership.

Deed:  A legal instrument transferring title to real property from the seller to the buyer upon the sale of such property.

Deed of Trust:  An instrument used in many states in place of a mortgage by which real property is transferred to a trustee by the borrower (trustor), in favor of the lender (beneficiary), to secure repayment of a debt.

Default:  The general failure to perform a legal or contractual duty or to discharge an obligation when due.  Some specific examples are:  1) Failure to make a payment of rent when due.  2) The breach or failure to perform any of the terms of a lease agreement.

Delivered Buildings:  Buildings that have complete construction and are ready for tenant build-out.  May or may not yet have a Certificate of Occupancy.

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:  The loss of utility and value of a property.

Demand:  The volume or quantity of a product or service purchased, or willing to be purchased, in relation to price.

Demand Factors:  Elements or forces that influence the demand for goods and services in a given market area.

Demographics:  Characteristics of human populations as defined by population size and density of regions, population growth rates, migration, vital statistics, and their effect on socio-economic conditions.

Density:  Number of dwelling units divided by the gross acreage being developed.

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.

Desktop GIS:  GIS software programs that support a wide variety of functions, queries, and mapping capabilities for personal computer-based applications, geared toward visual presentation and descriptive analyses of geo-coded data.

Differential Cash Flow:  The difference that results when the cash flows from one alternative are subtracted from the cash flows from another alternative.

Direct Survey Method:  The use of personal interviews with key personnel in all major firms within a given community to determine the percentage of a firm’s revenues obtained from sales made outside the local economy for the purpose of estimating firm-specific basic employment and, by aggregation, the total basic employment in that community; a method that is known to be costly and time consuming.  

Disaggregating Demand:  The process of separating and identifying the various forces and factors which affect the demand for a given property type in a given market or the differentiation of demand by category (in reference to tenure, household income, and geographic submarket).

 Disaggregating Supply:  The process of separating and identifying the various forces and factors which affect the supply of a given property type in a given market or the differentiation of supply by category (including leased versus owned, unit type, price, and geographic submarket).

Discount Rate:  The percentage rate at which money or cash flows are discounted. The discount rate reflects both the market risk-free rate of interest and a risk premium. Also see opportunity cost.

Discounted Effective Rent:  The cash flows over the term of the lease, discounted to the present value.

Discounting:  The process of reducing the value of money received in the future to reflect the opportunity cost of waiting to receive the money.

Displaced Sales:  Sales that result from purchases made by customers who are not located in the subject service area (represents a revenue gain for retail establishments as sales are generated from consumers who reside outside the local trade area).

Diversification:  A method of reducing risk by investing in unrelated (uncorrelated) assets.

Double Net: Tenant pays property taxes and insurance

Drain Information:  Information (substantiated and rumored) regarding inventory that is to be removed from the market by the forecast period.

Drive-Time Approach:  An approach to estimating the trade area (and sales/revenue potential) for a given retail establishment or center based on the central place theory concept of range and how far people are willing to travel to obtain retail goods as defined by drive time or mileage.

Due Diligence:  The process of examining a property, related documents, and procedures conducted by or for the potential lender or purchaser to reduce risk. Applying a consistent standard of inspection and investigation one can determine if the actual conditions do or do not reflect the information as represented.

Dynamic System:  A complex and ever-changing or evolving set of diverse and interrelated entities and agents which are organized into a coherent and working totality which serves multiple and/or common purposes or objectives. Also see system and market dynamics.

E

Early Termination:  A right and/or clause provided by a landlord, in a lease to prematurely end the lease contac by the tenant.  Early termination clauses.

Earnest Money:  The monetary advance by a buyer of part of the purchase price to indicate the intention and ability of the buyer to carry out the contract.

Easement:  A right to use over the property of another created by grant, reservation, agreement, prescription or necessary implication.  It is either for the benefit of adjoining land (“appurtenant”) such as the right to cross A to get to B., or for the benefit of a specific individual (“in gross”), such as a public utility easement.

Economic Base:  Those economic activities or sectors in a local or regional economy that account for a certain share of the area’s income that is generated from exports of goods and services.

Economic Base Analysis:  Inquiries that focus on the extent to which changes in basic employment (export-oriented activities and associated wage-income) affect the economic, employment, and population growth of a local or regional economy.

Economic Base Multiplier:  A measure that provides a rough estimate of how changes in basic employment will affect total employment in a given region (all other things being equal); defined as the ratio of total employment to basic employment.

Economic Characteristics:  Attributes of the workforce, including production and employment activities.

Economic Feasibility:  A project’s feasibility in terms of costs and revenue, with excess revenue establishing the degree of feasibility.

Economic Obsolescence:  The reduction in a property’s value due to external circumstances such as legislation or changes in nearby property use.

Economic Rent:  Calculations or analysis to determine market rental value of a property at any given time, even thought the actual rent may be different.

Economic Sectors:  Branches or divisions of a local or regional economy in which particular activities take place.

Effective Rent:  The actual rental rate to be 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.

Effective Usable Area: Excludes those areas within the Useable Space that the tenant pays rent on but effectively cannot use such as columns and sharply angled spaces.

Efficiency:  A measure of the capacity or effectiveness of space to produce the desired results with a minimum expenditure of time, money, energy, and materials.

Efficiency Percentage:  The relationship of useable area to rentable area on a given property. Also see add-on factor, load factor, and rentable-to-useable ratio. Formula:

Efficiency % = Useable square feet

Rentable square feet

Eminent Domain:  A right of the government to acquire private property for public use by condemnation, in return for just compensation.

Employment Ratios:  The percentage of total employees (at the firm or industry level) that are office space users.

Encroachment:  Generally, a structure which extends impermissibly over a property line, easement boundary, or building setback line.

Encumbrance:  Any right to, or interest in, real property held by someone other than the owner, but which will not prevent the transfer of fee title (i.e. a claim, lien, charge or liability attached to and binding real property).

End Cap:  Corner space of a retail building or shopping center.  Typically, the most visible retail space and commands the highest rental rate.

Enforcement: Specifies how the agreement is to be enforced and who pays attorney fees. Many businesses negotiate a clause into leases requiring the parties to resolve any disputes through either mediation or arbitration.

Environmental Conditions:  Features or state of the physical environment and the surroundings, factors, or forces which influence or modify that environment.

Environmental Hazards:  Any physical or natural condition or event which possesses a risk to humans.

Environmental Impact Report:  A report generally prepared by an independent company detailing the probable environmental effect of a development of the surrounding area.

Environmental Impacts:  The repercussions of an activity or specific land use on the physical/social environment as a consequence of emissions, waste disposal, water and power useage, etc.

Equilibrium Point:  The price at which the quantity supplied equals the quantity demanded.

Equity:  The value of one’s interest in a property, consisting of its fair market value less any outstanding debt or other encumbrances.

Equity Lease:  A type of joint venture arrangement in which an owner enters into a contract with a user who agrees to occupy a space and pay rent as a tenant, but at the same time, receives a share of the ownership benefits such as periodic cash flows, interest and cost recovery deductions, and perhaps a share of the sales proceeds.

Equity Yield Rate:  The return on the portion of an investment financed by equity capital.

Escalation Clause:  A clause in a lease which provides for the rent to be increased to reflect changes in expenses paid by the landlord such as real estate taxes, operating costs, etc.  This may be accomplished by several means such as fixed periodic increases, increases tied to the Consumer Price Index or adjustments based on changes in expenses paid by the landlord in relation to a dollar stop or base year reference.

Estoppel Certificate:  A signed statement certifying that certain statements of fact are correct as of the date of the statement and can be relied upon by a third party, including a prospective lender or purchaser.  In the context of a lease, a statement by a tenant identifying that the lease is in effect and certifying that no rent has been prepaid and that there are no known outstanding defaults by the landlord (except those specified).

Exchange:  Under Section 1031 of the Internal Revenue Code, like-kind property used in a trade or business or held as an investment can be exchanged tax-deferred. Under a fully qualified Section 1031 exchange, real estate is traded for other like-kind property. All capital gains taxes are deferred until the newly acquired real estate is disposed of in a taxable transaction. The underlying philosophy behind the deferral of capital gains taxes is that taxation should not occur as long as the original investment remains intact in the form of (like-kind) real estate (like-kind refers to real property as such, rather than the quality or quantity of property).

Exclusive Agency Listing:  A written agreement between a real estate broker and a property owner in which the owner promises to pay a fee or commission to the broker if specified real property is leased during the listing period.  The broker need not be the procuring cause of the lease.

Exclusive Use:  A Lessee/Tenant’s exclusive right to operate and/or sell a produce on a property that has multiple suites and/or spaces (i.e. a retailer/lessee has the exclusive right to sell pizza on the property).

Expansion:  A phase of the real estate or business cycle characterized by the dramatic short-term increase in the supply of available units in a given market (due to economic growth and increasing construction activity) as a response to increasing and/or pent-up demand and rising price levels.

Expected Value (EV):  The sum of the weighted averages of all possible outcomes of a probability distribution.  Probability distribution is the collection of all possible outcomes for an event and their corresponding probabilities of occurrence. The probabilities of occurrence for each possible outcome are used as the weights. The sum of each possible value multiplied by its probability of occurrence equals the EV of the outcome. EVs can be calculated for any type of outcome the investor chooses to analyze: net operating incomes, after-tax cash flows, and rates of return (IRRs). An example of calculating the EV of the IRR for an investment follows:

Scenario IRR% Probability Weighted Average

Best-case 17.0 0.10 1.70

Most-likely case 14.6 0.80 11.68

Worst-case 13.2 0.10 1.32

Sum = 1.00 EV = 14.70

Expenditure Patterns:  The tendencies or propensities of individuals/households to spend disposable income on a given good or service in comparison to other goods and services (typically defined as a percentage of disposable income) in relation to income level or range and/or other demographic or socio-economic characteristics.

Expense Stop:  The level (or maximum amount) up to which the landlord will pay certain operating expenses. Amounts above the stop are the responsibility of the tenant.

Extension Option: An agreed continuation of occupancy under the same conditions, as opposed to a renewal, which implies new terms or conditions. In a lease, it is a right granted by the landlord to the tenant whereby the tenant has the option to extend the lease for an ad.

External Economies:  Savings or cost-cutting allowances realized by firms or industries within a given city that are primarily due to the advantages of sharing production inputs, information, and infrastructure and/or possibly linked to a city’s comparative advantage to support a given activity.

External Obsolescence:  A form or source of accrued depreciation considered in the cost approach to market value.  The loss of value is because of external forces and change. For example, a new mall causes traffic and congestion, negatively affecting residential property values nearby, or a motel is no longer viable because a highway is rerouted, or another example would be depressed market conditions.

