Glossary of Key Terms

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Prerequisite I: Discounted Cash Flow & Net Present Value Analyses

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

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

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

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

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

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

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

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

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

Unlevered Cash Flows
Property-level cash flows irrespective of the financing structure.

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

Reversion / Terminal Value / Residual
Estimated property sale value; theoretically captures the value of all future cash flows beyond the point of sale; to estimate the sale value you will generally apply a cap rate to a stabilized NOI.

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

Gordon Growth Model
Converts perpetuity DCF analysis for a cash stream growing at a constant rate into a simple cap rate approximation by dividing stabilized NOI by the difference between the property’s discount rate (r) and the NOI growth rate (g).

Net Present Value (NPV)
The present value of the cash flows the investment generates minus your initial investment.

Prerequisite II: Internal Rate of Return

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

Levered IRR (Equity IRR)
The single discount rate, expressed as a percentage, that sets the NPV of expected future equity cash flows equal to zero. Generally thought of as the average annual compounded return to equity as measured after exit.

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

Prerequisite III: Amortization Fundamentals

Amortization
The repayment of principal borrowed from a lender.

Principal
The capital amount borrowed from a lender.

Interest-Only Loan (Zero-Amortization or Bullet Loan)
A loan on which only interest is paid on the outstanding principal until the time of the final monthly payment, at which point the entire principal balance is also repaid.

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

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

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

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

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

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

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

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

Accrual Construction Loan / Negative Amortization Loan
A short-term loan provided by a lender for the purpose of new property construction. The principal amounts needed for incurred project costs are borrowed monthly (through a loan draw request) and loan interest accrues (accumulates) and is added to the loan principal balance.

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

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

Current-Pay Interest
Interest payments made monthly.

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

Greenfield Land
Never-developed land, existing as farmland or pasture.

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

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

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

Property Lines
The boundary line between two pieces of property.

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

Strip Retail Center (Strip Center)
A commercial property that is comprised of several spaces that can be used for retail stores or services for the public.

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

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

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

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

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

Common Area Maintenance (CAM)
Upkeep of shared landscaping, sidewalks, and parking areas.

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

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

Superflat Floors
Industrial facility floors that have strict transverse and longitudinal tolerances.

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

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

Flex Building
An easily convertible industrial building structure.

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

Central Business District (CBD)
The downtown or center of commercial activity in a city.

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

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

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

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

Chevron
V-shaped corner design.

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

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

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

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

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

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

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

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

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

Non-Climate Controlled Structures
Self-storage spaces that are not temperature controlled.

Gross Square Footage (GSF)
Refers to the total area of a building, usually measured from inner wall to inner wall, with no deductions for obstructions or non-leasable space.

Net Leasable Square Footage (LSF) / Rentable Square Footage (RSF)
Refers to the floor area that can be leased.

Loss Factor
The difference between gross and net leasable footage.

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

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

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

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

Economic Occupancy
The percentage of leasable space that is currently generating rent.

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

Stacking Plan
A visual representation of an office building’s leases.

Chapter 3 | International Real Estate Investing

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

Chapter 4 | The Fundamentals of Commercial Leases

Lessor
The owner/landlord of a property.

Lessee
The tenant of leased space at a property.

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

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

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

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

Cost Recoveries (Reimbursements)
Tenant repayment to the landlord for tenant suite-specific expenses initially borne by the landlord.

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

Base Rent
The initial year’s rent for leased space.

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

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

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

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

Common Area Maintenance (CAM)
Upkeep of shared spaces such as the lobby, sidewalks, parking areas and outdoor landscaped areas.

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

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

Tenant Improvements (TIs)
Interior construction performed to make a tenant’s space fully operational.

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

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

Net Rent
Rent after all operating costs are paid.

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

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

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

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

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

Non-Compete Clause
A lease term that prevents landlords from leasing to competitors of the lessee.

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

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

Chapter 5 | Property-Level Pro Forma Analysis

Gross Potential Revenue (GPR)
The revenue you would receive if a building’s leasable space was 100% occupied.

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

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

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

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

Base Rent
The first year’s rent for a leased space.

Breakpoint (Revenue Threshold)
A predetermined revenue threshold over which a percentage of incremental sales are paid to the retail landlord.

Expense Reimbursements / Tenant Reimbursements / Recoverable Expenses / Cost Recoveries / Pass-Throughs
Payments defined in the leases, made by tenants to the landlord for specified property expenses such as insurance, property taxes, security, and utilities.

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

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

Total Operating Income
Gross Income less Credit Loss.

Operating Expenses
The costs required to effectively operate and maintain the property.

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

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

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

Non-Reimbursable Expenses
Operating costs without the negotiated right to reimbursement from tenants.

Total Operating Expenses
The sum of all reimbursable and non-reimbursable operating expenses.

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

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

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

Tenant Improvements (TIs)
Interior space physical improvements made to make tenant space habitable, useful, and pleasant.

TI Allowance
Tenant improvement scope of work budget provided by the landlord.

Leasing Commissions (LCs)
The fees the landlord pays to a broker or leasing company that leases their space.

