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FAQ

What is Commercial Real Estate?
Any multifamily residential, office, industrial, or retail property that can be bought or sold in a real estate market.
What is Annual Debt Service?
The total amount of principal and interest to be paid each year to satisfy the obligations of a loan contract.
What is 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.
What is Common Area Maintenance? (CAM)
Charges paid by the tenant for the upkeep of areas designated for use and benefit of all tenants. CAM charges are common in shopping centers. Tenants are charged for parking lot maintenance, snow removal, and utilities.
What is 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.
What is a Capitalization Rate? (CAP Rate)
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.
What is 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.
What is a Cash Flow Model?
The framework used to determine the cash flow from operations and the cash proceeds from sale.
What is a Cost Approach?
A method of determining the market value of a property by evaluating the costs of creating a property exactly like the subject.
What is Debt Coverage Ratio? (DCR)
Ratio of net operating income to annual debt service. Expressed as net operating income divided by annual debt service.
What is Depreciation?
The loss of utility and value of a property.
What is Diversification?
A method of reducing risk by investing in unrelated (uncorrelated) assets.
What is 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.
What are Economic Sectors?
Branches or divisions of a local or regional economy in which particular activities take place.
What are Environmental Conditions?
Features or state of the physical environment and the surroundings, factors, or forces which influence or modify that environment.
What are Environmental Hazards?
Any physical or natural condition or event which possesses a risk to humans.
What are 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 usage, etc.
What is an 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.
What is an Equity Yield Rate?
The return on the portion of an investment financed by equity capital.
What is a 1031 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).
What are 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.
What is 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.
What is a 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).
What is Financial Leverage?
The use of borrowed funds to acquire an investment.
What is Financial Risk?
The possible change in an investment’s ability to return principal and income.
What is a Fully Amortized Mortgage Loan?
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A method of loan amortization in which equal periodic payments completely repay the loan.
What is 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.
What is Future Value? (FV)
The amount to which money grows over a designated period of time at a specified rate of interest.
What is General Market Factors?
Factors influenced by the demographic, economic, and locational characteristics and the organizational aspects of a market.
What is a 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).
What is Globalization?
The condition of being or becoming globalized. A concept used to recognize cross- jurisdictional 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.
What is 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.
What is a Gross Area?
The entire floor area of a building or the total square footage of a floor.
What is the 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.
What is a Gross Lease?
A lease in which all expenses associated with owning and operating the property are paid by the landlord.
What is 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.
What is the 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).
What is 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.
What is Hedging?
Protecting oneself against negative outcomes.
What is 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.
What is 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
What is Industrial Property?
Commercial properties that are used for the purposes of production, manufacturing, or distribution.
What is Initial Investment?
The outlay of cash needed to acquire an investment.
What is the 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.
What is the 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.
What is a Landlord?
The lessor or owner of the leased property.
What is 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.
What is a Lease?
A contract that creates the relationship of landlord and tenant. A contractually binding agreement that grants a right to exclusive possession or use of property, usually in return for a periodic payment called rent.
What is a 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.
What is Lease Terminology?
Terms commonly used in reference to a lease.
Who is the Lessee?
The person renting or leasing the property. Also known as a tenant
Who is the Lessor?
The person who rents or leases a property to another. Also known as a landlord.
What is Leverage?
The use of borrowed funds to finance a portion of the cost of an investment.
What is Liquidity?
The ability to convert an investment into cash quickly without loss of principal.
What is the 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. Formula: Load factor = Rentable square feet Useable square feet
What is a Loan Balance?
The amount of money remaining to be paid on an amortizing loan at a given time.
What is a Loan Point?
A charge prepaid by the borrower upon the origination of a loan. One point equals one percent of the loan amount.
What is a Loan-To-Value Ratio
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.
What is Management?
The ability to monitor the performance of an investment and make changes as needed.
What is Managing Risk?
The steps taken by an investor or manager to control or reduce investment risk.
What is Marketability?
The ability to sell or lease a property quickly. Marketability deals with the appeal and demand for a property, good, or service.
What is 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).
What are 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).