F

Face Rental Rate: The ‘asking’ or nominal rental rate published by the landlord.

Factors of Production:  The rudimentary components of any production process or system consisting of: land and land-based resources (including raw materials); capital, which includes real capital such as machinery, facilities, and infrastructure and financial capital to start or expand businesses; labor or human input (as defined in terms of labor hours or quality/productivity); and technology which includes production know-how and methods, as well as management and operations skills.

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 a 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.

Fair Value of an Asset (or Liability):  The amount at which the asset (or liability) could be bought (or incurred) or sold (or settled) in a current transaction between willing parties, that is, other than in a forced or liquidation sale. (Real Estate Information Standards)

Fashion/Specialty Center:  This type of retail center is composed mainly of upscale apparel shops, boutiques, and craftshops carrying selected fashion or unique merchandise of high quality and price. These centers need not be anchored, although sometimes restaurants or entertainment can provide the draw of anchors. The physical design of the center is very sophisticated, emphasizing a rich décor and high-quality landscaping. These centers usually are found in trade areas having high-income levels.

Feasibility Analysis:  The process of evaluating a proposed project to determine if that project will satisfy the objectives set forth by the agents involved (including owners, investors, developers, and lessees).

FF&E:  The acronym for ‘Furniture, Fixtures & Equipment.’  Movable furniture, fixtures or other equipment that have no permanent connection to the structure of a building or utilities.

Financial Leverage:  The use of borrowed funds to acquire an investment.

Financial Risk:  The possible change in an investment’s ability to return principal and income.

First Generation Space:  Generally refers to new space that is currently available for lease and has never before been occupied by a tenant.

First Refusal Right or Right of First Refusal (Purchase):  A lease clause giving a tenant the first opportunity to buy a property at the same price and on the same terms and conditions as those contained in a third party offer that the owner has expressed a willingness to accept.

First Refusal Right or Right of First Refusal (Adjacent Space):  A lease clause giving a tenant the first opportunity to lease additional space that might become available in a property at the same price and on the same terms and conditions as those contained in a third party offer that the owner has expressed a willingness to accept.  This right is often restricted to specific areas of the building such as adjacent suites or other suites on the same floor.

Fixed Expenses:  Costs that do not change with a building’s occupancy rate. They include property taxes, insurance, and some forms of building maintenance.

Fixed Lease:  A lease in which the lessee pays a fixed rental amount for the duration of the lease.

Flat Lease: A lease in which the stated rent includes the operating expenses and taxes for the building. Same as Cross Lease. Opposite of Net Lease.

Flex Space:  Space that is flexible in terms of what it can be used for (for example, space that could be utilized for industrial or office activities). Also see cross-over (office use) demand.

Floodplain:  Land adjoining a river that would flood if the river overflows its banks.

Floor Area Ratio (FAR): The ratio of the gross square footage of a building to the land on which it is situated.  Calculated by dividing the total square footage in the building by the square footage of land area.

Forecast:  An estimate or prediction of a future condition or outcome.

Forecast Period:  An upcoming time period of interest in which a forecast is to be made.

Formal (or Geographic) Data:  Information/data collected and presented by formal region. Also see formal region.

Formal Region:  A region identified by political jurisdiction or on the basis of the presence or absence of one or more distinguishing features or characteristics.

Free Rent:  See rent concessions.

Full Recourse:  A borrowing with an unconditional guaranty.  Should the borrower become delinquent under a full recourse loan, he or she must accept full responsibility for the loan.

Full Serviced Lease: A lease in which the stated rent includes the operating expenses and taxes for the building. Same as Gross Lease. Opposite

Full Service Rent:  An all-inclusive rental rate that includes operating expenses and real estate taxes for the first year.  The tenant is generally still responsible for any increase in operating expenses over the base year amount.

Fully Amortized Mortgage Loan:  A method of loan amortization in which equal periodic payments completely repay the loan.

Functional Components:  Factors which determine how a location or site functions.

Functional Data:  Information/data collected and presented by functional region. Also see functional region.

Functional Feasibility:  Considerations made in the site selection process which assist in the evaluation of site potential as defined in terms of the practicality of a site, the best site for a given use, or the determination of a site’s best use, through the examination of linkages, competition, demographics, and market conditions.

Functional Obsolescence:  A form or source of accrued depreciation considered in the cost approach to market value.  The reduced capacity of a property or improvements to perform their intended functions due to new technology, poor design, or changes in market standards.

Functional Region:  A region delineated in terms of linkages or economic interactions that are typically organized as a trade area about a dominant location, center, or economic activity.

Future Value (FV):  The amount to which money grows over a designated period of time at a specified rate of interest.

FV:  See future value.

G

Gap Analysis:  An evaluation of the difference in the demand and supply of space (measured in terms of square footage) for a particular type of commercial property in a given market area where gaps are expressed as the amount of square footage demanded less the amount of square footage available in a given time period. Note that if demand exceeds supply, the gap will be positive. A positive gap indicates that potential opportunities exist for successful commercial real estate transactions. However, transactions might be avoided when supply exceeds demand (or when a negative gap occurs), as there is an oversupply of available space in the market.

General Market Area Gap Analysis:  A gap analysis that is carried out for a city or several cities (simultaneously) to identity one or more general market areas where a positive gap exists for a particular type of commercial real estate. Also see gap analysis.

General Market Factors:  Factors influenced by the demographic, economic, and locational characteristics and the organizational aspects of a market.

Generic Space:  Commercial space that can be used for a variety of purposes, such as multiple-use office space.

Geographic Information System(s) (GIS):  System(s) (usually computer-based) used for capturing, handling, storing, retrieving, managing, manipulating, and displaying geographic information or geo-coded data.

Geographic Submarket:  The total number of households or housing units within a given area as defined by tenure, income, and other socio-economic attributes that are known to exist or estimated to be within specific geographic units or divisions (for example, in various census tracts).

Globalization:  The condition of being or becoming globalized. A concept used to recognize crossjurisdictional interdependencies and the continuing integration of local, regional, and national economies which now form a larger economic and production system that is worldwide in scope and application; a trend that has greatly affected local economic change and real estate values.

Government:  Properties owned and at least 75 percent occupied by public sector government agencies.

Government Incentives:  Concession given or measures taken by local or regional government to attract firms or investment dollars to a given locality for the purposes of promoting economic growth and encouraging development.

Grace Period: Allows the parties a period of time in which to comply with the terms of the lease. This clause may specify the period of time in which the tenant must correct or “cure” a default in the rent.

Graduated Lease:  A lease, generally long term in nature, with varied rental payments and usually based on periodic appraisal or simply the passage of time.

Grant:  To transfer an interest in real property; either the fee or a lesser interest, such as an easement.

Grantee:  One to whom a grant of property or property rights is made; generally, the buyer.

Grantor:  One who grants property or property rights; generally, the seller.

Gravity Model:  A model that is used to account for a wide variety of flow patterns in human/economic systems, based on Newton’s gravity equation which defines gravity or the flow potential (between two sites or locations) as directly proportional to the product of their masses (or size) and inversely proportional to the square of the distance between them: gravity = (mass × mass) ÷ distance2.

Go Dark: This clause allows the Landlord to void the lease when a Tenant closes a business while the lease is still in effect. Relieves both parties of obligations.

Gross Area:  The entire floor area of a building or the total square footage of a floor.

Gross Lease:  A lease in which the tenant pays a flat sum for rent out of which the landlord must pay all expenses such as taxes, insurance, maintenance, utilities, etc… (see net lease)

Gross leasable area (GLA):  The total floor area designed for tenant occupancy and exclusive use, including basements, mezzanines, and upper floors, and it is measured from the center line of joint partitions and from outside wall faces. GLA is that area on which tenants pay rent; it is the area that produces income.

Gross operating income:  The total income generated by the operations of a property before payment of operating expenses. It is calculated from potential rental income, plus other income affected by vacancy, less vacancy and credit losses, plus other income not affected by vacancy. The Annual Property Operating Data form or the Cash Flow Analysis Worksheet can be used to calculate a property’s gross operating income.

Gross Rent Multiplier (GRM):  A method investors may use to determine market value. This method calculates the market value of a property by using the gross rents an investor anticipates the property will produce at end of year 1 multiplied by a given factor (known as the gross rent multiplier extracted from the marketplace).

Gross Up: An adjustment made to operating expenses to account for the occupancy level in a building. When operating expsense are “grossed up”, it means that the building’s variable expenses have been adjusted upwards to the level that those expenses would be incurred if the building was fully occupied (typically 95%).

Ground Lease:  A lease of the land only. Usually the land is leased for a relatively long period of time to a tenant that constructs a building on the property. A land lease separates ownership of the land from ownership of buildings and improvements constructed on the land.

Growth Patterns:  In reference to the patterns of urban or population growth in a geographic market, an important consideration in retail trade area analyses as growth patterns are known to affect sales/revenue potential within a market given the tendency of retail to follow population movement and income concentrations over time.

Guaranty:  Agreement whereby the guarantor undertakes collaterally to assure satisfaction of the debt of another or perform the obligation of another if and when the debtor fails to do so.

H

 

Hazardous Waste: This clause usually states that the Tenant is not allowed to have any hazardous waste on the premises. The clause may include a list of materials, which are considered to be hazardous.

Heavy Utility Needs:  In reference to location-decision considerations made in relation to the energy or power requirements of a firm/user in the assessment of the feasibility of a location to support a given activity.

Hedging:  Protecting oneself against negative outcomes.

High Order Good:  A good or service requiring a high threshold population before it is offered to a market.  Such a good or service requires a large number of consumers to support its business and requires a larger trade area than a low order good. Also see lower order good.

High-Tech:  Economic sectors and activities oriented toward the creation and production of hightechnology products and the use of advanced designs, techniques, or devices in fields like electronics, optics, lasers, aerospace, computers, semiconductors, and telecommunications.

 Highest and Best Use:  The reasonably probable and legal use of vacant land or an improved property, which is physically possible, appropriately supported, financially feasible, and that results in the highest value. [Appraisal Institute] 

Highest and Best Use (Financial) Analysis:  A determination of the highest and best use of one or more sites (either vacant or as though vacant) or properties as improved by examining the profitability of all possible use scenarios (including renovation, rehabilitation, demolition, and replacement)

Hold Over Tenant:  A tenant retaining possession of the leased premises after the expiration of a lease.