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

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

NOI After Normal Reserves (Adjusted NOI)
Unlevered cash flow in a forward-looking financial modeling context, where the adjustment to NOI references the deduction of normal reserves.

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

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

Income Tax Liability (Tax Liability)
What the property owner will owe in annual income tax.

Before-Tax Levered Cash Flow
Unlevered cash flow minus total debt service (interest payments and any amortization).

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

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

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

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

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

Loan Points (Origination Costs)
The fee paid to the lender to compensate for the lender’s underwriting costs.

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

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

Chapter 6 | Financial Modeling

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

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

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

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

Net Base Rental Revenue
Property gross revenues less vacancy.

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

Debt Service Coverage Ratio (DSCR)
Annual NOI divided by annual Debt Service Expense.

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

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

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

After-Tax Cash Flow
Before-Tax Levered Cash Flow less Income Tax Liability.

Residual Value / Reversion / Terminal Value
Estimated property sale value; theoretically captures the value of all future cash flows beyond the point of sale; to estimate the sale value you will generally apply a cap rate to a stabilized NOI.

Gross Sales Price / Gross Sales Proceeds
The negotiated property sale price before any potential deductions.

Exit Cap Rate / Sale Cap Rate
The cap rate, expressed as a percentage, at which a property’s sale is valued, which is equal to the year 1 NOI yield on the Purchase Price the buyer will receive.

Going-in Cap Rate / Purchase Cap Rate
A property buyer’s year 1 yield of NOI on the Purchase Price.

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

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

Net Sales Price
A property’s Gross Sales Price less Selling Costs.

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

Comparable Transactions (Comps)
A valuation method for a subject property in which one or more recently sold similar assets are used to help determine the value of the subject property.

Chapter 7 | Real Estate Due Diligence Analysis

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

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

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

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

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

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

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

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

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

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

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

Possible Maximum Loss (PML) Test
A test of a building’s structural integrity. The higher the building’s score, the worse its structural integrity.

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

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

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

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

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

Chapter 8 | Analyzing Metropolitan Long-Term Growth Patterns

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

Chapter 9 | The Use and Selection of Cap Rates

Income Multiple Analysis / Cap Rate Valuation
Estimates the value of a property by multiplying next year’s “stabilized” NOI by the price-to-NOI multiple for which comparable properties are selling today. The price-to-NOI multiple is the reciprocal of the cap rate.

Capitalization (Cap) Rates
A property’s “stabilized” NOI divided by its value (purchase price, either actual or anticipated), expressed as a percentage. The cap rate is the inverse (reciprocal) of the income multiple.

Stabilized Property
A property at full occupancy, except for an expected “systemic” level of vacancy, whose NOI is flat or growing relatively smoothly year-over-year. For instance, a 100-unit apartment building with 4% yearly vacancy and 2.5% yearly NOI growth.

Stabilized NOI
NOI for a stabilized property (a property at full occupancy, except for an expected “systemic” level of vacancy, where the NOI is flat or growing relatively smoothly year-over-year, e.g., a 100-unit apartment building with 4% yearly vacancy and 2.5% yearly NOI growth).

Normalized Reserves / Normal Reserves
An approximate “normal” level of capital reserves for an operating property.

Adjusted NOI
Unlevered cash flow where the adjustment to NOI is the deduction of normal reserves.

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

Perpetuity
A hypothetical never-ending cash flow stream.

Gordon Model / Gordon Growth Model
Converts perpetuity DCF analysis for a cash stream growing at a constant rate into a simple cap rate approximation by dividing stabilized NOI by the difference between the property’s discount rate (r) and its NOI growth rate (g).

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

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

Chapter 10 | Development Pro Forma Analysis

Speculative (“Spec”)
Development of a property without any contracts for pre-sold or pre-leased space.

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

Land Acquisition Costs
The purchase price of the site and associated transfer costs.

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

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

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

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

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

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

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

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

Release Prices
The minimum price at which a residential developer can sell units as enforced by the lender, which ensures the lender is fully compensated for their loss of collateral.

Build to Cap Rate / Build to Return / Return On Cost / Yield on Cost / Going-in Cap Rate
Build to an X means that projected NOI for the property upon stabilization divided by the expected total development cost equals X%; so to build to a 10 means that your stabilized annual NOI return is 10% of the total development cost.

Sell to Cap Rate / Going-out Cap Rate
To sell to an X means that stabilized NOI divided by your projected sales price is X%. Synonymous with the going-out cap rate.

Gross Development Profit Margin
Gross Development Profit Margin = (expected going-in cap rate / expected going-out cap rate) – 1

Chapter 11 | Development Feasibility Analysis

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

Loss Factor
How much gross square footage of the building is unleasable.

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

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

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

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

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

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

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

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

Chapter 12 | Real Estate Company Analysis

Corporate General and Administrative (G&A) Expense
Corporate overhead expense related to the day-to-day operations of the company as opposed to the properties it owns.