What is 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.
What is Market Data?
A method of determining the property’s value by analyzing recent sales or rental prices of comparable properties.
What is Market Data Approach?
A method of determining the property’s value by analyzing recent sales or rental prices of comparable properties.
What is 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.
What is 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.
What is Multifamily Housing?
Housing units that accommodate more than one family or household.
What is Multiple-Use Office Space?
Office space that can be used for a variety of purposes; sometimes referred to as generic office space.
What is a 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.
What is Net Operating Income? (NOI)
The potential rental income plus other income, less vacancy, credit losses, and operating expenses.
What is Net Present Value?
The sum of all future cash flows discounted to present value and netted against the initial investment.
What are different types of 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.
What is 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.
What are 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.
What is Original Basis?
The total amount paid for a property, including equity capital and the amount of debt incurred
What is a Percentage Lease?
A lease in which the rent amount is based on a percentage of gross sales (monthly or annually) made by the tenant.
What is a Percentage Rent?
The additional rent (over a base amount) that is paid by tenants to owners on tenant sales over a specified dollar amount. It is frequently found in retail leases. Also known as overage rent.
What is 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.
What is a 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.
What is Portfolio Income?
Income from interest, dividends, royalties, or the disposition of property held for investment
What is Positive Leverage?
Borrowed funds are invested at a rate of return higher than the cost of the funds to the borrower.
What is Potential Rental Income?
The total amount of rental income for a property if it were 100 percent occupied and rented at competitive market rates.
What is 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.
What is Principle?
The portion of a loan payment used toward reducing the original loan amount
What is 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.
What is 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.
What is Rate of Return?
The percentage return on each dollar invested. Also known as yield.
What is a 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.
What are 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.
What is a 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.
What is a 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.
What is 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.
What is Retail Property?
Properties used exclusively to market and sell consumer goods and services.
What is Risk?
The probability that actual cash flows from an investment will vary from the forecasted cash flows.
What is a Sale-Leaseback?
A leasing and financing strategy in which a property owner sells its property to an investor, then leases it back. This strategy frees capital that otherwise would be frozen in equity.
What is a Sales Comparison Approach?
A way to determine market value by comparing a subject property to properties with the same or similar characteristics
What is a 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.
What is 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.
What is a Site Analysis?
The identification and evaluation of a site or sites to satisfy a given use or objective.
What is a 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.
What is a 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.
What is Supply?
The amount of property that will be made available for sale or rent at a given price or rental rate.
What is a T-Bar?
A chart used to summarize the timing of real estate cash flows.
What is a Tax Impact?
The impact of taxes on investment income and rate of return.
What is Tax Liability?
Real estate taxable income multiplied by the tax rate.
What is a Tax Shelter?
The ability of real estate investments to reduce an investor’s tax liability through the use of cost recovery.
What is Taxable Income?
Adjusted gross income less personal deductions and exemptions.
Who is a Tenant?
A person or entity who has possession of the property though a lease. A tenant also may be referred to as a lessee.
What are Tenant Improvements?
Preparation of leased premises prior to or during a tenant’s occupancy, which may be paid for by either the landlord, the tenant, or both.
What are 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.
What is Total Effective Rate?
The total dollar amount (cash flow) that the tenant actually will pay out over the entire period analyzed.
What is Total Effective Rate/Formula?
The rate per square foot paid by the tenant over the entire period analyzed. Formula: Total effective rate = Total effective rent
What is Useable Are?
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.
What is 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).
What is Vacancy?
The percentage of the total supply of units or space of a specific commercial type that is vacant and available for occupancy at a particular point in time within a given market.
What is Vacancy? Rate
The percentage of the total supply of units or space of a specific commercial type that is vacant and available for occupancy at a particular point in time within a given market.
What are Variable Expenses?
Costs, such as utilities, that vary with a building’s occupancy rate.
What is Yield?
A measure of investment performance that gauges the percentage return on each dollar invested. Also known as rate of return.
What is Zoning?
The designation of specific areas by a local planning authority within a given jurisdiction for the purpose of legally defining land use or land use categories.
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