Hotelling: An alternative workspace concept where rather than having an assigned exclusive workspace, an employee accesses one space, perhaps being one of many such spaces in common with others on an as needed basis, and otherwise works outside of the office 

Hours of Operation:  A lessee/retailer’s established minimum or maximum hours to be open for business to the public.  Typically, open at least eight hours per day, six days per week.

Household:  A housing unit or residence at a given location that is occupied by one or more persons (that is, a social unit comprised of one or more individuals living together in the same dwelling or place).

Household Population:  The total number of households in a given geographic market or submarket as defined by specific demographic and socio-economic characteristics.

Housing Demand:  The total number of housing units demanded in a given market, defined as occupied household units divided by one minus the vacancy allowance for that market (where demand is affected by the rate at which new households are being added to the market, allowing for a normal level of vacancy).

HVAC:  The acronym for ‘Heating, Ventilating and Air-Conditioning.’

Hybrid Leases: Hybrid leases mix the features of Gross, Modified Gross leases and Net leases. In these, some expenses are passed on 100% to the tenants while others are included in the rent on a gross or modified gross basis. For example, utilities and cleaning may be charge to the tenants on a Net basis (fully charged to the tenant), while operating expenses and taxes are handled on a Modified Gross basis (base amount included in the rent, with a pass-through of increases).

I

Imbalances:  Unstable or nonsustainable conditions which arise out of a market disequilibrium or the lack of balance between the forces of supply and demand in any or all subcategories of commercial properties in one or more geographic submarkets over a given time period.

Imperfect Market:  A market in which product differentiation exists, there is a lack of important product information, and certain buyers or sellers may influence the market. Commercial real estate is bought and sold in an imperfect market.

Improvements:  In the context of leasing, the term typically refers to the improvements made to or inside a building but may include any permanent structure or other development, such as a street, sidewalks, utilities, etc…

In-Line Space:  A retail space that is located between two retailers or ‘in-between.’

In-Migration:  The process by which a given geographic area absorbs new individuals/households from locations outside that area (an influx of individuals/households to a given area).

In-the-Door Approach:  An approach to estimating the trade area (and sales/revenue potential) for a given retail establishment or center based on observed flow patterns or traffic counts, where estimates are obtained for both the percentage of traffic that stops or patronizes that establishment/center and the percentage of people coming in-the-door who make a purchase.

Income Capitalization Approach:  A method to estimate the value of an income-producing property by converting net operating income into a value. The cap rate is divided into the net operating income to obtain the estimated value. Value = net operating income ÷ capitalization rate

Index Lease:  A lease in which the rental amount adjusts accordingly to changes and/or movements in a price index, commonly the consumer price index.

Industrial Gap:  The difference between the demand for an industrial property and the supply of that property in a given market or area.

Industrial Location Decision-Making:  A decision-making process that involves the examination and evaluation of alternative locations or sites for a particular industrial activity based on location/site feasibility characteristics; great importance is placed on the national or regional location decision (usually narrowing the location decision to a handful of cities or localities), with less importance given to the local site selection process.

Industrial Gross Lease: In addition to the Rent, the Tenant is responsible for paying for their share of utilities and janitorial service.

Industrial Property:  Commercial properties that are used for the purposes of production, manufacturing, or distribution.

Industrial Service Area:  The geographic area within a market that contains either an acceptable number of employees (and meets necessary labor requirements), or the necessary service and resources needed to support a given industrial activity or facility.

Initial Investment:  The outlay of cash needed to acquire an investment.

Input-Output Modeling:  A mathematical approach to the description of a local or national economy, which takes explicit account of the flows and linkages within and between economic sectors. Recognizing that output (products and services) from one sector may require production inputs for other sectors, used to estimate sector- and region-specific multipliers for the purpose of analyzing the direct and indirect impacts of a given change in a particular sector or region.

Insurable Value:  The value of the portions of the property that are physically destructible.

Insurance and Liability: Specifies who is responsible for causalty and liability insurance and the coverage required.

Intangible Characteristics:  Attributes that are not directly measurable or quantifiable, and therefore must be expressed in a qualitative or abstract manner.

Interest-only Loan: A method of loan amortization in which interest is paid periodically over the term of the loanand the entire original loan amount is paid at maturity.

Internal Growth:  The rate at which a base population or the number of new households is changing due to natural increase (births less deaths) and time (the aging and maturation of that population), as children are born, grow up, and form families and households of their own.

Internal Rate of Return (IRR):  The percentage rate earned on each dollar that remains in an investment each year. The IRR of an investment is the discount rate at which the sum of the present value of future cash flows equals the initial capital investment.

Internal Rate of Return Method:  A comparison method that calculates the internal rate of return of the differential cash flow between any two investment alternatives, then compares that rate with the user’s opportunity cost. Also see internal rate of return.

Inventory:  The total square footage of existing buildings (versus proposed or under construction) that are able to be occupied by tenants.  The figure is typically quoted in rentable square feet for office space and in usable or gross square feet for flex, industrial and retail space.

Investing:  Limiting current consumption in favor of future consumption.

Investment Value:  The value to a specific investor, based on that investor’s requirements, tax rate, or financing.

IRR:  See internal rate of return.

IRR of the Differential:  The internal rate of return on the difference between the cash flows for any two investment alternatives. Also see internal rate of return method and differential cash flow

J

No glossary terms are available.

K

 

Key federal laws:  With respect to the handling of hazardous materials, they are important laws or statutes enacted to enforce the responsible handling of materials to minimize the danger to human beings and/or the environment.

L

Labor Pool:  A body or core group of workers (employed and employable) that make up the local labor force.

Landlord:  The lessor or owner of the leased property.

Landlord Improvements: Specifies which improvements the landlord is to make to the premises prior to the tenant’s taking possession of the property.

Landlord’s Lien: A Landlord lien can be put in the lease. This is a guarantee and notice from the landlord for the ability to levy Tenants personal property to pay back rent owed.

Landlord-Paid Tenant Improvements (LPTI):  The total cost (outlay) of necessary tenant improvements paid by the landlord netted against any contribution made by the tenant.  Also commonly referred to as ‘Tenant Finish Allowance’.

Landlord Solvency: Specifies tenant’s rights if the landlord is in financial trouble and there is a foreclosure on the leased property.

Land Sale-Leaseback:  The same concept as a sale-leaseback, but only the land is sold and leased back using a ground lease.

Leakage (Retail):  Purchases made in other service areas by consumers located within the subject area (representing a loss of revenue for retailers located within the trade area in which those consumers reside).

Lease:  An agreement whereby the owner of real property (i.e. Landlord/Lessor) gives the right of possession to another (i.e. Tenant/Lessee) for a specified period of time (i.e. term) and for a specified consideration (i.e. rent).

Lease Agreement:  The formal legal document entered into between a Landlord and a Tenant to reflect the terms of the negotiations between them; that is, the lease terms have been negotiated and agreed upon, and the agreement has been reduced to writing.  It constitutes the entire agreement between the parties and sets forth their basic legal rights.

Lease Buyout:  The process by which a landlord, tenant, or third party pays to extinguish the tenant’s remaining lease obligation and rights under its existing lease agreement.

Lease Commencement Date:  The date usually constitutes the commencement of the term of the lease for all purposes, whether or not the tenant has actually taken possession so long as beneficial occupancy is possible.

Lease Interest: A property interest that arises from the association of a lease with a property e.g., a leased fee estate or leasehold estate.

Lease Term: The specific period of time in which the Landlord grants to the tenant the right to possession of real estate.

Lease Terminology:  Terms commonly used in reference to a lease.

Leased Fee:  In exchange for permitting a tenant to use the property, the owner/lessor has the right to receive rental income and the right to repossess the property upon termination of the lease.

Leased Fee Interest:  The value (to the owner) of the rental payments plus the value of the property at the end of the lease term (reversionary interest).

Leasehold Estate:  In exchange for rent, the tenant has the right to occupy and use the property for the duration of the lease.

Leasehold Improvements:  Improvements made to the leased premises by or for a tenant.  Generally, especially in new space, part of the negotiations will include in some detail the improvements to be made in the leased premises by Landlord.

Leasehold Interest:  The value (to the tenant) of the lease. The value of the leasehold interest is determined by present value of the difference between market rent and the contract rent.

Leasing:  A means of obtaining the physical and partial economic use of a property for a specified period without obtaining an ownership interest.

Lessee:  The person renting or leasing the property. Also known as a tenant.

Lessor:  The person who rents or leases a property to another. Also known as a landlord.

Letter of Intent:  A preliminary letter that outlines the terms of a proposed agreement for a final contract (lease agreement).  They are most often non-binding and used as a written form of negotiation between the lessor/landlord and the lessee/tenant.

Leverage:  The use of borrowed funds to finance a portion of the cost of an investment.

Lien:  A claim or encumbrance against property used to secure a debt, charge or the performance of some act.

Lifestyle Characteristics (Psychographics):  Intangible characteristics of a local economy that define and shape the quality of life element and the social and cultural identity of the local population.

Linkages:  The cost to transport goods, services, or people to and from a site measured in time, distance, and inconvenience.

Liquidation Value:  The likely price that a property would bring in a forced sale (foreclosure or tax sale). Used when a sale must occur with limited exposure time to the market or with restrictive conditions of sale.

Liquidity:  The ability to convert an investment into cash quickly without loss of principal.

Listing Agreement:  An agreement between the owner of a property and a real estate broker giving the broker authorization to attempt to sell or lease the property at a certain price and terms in return for a commission, set fee or other form of compensation.

Load Factor:  The ratio of rentable area to useable area. The load factor is a gauge by which a user can evaluate different sites with comparable rents. It is also known as the add-on factor.

Loan Balance:  The amount of money remaining to be paid on an amortizing loan at a given time.

Loan or Mortgage Value:  That portion of the value of real property recognized by the lender when used to secure a loan.

Loan Point:  A charge prepaid by the borrower upon the origination of a loan. One point equals one percent of the loan amount.

Loan-to-Value Ratio (L/V):  The amount of money borrowed in relation to the total market value of a property.  Expressed as the loan amount divided by the property value.

Location Analysis:  The process of evaluating whether a general location meets the requirements of being both possible and practical as defined on the basis of technical and functional components.

Location Quotient:  An index, defined in ratio form that compares the proportion of a local activity to the proportion of that activity found at some larger geographic scale, such as the nation.

Location Quotient Method:  A method for estimating a community’s economic base multiplier using basic employment estimates obtained from estimated location quotients (under various simplifying assumptions).

Long Term Lease:  In most markets, this refers to a lease whose term is at least ten (10) years from initial signing until the date of expiration or renewal option.

Lower Order Good:  A good or service requiring a low threshold population to be offered. A good or service is considered to have a low threshold if it does not require a large number of consumers to support its business and thus requires a small trade area. Also see high order good.

