Commonly Used Commercial Real Estate And Economic Terms and Definitions:
· Leading indicators: Economic activity that consistently turns before the economy does.
· Coincident indicators: Economic activity that turns in step with the overall economy and tracks the business cycle's progress.
· Lagging indicators: Economic activity that turns after the economy turns, and play a confirming role.
· 1031 Exchange: A section of the U.S. Internal Revenue Service Code that allows investors to defer capital gains taxes on any exchange of like-kind properties for business or investment purposes. Taxes on capital gains are not charged on the sale of a property, but “deferred”, if the money is being used to purchase another property - the payment of tax is deferred until property is sold with no re-investment.
· Asset Manager: One who is charged with supervising an owner’s real estate assets at the investment level in addition to real estate management responsibilities that include maximizing net operating income and property value. An asset manager may recommend or be responsible for or participate in property acquisition, development, and divestiture and may have only superficial involvement with day-to-day operations at the site (e.g., supervision of personnel, property maintenance, tenant relations). Compare property manager.
· Capitalization (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.
· Certified Property Manager (CPM©): Individuals recognized as experts in real estate management, issued by the Institute of Real Estate Management (IREM©). The CPM© is considered in the real estate industry to be at the top of the profession. Has the experience and skills to operate real estate and understands the fundamentals of business management. The person who is responsible in a fiduciary capacity for the operation of a property, making sure it is properly leased, well maintained, competitive with other sites, and otherwise managed according to the owner’s goals and objectives.
· 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.
· Full Service Gross Lease: A lease in which the landlord receives stipulated rent and is obligated to pay all of the property’s operating expenses and real estate taxes, as well as the tenant’s utilities and janitorial services.
· Gross Lease: A lease in which the landlord receives stipulated rent and is obligated to pay all or most of the property’s operating expenses and real estate taxes.
· Gross Rent Multiplier (GRM): Simple measure of investment performance used to compare alternative investments. The gross rent multiplier formula is calculated as price divided by potential gross income.
· Internal Rate of Return (IRR): Long term annualized rate of return on invested capital over time that an investment generates.
· Modified Gross Lease: A lease in which the landlord receives a stipulated rent and the payment of the property’s operating expenses are divided between the lessor and lessee via specified terms in the lease; depending on the degree to which the tenant or landlord are responsible for operating costs.
· Multi-tenant Office Building: A building for which there are multiple lease obligations and less than 90% of which may be owner occupied.
· Net Lease: A lease in which the tenant pays all property operating expenses in addition to the stipulated rent. Disclosure of the specific expenses to be paid directly by the tenant is required.
· Net Operating Income (NOI): Gross Operating Income less sum of all operating expenses representing the property’s profitability before taxes, financing, or recovery of capital.
· Net Present Value (NPV): The discount of all future cash flows discounted to present value and less the initial investment.
· Owner Occupied Office Building: Buildings that are occupied by the owner and generally not counted in total investment inventory.
· Return on Investment (ROI): Most commonly used profitability ratio. Cash-on-cash return on an investment based on net cash flow divided by the invested capital.
· Single-tenant Building: A building for which there is a single lease obligation or is 100% owner occupied.
· Single Tenant Net Leased Investment (STNL): A building leased to a single tenant where the tenant is responsible for paying base rent to the landlord, and the tenant handles all property maintenance and expenses. Often the tenant is responsible for the parking lot, HVAC, building, roof, and structure.
· Tenant Estoppels Certificates: An estoppels certificate is typically used when the owner of a commercial property wants to sell or refinance the property, and the buyer or lender requires confirmation of the status of all leases in the property to ensure that the lease is valid, and that the tenant(s) do not have any claims against the landlord which would allow the tenants to offset or withhold future rent payments.
· Triple Net Lease (NNN): The tenant pays its pro rata share of taxes, maintenance, and property insurance and all costs associated with their occupancy, including personal property taxes, janitorial services and all utility costs. The landlord is responsible for the roof and the structure and parking lot.