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

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

Adjusted Funds from Operations (Adjusted FFO; AFFO) / Funds Available for Distribution (FAD) / Cash Available for Distribution (CAD)
A real estate company’s cash available for distribution to shareholders without a deterioration of its asset base.

Net Asset Value (NAV)
A commonly-used approach to valuing a real estate company that assumes that management neither adds nor subtracts value.

Chapter 13 | Distressed Real Estate Loan and Bankruptcy Basics

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

Curing Delinquency
Making all missed payments to bring the loan payments current

Default
When the borrower fails to cure their delinquency.

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

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

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

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

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

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

Junior Creditors
Those with positions subordinate to the senior debt.

Chapter 7 Bankruptcy
The debtor creases all operations, goes completely out of business, and a trustee is appointed to sell the property and other assets in order to pay off obligations with sale proceeds.

Chapter 11 Bankruptcy
Created in 1978 to formalize the business reorganization framework. Codified the view that reorganization of the business is generally preferred to liquidation.

Debtor in Possession (DIP) Financing
Allows the defaulting borrower to subordinate existing debt claims to new debt which is taken on to operate the business while it attempts a successful reorganization.

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

New Value Exception (to the absolute priority rule)
The debtor proposed contributing fresh capital in exchange for the 100% ownership of the property as it exited bankruptcy.

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

Unsecured Debt
Debt not backed up by an underlying asset.

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

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

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

Chapter 14 | Should You Borrow?

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

Capital Structure / Capital Stack
The mix of debt and equity that comprise a real estate transaction.

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

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

Compounded Annual Growth Rate (CAGR)
The annualized compounded rate of return earned on an investment.

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

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

Cash-on-Cash Yield
Annual cash flow after debt service divided by cumulative equity investment.

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

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

Junior Debt / Subordinate Debt
Debt holding the second, seventh, or another unsecured position.

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

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

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

Weighted Average Cost of Capital (WACC)
A property’s blended cost of capital across all equity and debt components.

Chapter 15 | The Use of Debt and Mortgages

Fixed Loan Interest Rate
A nominal rate that stays constant for the duration of the loan term.

Floating (Variable) Loan Interest Rate
Adjusts with the debt markets; the rate the borrower pays is reset at a negotiated time interval.

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

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

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

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

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

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

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

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

Loan-to-Cost (LTC)
The amount of construction loan principal as a percentage of total eligible development costs.

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

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

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

Debt Service Coverage Ratio (DSCR)
A loan sizing ratio that divides the annual NOI by the annual debt service payment inclusive of both principal and interest.

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

Loan Covenants
Terms or clauses of loan agreements.

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

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

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

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

Lock-Out Clause
The complete prohibition of early loan principal repayment for a specified period of time.

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

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

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

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

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

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

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

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

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

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

Amortization Schedule
The schedule over which loan principal is repaid.

Loan Points (Origination Fees)
A fee the lender charges for processing the loan.

Refinancing
The replacement of one debt facility with another.

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

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

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

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

Commercial Mortgage-Backed Security (CMBS)
A tradable security that is collateralized by mortgages on commercial properties.

Special-Purpose Bankruptcy-Remote Entity (SPE)
A special purpose vehicle that is formed to hold a defined group of assets and to protect them from being administered as property of a bankruptcy estate.

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

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

Tranche
A discrete ownership class within a pool of CMBS mortgages.

Chapter 17 | Ground Leases as a Source of Finance

Fee Simple Ownership Interest
The outright purchase of both a building and the land on which it sits.

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

Chapter 18 | Real Estate Owner Exit Strategies

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

Gross Sales Price / Gross Sales Proceeds
The negotiated property sale price before any potential deductions.

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

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

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

Refinancing
The replacement of one debt facility with another.

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

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

Qualified Intermediary (QI)
An independent specialist who executes a 1031 exchange and helps sell the property.

Chapter 19 | Real Estate Private Equity Funds

Real Estate Private Equity Fund (Opportunity Fund)
A major source of capital for the real estate industry; among the largest owners of real estate in the country; raise large pools of equity prior to investing to ensure ready access to equity

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

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

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

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

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

Limited Partner (LP)
A partner in a private equity fund whose liability towards the fund’s debts is legally limited to the extent of the partner’s investment.

Investment Cash Flow Waterfall / Return Waterfall
A mechanism for how fund proceeds are split between the investors and the sponsor for the purposes of returning invested capital and paying out profits.

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

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

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

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

Residual Split
Only the profits in excess of the preferred return distribution.

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

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

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

Chapter 20 | Investment Return Profiles

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

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

Chapter 21 | REITs and Liquid Real Estate

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

Secondary Equity Offering
Sale of equity shares after the IPO.

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

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

Chapter 23 | Corporate Real Estate Decision Making

Loss Factor
The difference between gross and net leasable footage.

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

Chapter 25 | Real Estate Cycles

Real Estate Cycles
Prolonged periods of property supply and demand imbalance.

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

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

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

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

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

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

Residential Mortgage-Backed Securities (RMBS)
A tradable security that is collateralized by mortgages on single family residential properties.

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

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

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