 M

Macro-Economy:  Generally used in reference to matters of economy or economic factors and forces portrayed or operating at the macro-level (as opposed to micro-level), used synonymously with national economy.

Maintenance and Repairs: Specifies which party is responsible for the maintenance and repair of which portions of the property.

Management:  The ability to monitor the performance of an investment and make changes as needed.

Managing Risk:  The steps taken by an investor or manager to control or reduce investment risk.

Mapping GIS Software:  Computer-mapping programs that perform any of a wide variety of map-making tasks (for both on-screen and file-oriented use).

Marketability:  The ability to sell or lease a property quickly. Marketability deals with the appeal and demand for a property, good, or service.

Market Area:  A geographical area in which supply and demand operate to influence the course of industrial and commercial activities, for example, a Metropolitan Statistical Area (MSA).

Market Adjustments:  A change in market parameters or conditions brought about in response to one or more market signals (including price changes from shifts in supply and demand); typically characterized as cycles, fluctuations, or trends (categories that differ in terms of cause, duration, and impact on commercial real estate markets).

Market Analysis:  The process of examining market supply and demand conditions, demographic characteristics, and opportunities; identifying alternative locations/sites that meet specific objectives or satisfy various criteria; and assessing the financial feasibility of those locations/sites to facilitate decision making regarding the commercial potential or suitability of various locations/sites to support a given activity or use.

Market Data:  Information/data collected and displayed for a given market or by market area.

Market Data Approach:  A method of determining the property’s value by analyzing recent sales or rental prices of comparable properties.

Market Dynamics:  In reference to changing market conditions and the underlying processes responsible for creating change and defining/redefining interrelationships amongst components in an economic system (consider the change in price levels of a given commodity as an outcome of the forces and interplay of supply and demand).

Market Feasibility:  Pertaining to the evaluation or selection of a site or an analysis of a site’s highest and best use. Also see feasibility analysis.

Market Gap:  The demand for space minus the supply of space for a specific type of commercial property in a given real estate market. Also see general market area gap analysis.

Market Opportunities:  Advantageous circumstances in a market which facilitate a given action or outcome that is generally viewed as favorable from a money-making standpoint.

Market Pricing:  The pricing of commodities (including rental rates of various types of commercial properties) as determined by the forces and factors of influence operating in a market.

Market Rent:  The rental income that a property would command on the open market with a landlord and a tenant ready and willing to consummate a lease in the ordinary course of business; indicated by the rents that landlords were willing to accept and tenants were willing to pay in recent lease transactions for comparable space.

Market Risk:  The possibility that downward market trends will reduce an investment’s market value.

Market Share:  Refers to the percentage of total sales in a retail category that each competing outlet is expected to capture based on current patterns and trends in the market.

Market Strategy:  A course of action defined with respect to a particular real estate market phase. For example, consider the market strategy of avoiding real estate transactions when there is an oversupply of space available in the market.

Market Value:  The most probable price that a property would bring in a competitive and open market under fair sale conditions. Market value also refers to an estimate of this price.

Master Lease:  A primary lease that controls subsequent leases and which may cover more property than subsequent leases.  An Executive Suite operation is a good example in that a primary lease is signed with the landlord and then individual offices within the leased premises are leased to other individuals or companies.

Match:  Second stage of four-stage transaction management process pertaining to gathering and evaluating property information to unite the investor and user. The acronym MATCH represents the activities to market, analyze, target, compare, and highlight during the match stage.

Mean:  A measure of central tendency (for a distribution of values) defined as the average value of a variable in a sample and calculated by adding together all the values observed in a data set and dividing by the number of values observed.

Median:  Defined as the middle value of a data set (or sample) when the values are arranged in order (by size ranking, in ascending or descending order). Note that for an odd number of values in an ordered data set, the median is identified as the value which divides the data set into two data sets of equal size on each side of the median or middle value. For an even number of values arranged in order, the median is found by simply calculating the value mid-way between the two middle values. Note that the position of the median value of an ordered data set containing n observations may be found by using the formula: position of the median = n/2 + 1/2.

Medical:  Properties consisting of 75 percent or greater medical tenancy.

Meditation: Both parties voluntarily agree to work with a mediator, a neutral third party, to craft their own agreement. Mediation agreements are confidential and may be binding. The mediator is not a judge or a fact-finder. They will not make a decision in your case.

Metropolitan Statistical Area (MSA):  Generally, the area in and around a major city. The Office of Management and Budget (OMB) defines an MSA as having one of the following characteristics: a city with a population of at least 50,000, or an urbanized area with a population of at least 50,000 with a total metropolitan population of 100,000.

Mid-Month Convention:  A requirement of the Tax Reform Act of 1984 that taxpayers use the 15th of the month to establish the date of acquisition and date of disposition when calculating cost recovery deductions. This act applies to real estate placed in service after June 22, 1984 (with the exception of low-income housing).

Minimum Requirement:  The observed minimum proportion of employment in a given economic sector for communities within a given size range, assumed to be that employment/activity level that is necessary to serve the needs of a community that falls within a predetermined size range (the minimum amount of nonbasic employment necessary to support a typical mix of industry for a population base of a given size range).

Minimum Requirements Method:  A method for estimating a community’s economic base multiplier using basic employment estimates that are obtained by comparing employment levels by economic sector to the identified minimum requirement.

Mixed-Use:  Space within a building or project providing for more than one use (i.e. a loft or apartment project with retail, and apartment building with office space, an office building with retail space.)

Modified Gross:  A Modified Gross rent rate encompasses any arrangement whereby the tenant pays one or more of the expenses covered by the landlord in a Full Service lease, but not all of the expenses in a Triple Net lease.

Mortgage Release Price: A specific amount of money that must be paid to lender so that lien specified by the mortgage on a particular property will be released.

Moving Allowance:  A specified dollar amount paid by the owner to cover, in part or in whole, tenant moving expenses. Also known as owner’s moving expense.

Moving Expenses:  The cost incurred by the tenant to move into the new space. The landlord may pay a portion or all, depending on what is negotiated in the lease. Also see moving allowance.

Multifamily Housing:  Housing units that accommodate more than one family or household.

Multi-Tenant:  A Multi-Tenant building is leased to two or more tenants or has available space to accommodate two or more tenants.

Multiple-Use Office Space:  Office space that can be used for a variety of purposes; sometimes referred to as generic office space.

N

N:  A component of the T-bar that represents the number of periods over which the investment is held.

Negative Leverage:  Borrowed funds are invested at a rate of return lower than the cost of funds to the borrower.

Neighborhood Center:  This center is designed to provide convenience shopping for the day-to-day needs of consumers in the immediate neighborhood. According to ICSC’s SCORE publication, a supermarket anchors half of these centers, while about a third have a drugstore anchor. Stores offering pharmaceuticals and health-related products, sundries, snacks and personal services, support these anchors. A neighborhood center is usually configured as a straightline strip with no enclosed walkway or mall area, although a canopy may connect the storefronts.

Net Absorption:  Net absorption is the net change in physically occupied space between the current measurement period and the last measurement period.  Net absorption can be either positive or negative.  Leasing activity in buildings under construction is counted as net absorption when the property is delivered.

Net Lease:  A lease in which the tenant pays, in addition to rent, all operating expenses such as real estate taxes, insurance premiums, and maintenance costs. Also see gross lease or NNN Lease.

Net-Net-Net Lease: A lease in which the tenant pays all the operating expenses including taxes, insurance and repairs/maintenance. NNN or Triple Net Leases are sometimes also called Full Net Leases. Generally the NNN expenses will be estimated perhaps based on prior experience and the total annual amount will be divided into monthly installments based on the SF the tenant occupies and collected monthly along with the rent. After the end of the year – the owner will be responsible for providing a statement of income/ expense for the NN expenses and an adjustment may be in order based on actual experience.

Net Operating Income (NOI):  The potential rental income plus other income, less vacancy, credit losses, and operating expenses.

Net Present Value (NPV):  The sum of all future cash flows discounted to present value and netted against the initial investment.

Net Rentable Area:  The floor area of a building that remains after the square footage represented by vertical penetrations, such as elevator shafts, etc., has been deducted.  Common areas and mechanical rooms are included and there are not deductions made for necessary columns and projections of the building.

Neutral Leverage:  An investment situation in which the cost of borrowed funds is exactly equal to the yield provided by the investment.

NOI:  See net operating income.

Non-Basic Employment:  Employment that is considered to be of the nonexport-oriented variety: employment not associated with export-oriented activities. Nonbasic employment is best characterized by industries and activities that produce goods and services exclusively for local use or consumption.

Non-Compete Clause:  A clause that can be inserted into a lease specifying that the business of the tenant is exclusive in the property and that no other tenant operating the same or similar type of business can occupy space in the building.  This clause benefits service-oriented businesses desiring exclusive access to the building’s population.

Non-Household Population:  That portion of the total population that is not considered to be part of the local residential housing market; composed of individuals living in dormitory-like facilities (including military bases) or institutional settings (such as students in residence halls).

Novation: This requires all three parties to consent, the Landlord, the Tenant and the new Tenant.  This creates a new contract and transfers all duties and obligations to the new Tenant/Assignee. This usually creates a new contract with the same terms and conditions as the current contract, but the parties are different. The Landlord and the new Tenant are the only parties to this new contract, and the former Tenant is released of all obligations under the old Lease.

NPV:  See net present value.

O

Obsolescence:  In reference to the inadequacy, disuse, outdated, or nonfunctionality of facilities, infrastructure, products, or production technologies due to effects of time, changing market conditions, or decay (a factor considered in depreciation to cover the decline in value of fixed assets due to the invention and adoption of new production technologies, or changing consumer demand).

Occupancy cost:  The actual dollars paid out by the tenant to occupy the space. It can be expressed in either pre-tax or after-tax dollars.

Office:  Low-rise – Fewer than seven stories high above ground level.

Mid-rise – Between seven and twenty-five stories above ground level

High-rise – Higher than twenty-five stories above ground level. [BOMA]

Office gap:  The difference between the demand for office space and the supply of office space by property type, submarket, sector, or user classification in a given geographic market.

 Office property:  A commercial property type used to maintain or occupy professional or business offices.  Such properties typically house management and staff operations. The term office can refer to whole buildings, floors, parts of floors, and office parks. Office space that can be used for a variety of purposes is sometimes referred to as generic office space. Office properties may be classified as Class A, B, or C. Class A properties are the most functionally modern.

Properties Classed B and C in the same market typically command lower rents because they are older and in need of modernization. They may not be as efficient or desirable as Class A properties because their design or condition causes functional problems.

Office Space: Is loosely classified based on the quality of construction, features and the status of location:

Class A. Most prestigious buildings competing for premier office users with rents above average for the area. Buildings have high quality standard finishes, state of the art systems, exceptional accessibility and a definite market presence.

Class B: Buildings competing for a wide range of users with rents in the average range for the area. Building finishes are fair to good for the area and systems are adequate, but the building cannot compete with Class A at the same price.

 

Class C. Buildings competing for tenants requiring functional space at rents below the area average.

Operating Expense Stop:  A negotiable amount at which the owner’s contribution to operating expenses stops. It also can be stated as the amount above which the tenant is responsible for its pro rata share of operating expenses.

Operating expenses:  Cash outlays necessary to operate and maintain a property. Examples of operating expenses include real estate taxes, property insurance, property management and maintenance expenses, utilities, and legal or accounting expenses. Operating expenses do not include capital expenditures, debt service, or cost recovery.

Opportunity cost:  The cost of selecting one alternative is the benefit foregone from the next best alternative.  Also see discount rate.

Original Basis:  The total amount paid for a property, including equity capital and the amount of debt incurred.

Out-Migration:  The process by which a given geographic area expels or loses individuals/households to locations outside that area (an outflux of individuals/households from a given area).

Outlet Center:  A retail property type usually located in rural or occasionally in tourist locations, outlet centers consist mostly of manufacturers’ outlet stores selling their own brands at a discount.

These centers are typically not anchored. A strip configuration is most common, although some are enclosed malls, and others can be arranged in a village cluster.

Overage Rent:  See percentage rent.

Oversupply:  In reference to commercial real estate, oversupply is a stock or supply of a given commercial property type that is greater than that which can be cleared under prevailing prices levels and market conditions (for example, excess supply). Also, a phase of the real estate market cycle denoting that period of time in which commercial real estate markets become saturated with units due to overbuilding.

Owner Occupied:  An Owner-Occupied facility is owned by the tenant that occupies the property rather than the developer or a third party investor.  A property is considered to be owner-occupied if the owner occupies 50 percent or more of the space.  Owner-occupied facilities are not counted as part of the competitive inventory in the compilation of market statistics.

Owners Moving Expense:  See moving allowance.

Owning:  A means of obtaining the full economic use of a property for an unspecified period by obtaining an ownership interest.

P

Parking Ratio:  The intent of this ratio is to provide a uniform method of expressing the amount of parking that is available at a given building.  Dividing the total rentable square footage of a building by the building’s total number of parking spaces provides the amount of rentable square feet per each individual parking space (expressed as 1 / xxx or 1 per xxx).  Dividing 1000 by the previous result provides the ratio of parking spaces available per each 1000 rentable square feet (expressed as x per 1000)

Partially Amortized Mortgage Loan:  The payments do not repay the loan over its term and thus a lump sum (balloon) is required to repay the loan.

Participation Mortgage:  A loan secured by real property, with a stated interest rate that also provides for a share to the lender in annual net cash flow, gain on sale, or proceeds from refinancing the property. (Real Estate Information Standards)

Party:  The parties to a lease are Landlord and the Tenant. The Landlord owns the property and allows the Tenant to use the property in exchange for monetary payments called Rent.

Passive Income:  Income from rental activity, limited business interests, or other activities in which the investor does not materially participate.

Passive Losses:  Losses from the ownership of passive investments.

Pass Throughs:  Refers to the tenant’s share of operating expenses (i.e. taxes, utilities, insurance, repairs) paid in addition to the base rent.  Also referred to as the NNN or triple net charges.

Payment (PMT):  A periodic amount paid or received for two or more periods.

Percentage Lease:  A lease in which the rent amount is based on a percentage of gross sales (monthly or annually) made by the tenant.  There is usually a base rent amount to which ‘percentage’ rent is then added at a predetermined ‘natural’ or ‘unnatural’ breakpoint.  This type of clause is most often found in restaurant and retail leases.  Also known as ‘overage rent.’

Perfect Market:  A market in which the products are homogenous, there is complete information, and no buyers or sellers may influence the market.

Physical Depreciation or Deterioration:  A form or source of accrued depreciation considered in the cost approach to market value.  The physical decay or deterioration of a property that may result from breakage, deferred maintenance, effects of age on construction material, and normal wear and tear.

Physical Limitations:  Limitations imposed by the physical size, shape, or characteristics of a property or its level of development.

Pipeline Information:  Information (substantiated and rumored) regarding new inventory that is in the process of being added to the market by a specified forecast period.

Planned Additional Inventory:  In reference to commercial real estate, it is the supply or stock of a specific type of commercial unit or the amount of space that will be available in an upcoming forecast period from expansions, conversions (in), and new construction.

Planned Removed Inventory:  In reference to commercial real estate, it is the supply or stock of a specific type of commercial unit or the amount of space that will not be available in an upcoming forecast period due to demolitions and conversions (out).

Plus E: Electricity – In whatever type of lease – the tenant is responsible for their own electricity expense.

Plus U: Plus utilities – may include electric, water, gas, etc. typically individually metered to the property or particular space.

PMT:  See payment.

Population/Expenditure Approach:  An approach to estimating the trade area (and sales/revenue potential) for a given retail establishment or center based on the minimum area (or threshold population) that would be required to sustain a business, by calculating the population necessary to support total square footage of both existing and proposed space for a specific-use and determining/mapping the extent of the trade area based on population density.

Population Growth:  The rate at which a given population base in a given geographic area is growing (positive or negative) in relation to the forces of internal growth, in-migration, and out-migration; a factor that is widely acknowledged as having the greatest impact on the demand for housing.

Population Migration:  The movement and relocation of people from one place of residence to another in response to social and economic factors and forces; a long-term trend that can be expected to affect local economies and real estate values.

Portfolio Income:  Income from interest, dividends, royalties, or the disposition of property held for investment.

Positive Leverage:  Borrowed funds are invested at a rate of return higher than the cost of the funds to the borrower.

Potential Rental Income:  The total amount of rental income for a property if it were 100 percent occupied and rented at competitive market rates.

Power Center:  This retail center is dominated by several large anchors, including discount department stores, off-price stores, warehouse clubs, or category killers—stores that offer tremendous selection in a particular merchandise category at low prices. The center typically consists of several freestanding (unconnected) anchors and only a minimum amount of small specialty tenants.

Premise: The location, address and square footage of the space to be leased. Should be clearly defined or described in the Lease.

Preleased:  Refers to space in a proposed building that has been leased before the start of construction or in advance of the issuance of a Certificate of Occupancy.

Present Value (PV):  The sum of all future benefits or costs accruing to the owner of an asset when such benefits or costs are discounted to the present by an appropriate discount rate.

Present Value Method:  A comparison technique that compares the present values of the cash flows for any two real estate alternatives. The best user alternative is based on the lower present value amount.  It is not the same as net present value.

Prestige and Property Classes:  In reference to the recognition that various levels of status may be assigned to commercial properties as defined by user needs, the quality of a property and its amenities in relation to site factors, and its general location, suggesting the division of properties into distinct classes.

Price:  The dollar amount that was offered, asked, or actually paid for a property.

Primary Source Data:  Information obtained directly from field observations and survey instruments (by observing or monitoring a phenomenon or site firsthand), typically involving quantitative measurement and/or qualitative assessment of that which is observed or monitored.

Principal:  The portion of a loan payment used toward reducing the original loan amount.

Probabilities and Expected Value:  A quantifiable method of risk analysis. This method assigns probabilities to specific, possible investment outcomes, calculates an expected outcome for the investment based on these probabilities, and measures the likelihood that actual results will differ from the expected outcome. This method of risk analysis can be applied directly to real estate investments. It also can be used in conjunction with the forecasts generated through sensitivity analyses.  This technique requires that probabilities be assigned to possible outcomes. Probabilities on the best-case, most-likely, and worst-case scenarios can be assigned to the resulting expected values for the return. Variances also can be computed using the assigned probabilities.

Production:  Any economic activity that alters, enhances, or transforms a product or material, thereby increasing the value of that product or material by changing its physical form and/or location.

Property: Gives a full description of the property being leased. This description should include the suite number, street address, city, state, and zip code. It should also include the number of square feet in the space.

Property Data:  Property/site-specific information obtained from primary and secondary sources.

Property Lease: In multi-unit building, the lease a corporation provides to the stockholders

Property Market:  The supply and demand for ownership interests in property.

Property-Specific Factors:  Factors influenced by the site-specific and technical characteristics of a property or parcel including its layout, limitations, orientation, physical features, and ability to comply with government imposed zoning and land-use restrictions.

Property Type:  The classification of commercial real estate based on its primary use. The four primary property types are: retail, industrial, office, and multi-family residential.

Proposed:  Proposed projects have been announced, and in some cases approved by a planning commission, but vertical construction has not yet commenced.

Proprietary Data:  Information obtained (usually at a cost) from private sources or firms that hold the exclusive rights to manufacture and distribute information created for specific commercial applications, supplying business, sales, and market-potential data and other information services to a targeted audience.

Pro rata:  Proportionately; according to measure, interest or liability.  In the case of a tenant, the proportionate share of expenses for the maintenance and operation of the property.

Purchasing Power Risk:  The variability in the future purchasing power of income received from an investment.

Purchase Option: Gives the tenant an option to purchase the facility at the end of the lease term. This provision should specify not only the option price but also when and how the option must be exercised.

PV:  See present value.

Q

Qualify:  First stage of four-stage transaction management process pertaining to the process of gathering and evaluating information to measure a client’s readiness, willingness, and ability to consummate a transaction. The acronym QUALIFY represents the considerations of quantify, usage, authority, latitude, intention, financial, and yield involved in the qualify stage.

 Quality of Life:  The psychological and individual aspects of social well-being as perceived and experienced by people in reference to a given geographic area, which reflect a state of mind or position on the prevailing quality of existence in relation to various socio-economic and environmental conditions and/or amenities known to be associated or found within that area.

R

Range:  The maximum distance consumers are willing to travel to purchase a good or service from a given establishment or location. Hence, the boundary or outer limits of the market area circumscribed about a location at which a good or service may be purchased can be easily identified having knowledge of the range.

Rate of Return:  The percentage return on each dollar invested. Also known as yield.

Real Estate Cycles (Phases):  The regularly repeating sequence of economic downturns and upturns and associated changes in real estate market transactions tied to market dynamics and changing macroeconomic conditions, whose phases include (in order) recession, recovery, expansion, and oversupply.

Real Estate Fluctuations:  Short-term variations in real estate prices or rents (usually lasting anywhere from one day to a few months) caused by natural hazards (such as tornadoes, hurricanes, floods, earthquakes, and wildfires) or boosts or shocks to the local economy (such as the entry or exit of major employers).

Real Estate Investment Trust (REIT):  An investment vehicle in which investors purchase certificates of ownership in the trust, which in turn invests the money in real property and then distributes any profits to the investors. The trust is not subject to corporate income tax as long as it complies with the tax requirements for a REIT. Shareholders must include their share of the REIT’s income in their personal tax returns. (Barron’s Dictionary of Real Estate Terms and Encyclopedia of Real Estate Terms 2nd Edition, Damien Abbott)

Real Estate Trends:  Long-term movements or tendencies in the demand for commercial real estate (which can typically last for years or decades), usually tied to macro-economic or business cycles.

Real Property:  Land, and generally whatever is erected or affixed to the land, such as buildings, fences, and including light fixtures, plumbing, hood systems, sinks, walk-in coolers, doors and heating fixtures, or other items which would be personal property if not attached.

Recession:  A period of reduced economic activity or a general economic downturn marked by a decline in employment, production, sales, profits, and weak economic growth that is not as severe or prolonged as a depression. As a result, sales in real estate markets are slow, property values and price levels are flat or decreasing, and there is virtually no construction of new stock given excess supply of units in most real estate markets.

Recovery:  A period of increasing economic activity or a general economic upturn, typically following a stabilization of key sectors and industries, marked by increasing sales and recovering prices in real estate markets as a direct result of an external shock (for example, a favorable tax code revision) or an increase in demand for commercial real estate which, in turn, leads to the absorption of excess space. Little or no construction occurs during the initial stages of this phase until most of the excess space is absorbed or until reasonable financing opportunities become available.

 Regional Center:  This center type provides general merchandise (a large percentage of which is apparel) and services in full depth and variety. Its main attractions are its anchors: traditional, mass merchant, discount department stores, or fashion specialty stores. A typical regional center is usually enclosed with an inward orientation of the stores connected by a common walkway and parking surrounds the outside perimeter.

Regulatory Requirements:  In reference to land use, they are restrictions or guidelines on development or use of land, properties, or facilities as defined in accordance with design standards, building construction requirements, land use plans, occupancy codes, and zoning classifications as determined by the controlling or governing parties at the municipal or county levels.

Relocation Clause: This is period of free rent given to Tenant by the landlord. It can be associated with Tenant Improvements, where Landlord does not charge rent for the time when improvements are being made and the business is not operating. May be used as a negotiating tool.

Renewal Option:  A clause giving a tenant the right to extend the term of the lease, usually for a stated period of time and at a rent amount as provided for in the option language.

Rent:  Compensation or fee paid, usually periodically (i.e. monthly) rent payments, for the occupancy and use of any rental property, and, buildings, equipment, etc…

Rent Commencement Date:  The date on which a tenant begins paying rent.  The dynamics of the marketplace will dictate whether this date coincides with the lease commencement date or if it commences months later (i.e. in a weak market, the tenant may be granted several months free rent).  It will never begin before the lease commencement date.

Rent Concession:  A period of free rent given to the tenant by the lessor.

Rentable Area/Rentable SF:  Office space is typically quoted in Rentable Square Feet, which includes the tenant’s suite plus a prorated portion of all interior common areas excluding major vertical penetrations such as elevator shafts.  Unlike useable area, rentable area includes common areas such as lobbies, restrooms, and hallways as well as the measurement of structural columns and architectural projections.

Rentable-to-Useable Ratio:  Defined as rentable area divided by useable area. Also known as the add-on factor or load factor. Also see efficiency percentage.

Rent Escalators:  Items specified in a lease such as base rent, operating expenses, and taxes that may increase by predetermined amounts at stated intervals or by a constant annual percentage.  Also see index lease and expense stop.

Rent-Up Period:  That period of time, following construction of a new building, when tenants are actively being sought and the project is approaching its stabilized occupancy.

Replacement Cost:  The estimated cost to construct, at current prices, a building with utility equivalent to the building being appraised, using modern materials and current standards, design, and layout.

Representation Agreement:  An agreement between a tenant/retailer and a real estate broker giving the broker the authorization to attempt to locate and secure a property location(s) under tenant directed criteria and lease the property in return for a commission, set fee or other form of compensation.

Request for Proposal (RFP):  The formalized Request for Proposal represents a compilation of the many considerations and requirements that a tenant or landlord might have and should be customized to reflect their specific needs.

Researched Building:  A Researched Building meets the criteria for inclusion in market analytics.  They are non-owner-occupied properties totaling at least 10,000 square feet.

Residential Property:  Single- or multifamily housing units that are used, serve, or are designed as a place of residence.

Retail:  Also see community center, fashion/specialty center, neighborhood center, outlet center, power center, regional center, superregional center, and theme/festival center.

Retail Gap Analysis:  A gap analysis performed specifically on retail floorspace in a given market or trade area.

Retail gravity model:  A gravity model used to estimate dollar flows to or the sale/revenue potential of competing retail establishments in a given geographic market. Also see gravity model.

Retail property:  Properties used exclusively to market and sell consumer goods and services.

Retail Trade Area:  Also referred to as service area, is generally defined as the geographic or formal area from which a sustained patronage is attracted to support a retail center or establishment; the extent to which is determined by numerous factors including the site characteristics of the center or establishment, its accessibility, the presence or absence of physical barriers to movement, and general limitations imposed by driving time, congestion, and distance/separation.

Revaluation Lease: A lease in which rent is adjusted periodically according to the revaluation of the real estate.

Reversion Value:  A lump-sum cash benefit that an investor receives or expects to receive upon the sale of an investment.

Right of Entry: Gives the landlord the right to enter the premises on an as-needed basis.

Right of First Offer: A Tenant’s right to make the first offer on a space to lease or buy. The Landlord must approach the Tenant first with the opportunity. The Tenant then has the right to make an offer for a limited time period. This is only an agreement to negotiate in good faith.

 

Right of First Refusal: A right, in writing, usually given by the Landlord, which gives the Tenant a first chance to buy or lease a portion of the property if the owner decides to sell or lease. The terms of the process are spelled out. This is not just an agreement to negotiate in good faith. The Landlord must have an offer, which the Tenant can match or refuse. If the Tenant refuses, the property can then be sold or leased to the offeror.

Right to Terminate: Landlord may allow for an early termination for a free paid by the Tenant. This fee may be based on several months Rent and any additional cost to the Landlord for re-renting the premises. This is a good option for start-up businesses as long as the fee is not excessive.

Risk:  The probability that actual cash flows from an investment will vary from the forecasted cash flows.

S

Safe Rate:  The rate a low risk, liquid investment achieves.

Sale Cost:  The brokerage commissions and fees, and any additional transaction costs that are incurred during the sale of the property.

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.  Although the lease technically follows the sale, both will have been agreed to as part of the same transaction.

Sales Proceeds After Tax:  The sale proceeds before tax minus the tax liability on the sale.

Sale(s) Proceeds Before Tax:  The sale price minus the sale costs and the mortgage loan balance.

Sales Comparison Approach:  A way to determine market value by comparing a subject property to properties with the same or similar characteristics.

Sales Comparison Value:  An estimate of value derived by comparing the property being appraised to similar properties that have been sold recently, applying appropriate units of comparison, and making adjustments to the sales prices of the comparable based on the elements of comparison. [Appraisal Institute]

Sales per Square Foot:  Sales revenue generated per square foot of retail floor space.

Sales Potential:  The possible or expected revenue of a retail outlet as defined by conditions within the market or trade area and the forces of competition.

Sales Price Point of Indifference:  The future reversionary value (sales price) that would make the present cost of leasing mathematically equal to the present cost of owning a property.

Sales Volume:  The total amount of sales/revenue generated by a retail outlet or facility in a given time period.

Sample:  A subset of a statistical population (typically selected randomly).

Sampling:  The practice of obtaining a sample from a given statistical population.

Sandwich Lease:  See sublease.

Scale Economies:  Cost reductions, savings, or advantages that come about from efficiency gains associated with increasing levels of production output or the increased size of an operation or system (as the average cost of production falls with increasing output or size).

SDC’s:  The acronym for ‘System, Development, Charges.”  Fees levied by governmental agencies for new development to recover all or part of the costs of building certain infrastructure needed to serve that development.

Secondary Source Data:  Information obtained from second-party or archival sources.

Second Generation or Secondary Space:  Refers to previously occupied space that becomes available for lease.

Securitization:  The phenomenon of indirectly investing in real estate markets in ways that minimize risk (for example, investments made collectively with pooled money or the use of investment packages/funds, such as mortgage backed securities sold on the secondary financial market) as opposed to direct investments where investors own property or hold mortgages; a long-term trend that has had significant impact on real estate values.

Security: Describes building security such as alarms and security personnel. And access such as security password, personal identification number (PIN) or security key card.

Security Deposit:  A deposit of money by a tenant to a landlord to secure performance of a lease.

Segmentation of Formal Regions:  The compartmentalization or division of formal regions into smaller geographic areas for the purpose of carrying out a more detailed market area analysis.

Sensitivity Analysis:  The process of recalculating outcomes under alternative assumptions to determine the impact of the variable under analysis.

Service Area:  The geographical area that encompasses/delineates the principal share of clients or customers served by the tenants of the property (a concept that becomes less applicable as the service area of the customer base increases).

Setback:  The distance from a curb, property line or other reference point, within which building is prohibited.

Setback Ordinance:  Setback requirements are normally provided for by ordinances or building codes.  Provisions of a zoning ordinance regulate the distance from the lot line to the point where improvements may be constructed.

Shell Space:  The interior condition of the tenant’s premises when it is without improvements or finishes.  While existing improvements and finishes can be removed, thus returning space in an older building to its ‘shell’ condition, the term most commonly refers to the condition of the usable square footage after completion of the building’s ‘shell’ construction but prior to the build out of the tenant’s space.  Shell construction typically denotes the floor, windows, walls, and roof of an enclosed premises an may include some HVAC, electrical or plumbing improvements but not demising walls or interior space partitioning.  In a new multi-tenant building, the common area improvements, such as lobbies, restrooms and exit corridors may also be included in the shell construction.  In a retail project, all or a portion of the floor slab is often installed along with the tenant improvements so as to better accommodate tenant specific under-floor plumbing requirements.

Signage:  Any kind of graphics created to display information to a particular audience, typically wayfinding information on streets, outside and inside of buildings.  Types of signage varies significantly from ‘canned’, ‘freestanding’, ‘channel-lume’, ‘neon’, ‘banned’, ‘marquee’, ‘pylon’, ‘directional’, ‘hanging’, ‘monument’, etc…

Single-Tenant:  A Single-Tenant building is leased in its entirety to a single tenant or is available in its entirety and best suited for a single tenant.

Sinking Fund: A fund designed to accumulate a designated amount of money over a specified period of time. The periodic amount of money deposited plus compound interest will accumulate to the designated amount of money over the specified period of time.

Site Analysis:  The identification and evaluation of a site or sites to satisfy a given use or objective.

Site Factors:  Site-specific factors, features, conditions, or attributes which are important in the analysis or evaluation of a location/site (including relative location, visibility, aesthetics, landscaping, condition of existing structures, regulatory mechanisms, and lot size).

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

Site Selection:  The process of determining the best site for a specific use.

Space Market:  The supply and demand for the use of physical space.

Space Plan:  A graphic representation of a tenant’s space requirements, showing wall and door locations, room sizes, and sometimes includes furniture layouts.  It must be sufficiently detailed to allow an accurate estimate of the construction costs.  This final space plan will often become an exhibit to any lease negotiated between the parties.

Special Assessment:  Any special governmental charge levied against real property for issuance of tenant improvements (e.g. sidewalks, streets, water and sewer, etc.) that benefit the assessed property.

Speculative Construction:  Speculative construction is designed to attract tenants likely to be in the market when the project is leasing.  Prior to funding a speculative project, lenders may require a set amount of preleasing.  Typically, but not always, a speculative office project becomes a multi-tenant, office building upon completion.

Standard Deviation:  A measure of the amount of dispersion or variation of data points or values about the mean.  The standard deviation has a very useful property in that 95.4% of the values of a data set will lie within two standard deviations (plus or minus) of the mean.

Standard Industrial Classification (SIC):  A classification scheme used for general recording purposes by government and industry to categorize and account for economic and employment activity by sector using a series of standardized and universally accepted codes.

Statistical Descriptions:  Drawing a reasonable conclusion or deduction from statistical evidence based on sample statistics, while attaching a statement as to the likelihood that an assertion made about a given statistical population is true (in probabilistic terms).

Statistical Population:  The total set of elements or the collection of all individuals, items, or objects under consideration in a statistical inquiry. In short, a population is a universe comprising all members of a specified group.

Step-Up Lease:  A lease in which the rental amount paid by the lessee increases by a preset rate or set dollar amount at predetermined intervals. A step lease is a means for the lessor to hedge against inflation and future maintenance or operational expenses.

Straight Lease: The amount of Rent is fixed for the Lease Term.

Street-Based Mapping:  Relatively easy-to-use GIS applications that allow the user to map objects such as commercial properties or retail establishments by street address.

Strip Center:  Any shopping area, generally with common parking, comprised of a row of stores without an anchor tenant.

Sublease:  A lease in which the original tenant (lessee) sublets all or part of the leasehold interest to another tenant (known as a subtenant) while still retaining a leasehold interest in the property. Also known as a sandwich lease due to the sandwiching of the original lessee between the lessor and the subtenant.

Submarket: A segment or portion of a larger geographic market defined and identified on the basis of one or more attributes that distinguish it from other submarkets or locations.

Subrogation Clause: Usually waives Landlord’s liability against lawsuits which may be filed against the Tenant or the Business.

Substitute Basis:  The basis in a property acquired in a qualified Section 1031 Exchange is reduced by deferred gain and becomes the substitute basis. For example, if the market value of property given up is $200,000, and the basis in that property was $75,000, then realized gain equals $125,000. Assume the market value of property acquired through a taxdeferred exchange is $350,000, then subtracting the unrecognized gain of $125,000 equals the substitute basis of $225,000. The effect of this adjustment to basis is to build in the deferred $125,000 gain into the property acquired. If the new property were sold the next day for $350,000, a $125,000 gain would be reported.

Sunk Costs:  Investment costs that are committed and cannot be recovered.

Superregional Center:  A retail property type similar to regional centers, but because of its larger size, a superregional center has more anchors, a deeper selection of merchandise, and draws from a larger population base. As with regional centers, the typical configuration is as an enclosed mall, frequently with multilevels.

Supply:  The amount of property that will be made available for sale or rent at a given price or rental rate.

Supply Factors:  Elements or forces that influence the supply of goods and services in a given market.

Supporting Industries:  Industries that offer goods or services that are necessary as inputs in a production process or for the transportation and marketing of intermediate or finished products.

Suspended Losses:  Passive losses that cannot be used in the current year are suspended for use in future years or at the time of sale.

Synthetic Lease:  A leasing and financing strategy whereby the terms of the lease under specific Financial Accounting Standard Board guidelines change the lease obligation from a capital lease (long-term lease on the company’s balance sheet) to an operating lease (short-term lease on the company’s balance sheet).

System:  See dynamic system and systems analysis.

Systems Analysis:  A methodological framework for investigating the structure, components, and functions of a system.

T

T-bar:  A chart used to summarize the timing of real estate cash flows.

Tangible Characteristics:  Attributes that are quantifiable, measurable, factual, or expressed numerically as data or statistics.

Target Market:  Likely users or investors whose needs match the property’s features. Alternatively, when representing users, the target market is the kind of property that matches your user-client’s needs.

Tax Impact:  The impact of taxes on investment income and rate of return.

Tax Liability:  Real estate taxable income multiplied by the tax rate.

Tax Savings (Annual Expense):  Entry on the tenant’s Cash Flow Form. All annual expenses incurred by the tenant are tax deductible. The tax savings are calculated by multiplying the annual deduction by the tenant’s tax rate.

Tax Savings (Capital Expenditure):  Entry on the tenant’s Cash Flow Form. It refers to any tax savings associated with any capital expenditure by the tenant in terms of the site or major, unusual business expenses incurred to make the new office efficient for the business. The amount of tax savings is calculated by multiplying the annual deduction amount by the tenant’s tax rate.

Tax Shelter:  The ability of real estate investments to reduce an investor’s tax liability through the use of cost recovery.

Taxable Income:  Adjusted gross income less personal deductions and exemptions.

Taxation:  How an investment is affected by tax laws and codes.

Technical Components:  Factors that determine whether a location or site is suitable or able to support a given use.

Technical Feasibility:  In the case of site selection, it is an evaluation of multiple sites to determine which sites should be considered further based upon their physical limitations, regulatory requirements, and environmental and legal considerations; whereas in the case of highest and best use, it refers to the determination of the possible uses of a particular site as based upon technical considerations.

Tenant/Lessee:  A person or entity who has possession of the property though a lease.

Tenant at Will:  One who holds possession of premises by permission of the owner or landlord, the characteristics of which are an uncertain duration (i.e. without a fixed term) and the right of either party to terminate on property notice.

Tenant Finish Allowance:  See Landlord-Paid Tenant Improvements (LPTI)

Tenant Improvements:  Improvements made to the leased premises by or for the tenant.  Generally, especially in new space, part of the negotiations will include in some detail the improvements to be made in the leased premises by the landlord.

Tenant Improvement Allowances: This allowance is a fixed amount of money contributed by the Landlord towards Tenant improvements that is built in to the monthly Rent.

Tenant-Paid Tenant Improvements (TPTI): The total cost (outlay) of necessary tenant improvements paid by the tenant netted against any allowance provided by the landlord.

Tenure:  A designation which distinguishes between the renter versus owner-occupied status of housing units or households.

Termination: Imposes an obligation on the tenant to return the property n a certain condition at the end of the lease.

Term of the lease: Identifies in months or years the duration of the lease. It should also state when the tenant is entitled to possession.

Theme/Festival Center:  These retail centers typically employ a unifying theme that is carried out by the individual shops in their architectural design and, to an extent, in their merchandise. The biggest appeal of these centers is to tourists; restaurants and entertainment facilities can anchor them. These centers, generally located in urban areas, tend to be adapted from older, sometimes historic, buildings and can be part of mixed-use projects.

Threshold Population:  The minimum number of people or minimum market area or sales volume necessary to sustain a business or make it economically viable. Also see high order goods and lower order goods.

TI:  See Tenant Improvements.

TI Allowance from Owner:  See Landlord-Paid Tenant Improvements (LPTI)

TIF’s (Traffic Impact Fees):  TIF’s are levied by governmental agencies on new developments or change of uses as fees to improve the transportation system to accommodate the higher travel demand added by new development.

Time Value of Money (TVM):  An economic principle recognizing that a dollar today has greater value than a dollar in the future because of its earning power.

Title Insurance:  A policy issued by a title company after searching the title and which insures against loss resulting from defects of title to a specifically described parcel of real property, or from the enforcement of liens existing against it at the time the title policy is issued.

Title Search:  A review of all recorded documents affecting a specific piece of property to determine the present condition of title, thus ownership.

Total Effective Rate:  The rate per square foot paid by the tenant over the entire period analyzed. Formula:

Total Effective Rent:  The total dollar amount (cash flow) that the tenant actually will pay out over the entire period analyzed.

Total Employment:  The total number of actively employed people in the workforce within a given geographic area at a particular point in time.

Total Existing Inventory:  In reference to commercial real state, it is existing and currently available supply or stock as represented by the total number of units or total amount of space available of a specific commercial property type in a given market at a particular point in time.

Total Forecast Supply:  Total existing inventory plus forecast planned additional inventory minus forecast planned removed inventory for a specific commercial property type in a given market area.

Total Supply of Commercial Real Estate:  Refers to all existing space vacant or occupied, built, forecasted, or demolished, for a particular market area for a specific period of time.

TPTI:  See tenant-paid tenant improvements.

Trade Area:  An area delineated about a central or dominant location, comprising a zone that is dependent upon production output from that location to meet internal demand, whose outermost boundaries are defined in terms of the presence or absence of interactions with that central or dominant location (for example, a localized area over which some specific activity or transaction takes place). Note that in central place theory context, the terms trade area and range are used interchangeably. Also see range.

Trade area Gap Analysis:  A gap analysis performed on a specific trade area located within a predetermined market area or city.

Trade Fixtures:  Personal property that is attached to a structure that are used in the business (i.e. furniture).  Since this property is part of the business and not deemed to be part of the real estate, it is typically removable upon lease termination.

Traffic Generators:  A business, retailer, or site that draws business to a given location (for example, a large retail store/anchor in a regional shopping mall that generates traffic for smaller retail shops located within the mall or nearby).

Transaction Management Process:  A continuous, cyclical four-stage process in which a transaction manager is involved with qualifying, matching, closing, and adding value for clients. Also see qualify, match, close, and add value.

Transfer Income:  Money that is transferred to a local economy from outside sources without the exchange of any good or service (including social security, welfare and retirement benefits, interest dividends and rent on investments).

Triple Net/NNN:  A lease in which a tenant pays, in addition to base rent, certain costs associated with a leased property, which may include property taxes, insurance premiums, repairs, utilities and maintenance.

Turn Key Build-out: Tenant Improvements to the premises, provided by the Landlord. The Landlord and Tenant establish the cost and the budget. The costs of the improvements are then included in the monthly rent. The Landlord pays for the improvements and handles the contracts for the improvements.

Turn Key: The property is completely ready for a Tenant to move in. No improvements need to be made.

Turnkey Lease: Under the terms of a turnkey lease, a landlord agrees to turn the premises over to the tenant in a ready to use condition based on specifics negotiated as to any maintenance, repairs or improvements.

TVM:  See time value of money.

U

Under Contract:  A property for which the seller has accepted the buyer’s offer to purchase is referred to as being ‘under contract.’  Generally, the prospective buyer is given a certain period of time in which to perform its due diligence and finalize financing arrangements.  During the period of time the property is under contract, the seller is precluded from entertaining offers from other buyers.

Under Construction:  To be considered under construction, work must have begun on the foundation.  Grading or other site work does not count as an official construction start.

Under Renovation:  Projects that are under renovation are being restored to like-new condition.  During the renovation period, the property is not tenantable and thus is 100 percent vacant.

Unencombered:  Describes title to property that is free of liens and any other encumbrances.  Free and clear.

Urban System (City as a System):  A complex and structured urban environment or system composed of highly diverse, interacting, and interdependent parts and activities aggregated or organized in such a way as to serve a common purpose and/or satisfy the needs and wants of people residing in and dependent upon that system.

Use:  The specific purpose for which a premises/space is intended to be used or for which it has been designed or arranged upon lease (i.e. a shoe store, a restaurant, etc…)

Useable Area / Gross SF:  Rentable area, less certain common areas that are shared by all tenants of the office building (such as corridors, storage facilities, and bathrooms). Also defined in office buildings as the area that is available for the exclusive use of the tenant. Useable area =rentable area × building efficiency percentage.

User Criteria:  In reference to the identification and classification of properties and the evaluation of feasibility characteristics of various locations/sites in accordance with the specific needs of the user as defined by its business requirements, and the use and zoning restrictions in any given jurisdiction or municipality.

Use of Premises: Specifies any restrictions on the use of the premises

Utilities and Services: Specifies what utilities and services each party is responsible for and the days and hours provided. Water, trash, sewer, waste water, electricity, gas, CATV, telephone, etc.

V

Vacancy:  The number of units or space (of a specific commercial type) that are vacant and available for occupancy at a particular point in time within a given market (usually expressed as a vacancy rate).

Vacancy Allowance:  A desirable level of vacancy that is known to facilitate transactions and turnover in a housing market (for example, a vacancy rate that allows the market to operate smoothly and efficiently by enhancing household mobility); an index used for estimating housing demand.

Vacancy rate:  The total amount of available space compared to the total inventory of space and expressed as a percentage.

Vacant:  Space that is typically vacant and available for lease or sale.

Vacant Space:  Refers to existing tenant space currently being marketed for lease.  This excludes space available for sublease.

Variable:  A measurable attribute of a person, place, property, location, or other phenomenon of interest, whose value may vary from observation to observation.

Variable Expenses:  Costs, such as utilities, that vary with a building’s occupancy rate.

Variance: A variance is a city permit or permission to use or develop a property in a way which is not permitted by the zoning regulations.

W

Warranty: Statement by the landlord that the premises are in compliance with applicable laws.

 

Weighted Average Cost of Capital (WACC):  The average cost of capital (whether equity or debt), taking into account the relative proportions of each source of capital.

Work Letter:  A list of the building standard items that the landlord will contribute as part of the tenant improvements.  Examples of the building standard items typically identified include:  style and type of doors, lineal feet of partitions, type and quantity of lights, quality of floor coverings, number of telephone and electrical outlets, etc.  The work letter often carries a dollar value but is contrasted with a fixed dollar tenant improvement allowance that can be used at the tenant’s discretion.

Workstation GIS:  Mainframe-oriented or UNIX-based computer-software products, programs, and systems that are specifically geared toward large-scale applications, requiring large platforms and advanced programming skills and knowledge.

X

No glossary terms are available.

Y

Yield:  A measure of investment performance that gauges the percentage return on each dollar invested. Also known as rate of return.

Z

Zoning:  The division of a city or town into zones and the application of regulations having to do with the structural, architectural design and intended use of buildings within such designated zone.

How to Market and Sublease Raleigh Commercial Real Estate

Unfortunately, circumstances arise when a company no longer has use for commercial space it has leased. Needs may have changed regarding the size of the business or location, or a company may have experienced financial reversals and must rid itself of the unnecessary expense. Whatever the cause, unwanted commercial space is expensive. Companies holding such leases are hemorrhaging money every month and want relief fast.

“The larger the square footage and longer the lease term, the greater the exposure,” says Robert Chavez, founder and CEO of Guardian Commercial Realty. “Maximizing time and efficiency is vital to properly sublease space and mitigate losses.”

Smart Business spoke to Chavez about the few important steps companies should consider before taking their space to market.

What should tenants consider first when looking to sublease space?

First, read the sublease and default sections of your lease and be aware of any sublease restrictions that may exist. Landlords’ ‘form’ leases often prohibit subleasing to existing tenants in their building, or to companies with whom the landlord is engaged in active negotiations. Likewise, governmental organizations with high traffic count, or the Internal Revenue Service, for example, may be excluded because the landlord deems them an unfit occupant of their building. It would be most unfortunate to spend time and money negotiating and documenting a sublease only to find out in the 11th hour that the proposed subtenant is prohibited.

How can they improve the chances that the space will be sublet?

Have a solid marketing plan. Interview real estate brokers that are active in your market. Understand exactly what measures they will employ to sublease your space and keep you informed. Know their track record and ask for references. Make 1certain that any listing agreements they may have in the area are not actually conflicting interests. Such brokers may be more beholding to their landlord clients, as they are simply the bigger fish. Ask if the broker can show you a ‘sublease recovery analysis.’ If they do not understand this concept, it may be wise to move on.

It is imperative to understand the subtleties in your market and price the space properly. Pricing the space too high will likely cause the space to sit vacant and allow the financial hemorrhage to continue. Price too low and money is left on the table unnecessarily. The balance between price and timing must be carefully addressed early and clearly. Discuss commission incentives and see if they are commonplace in the market and likely to bring better results.

Also, be certain that your broker has the ability to find tenants that are actively seeking space in the market. All too often sublease space is listed on a marketing service website and brokers wait for the phone to ring. The likelihood of success is enhanced if your broker has an active and well-conceived marketing strategy. Subleasing space properly is more work, so be sure to agree upon a reporting process and keep your brokers accountable for weekly activity reports.

What other challenges must be overcome?

Unless the real estate market is ‘white-hot,’ subleasing space is difficult. Unlike the building owner, a tenant (or sublandlord) only has its specific amount of space, design and floor plan available. Sublandlords are seldom in a position to spend vast sums of money retrofitting their space to suite another occupant. Accordingly, the target audience for subleases is dramatically reduced as compared to what a landlord can offer. Pricing the sublease space below the landlord’s rates is often the only viable way to quickly sublease the space. Timing is extremely critical. It does a company little good if their space works nicely for a particular company but they cannot occupy for 18 months because that is when their lease expires. This would cost a company with 10,000 square feet nearly a half-million dollars in rent just waiting for the subtenant to become viable.

What are the final steps once a subtenant has been identified?

It is important to qualify the company before agreeing to final terms. Be certain to review financial statements and research the company as well as their industry. You want to be as certain as possible that the subtenant will continue to pay their sublease rent. The last thing a sublandlord needs is to spend even more time and money evicting a deadbeat subtenant, and then have to start the process all over again.

Inform your landlord in writing once you decided to sublease space. This may expedite the landlord’s consent process, which will be required to consummate the sublease. Additionally, you may get lucky and the landlord could elect to ‘recapture’ the space if they have another party interested.

In rare instances, a sublandlord may be able to profit from subleasing space due to an upward trend in market conditions. This is more typical in a retail setting, but can happen in office or industrial sectors as well. Once again, look to your lease before celebrating. The landlord may be entitled to all profits if the lease was poorly negotiated. If that is the case, the tenant might as well sublease the space at its below-market rate and a find subtenant much sooner. Again, read your lease, as you may not be permitted to undercut the landlord’s rates. Most commercial leases are ultimately drafted such that the landlord and tenant share any sublease profits on a 50/50 basis, after the tenant has recovered reasonable fees for commissions, improvement allowances and other marketing expenses.

As you can see, subleasing space is no fun. There is little certainty with regard to the outcome and very limited flexibility. The best defense is to plan ahead and exercise extreme caution when entering into a lease in the first place.

The Top 10 Reasons You Need Tenant Representation

  1. YOUR TIME IS VALUABLE:  Don’t waste it looking at inappropriate properties.  We’ll show you only those spaces that suit you.
  2. WE’LL GET YOU THE BEST DEAL POSSIBLE:  Why overpay or lease more space than needed?  Our negotiating skills work to your advantage.
  3. DON’T EXPECT AN OWNER OR A LISTING AGENT TO CARE ABOUT YOUR INTERESTS
  4. KNOWLEDGE IS POWER:  We know the buildings, the players, the deals.
  5. WHAT YOU DON’T KNOW CAN HURT YOU:  Tenants rarely lease property, yet rent is the second largest expense after payroll.  We negotiate leases every day.  This is our specialty.  If you try this on your own, no matter how good you may be at what you do, you may make a mistake which can cost you dearly for many years to come.
  6. WE HAVE THE RIGHT TOOLS:  We can show you all the available space that’s right for you; our software allows us to carefully analyze and compare the economics of each lease under consideration.
  7. USING THE WRONG BROKER CAN BE YOUR BIGGEST MISTAKE:  You need a broker committed to getting you the best deal.
  8. WE’RE TENANT SPECIALISTS:  We create the leverage you need in lease negotiations.
  9. THE LEASE IS ONLY THE BEGINNING:  We help you through the entire process to ensure all goes smoothly and efficiently.
  10. WE’RE YOURS!:  That’s why our clients keep coming back, and why they readily refer us to friends and colleagues.

Are you looking for Raleigh Commercial Real Estate?  Contact Rodney McNabb with MainStreet Realty Services to get the search underway.