Real Estate Vocabulary
A
Absolute Net Lease
A lease agreement where the tenant is responsible for all property expenses including maintenance, insurance, and taxes in addition to rent and utilities.
Absorption
The rate at which available rentable space is leased in a specific real estate market over a given period of time.
Accredited Investor
An individual who meets certain income and net worth thresholds set by the SEC and is therefore allowed to invest in private securities offerings like real estate syndications.
Acquisition
The process of identifying, negotiating, and closing on the purchase of an investment property.
Acquisition Fee
An upfront fee, typically a percentage of the purchase price, paid to the sponsor for sourcing and closing on an investment property.
Amortization
The process of spreading out a loan into a series of fixed payments over time. Also refers to the spreading out of capital expenses of a property over its useful life for tax and accounting purposes.
Appreciation
An increase in the value of an asset over time due to market conditions or property improvements.
Asset Management
The various disciplines involved with managing real estate assets from the time of investment through the time of disposition. Proper asset management plans and policies include leasing, property management, capital expenditures, and disposition.
Asset Manager
The individual responsible for developing and overseeing the strategic plan for the investment, including managing the property management company's activities, and the ultimate disposition of the asset.
Average Daily Rate (ADR)
A metric used in the hotel industry, calculated by dividing the total room revenue by the number of rooms sold.
Bad Debt
Uncollected money owed by a tenant after moveout.
Balloon Payment
The final lump sum payment due at maturity on a loan that has not been fully amortized over the term of the loan.
Basis Point (BPS)
A unit of measure used in finance to describe the percentage change in interest rates or other financial metrics. One basis point is equivalent to 0.01% (1/100th of a percent).
Bridge Loan
A shortterm loan used to acquire a property or provide capital for improvements until permanent financing can be secured.
Buyout
When one party acquires most or all of a company's shares to gain control of the company.
C
Call Option
A contract that gives the owner the right, but not the obligation, to buy a property at a specified price within a specific time period.
Cap Rate (Capitalization Rate)
The ratio of a property's net operating income to its purchase price or current market value, expressed as a percentage.
Capital Call
When a private equity fund manager asks the limited partners to contribute a portion of the capital they committed to invest in the fund.
Capital Expenditure (CapEx)
Funds used by a company to acquire, upgrade, and maintain physical assets such as property, buildings, technology, or equipment.
Capital Gain
The profit earned when an asset is sold for more than its purchase price.
Capital Improvement Plan
A budgeting and financial tool used to determine the capital expenditures required to maintain and improve a property over a multiyear period.
Capital Stack
The structure of the investment capital in a real estate transaction, which can include senior debt, mezzanine debt, preferred equity and common equity.
Capitalization Rate
The rate of return on a real estate investment property based on the income that the property is expected to generate. Capitalization Rate = Net Operating Income / Current Market Value.
Cash Flow
The total amount of money being transferred into or out of a business, especially as affecting liquidity.
Cash-on-Cash Return
The ratio of annual beforetax cash flow to the total amount of cash invested, expressed as a percentage.
Certificate of Occupancy
A document issued by a local government agency certifying a building's compliance with applicable building codes and indicating it to be in a condition suitable for occupancy.
Closing
The final step in executing a real estate transaction when the title of the property is transferred from the seller to the buyer.
Closing Costs
Expenses in addition to the price of the property that buyers and sellers normally incur to complete a real estate transaction.
Commercial Mortgage Backed Securities (CMBS)
A type of fixed income security collateralized by commercial real estate loans.
Common Equity
The amount of money invested by the owner that sits at the bottom of the capital stack and is not paid back until all other capital is returned.
Concessions
Incentives offered by a landlord to attract tenants, such as free rent or tenant improvement allowances.
Core
A type of real estate investment that involves fully leased, multitenant properties in major markets with minimal leverage and stable, predictable cash flows.
Core Plus
A type of real estate investment that is similar to core but with slightly more risk, usually due to greater leverage, some vacancy or upcoming lease rollover.
Covenants
Legally binding terms that govern the performance of the parties in a real estate transaction or ownership of a property.
Crowdfunding
The practice of funding a project or venture by raising small amounts of money from a large number of people, typically via the Internet.
D
Debt Service
The cash required to cover the repayment of interest and principal on a debt for a particular period.
Debt Service Coverage Ratio (DSCR)
The ratio of net operating income to annual debt service, measuring a property's ability to service its debt.
Debt Yield
The ratio of a property's net operating income to the total loan amount, expressed as a percentage.
Depreciation
An accounting method of allocating the cost of a tangible or physical asset over its useful life or life expectancy.
Development
A type of real estate investment that involves groundup construction or substantial renovation of a property.
Disposition
The sale of an investment property.
Diversification
A risk management strategy that mixes a wide variety of investments within a portfolio.
Due Diligence
The process of investigating, auditing and reviewing the details of a potential investment to confirm all material facts regarding a sale.
E
Earnest Money Deposit
A deposit made by a potential buyer to demonstrate their commitment and intent to purchase a property.
Economic Occupancy
The percentage of total gross leasable area for which a tenant is paying rent.
Effective Gross Income
The anticipated income from all operations of real property after allowance is made for vacancy and collection losses.
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.
Equity
The amount of money invested by the owner in a property, calculated as the difference between the current market value of the property and the amount of mortgage debt.
Equity Multiple
The total cash distributions received from an investment, divided by the total equity invested.
Equity Waterfall
The method by which profits from a real estate investment are distributed to investors. The waterfall structure outlines how distributions are made at different stages or "hurdles" as the property reaches higher levels of profitability.
Escrow
Funds held by a neutral third party on behalf of the principals in a transaction.
Expense Stop
An annual limitation on the amount of expenses passed through to a tenant; the landlord pays any amount above the expense stop.
F
Fair Market Value
The price that a property would sell for on the open market under normal conditions between a willing buyer and a willing seller, with neither being required to act, and both having reasonable knowledge of the relevant facts.
Fiduciary
A person who has the power and obligation to act for another under circumstances which require total trust, good faith and honesty.
Financial Modeling
The process of creating a summary of a company's expenses and earnings in the form of a spreadsheet that can be used to calculate the impact of a future event or decision.
Fixed Costs
Costs that do not change based on the level of production or sales, such as rent, insurance, and property taxes.
Floor Area Ratio (FAR)
The ratio of a building's total floor area to the size of the piece of land upon which it is built.
Forced Appreciation
An increase in the value of an asset that occurs due to an owner's actions, such as renovations or improved management, rather than market forces.
Funds From Operations (FFO)
A measure of a REIT's operating performance, calculated by adding depreciation and amortization expenses to earnings.
G
General Partner (GP)
The partner in a limited partnership responsible for the management and investment decisions of the partnership.
Gross Lease
A lease in which the tenant pays a flat rental amount and the landlord pays for all property charges regularly incurred by the ownership.
Gross Operating Income
The total income generated from the operations of a property, including rental income, tenant reimbursements, and other income.
Gross Potential Rent
The total rental income a property would generate if it were 100% leased at market rental rates.
Gross Square Feet
The total floor area of a building, including basements, mezzanines, and upper floors.
Ground Lease
A lease in which the right of use and occupancy of land is granted for a specified period, usually in exchange for a specified rent.
H
Hard Costs
The direct construction costs of a project, including labor, materials, and equipment.
Highest and Best Use
The reasonably probable and legal use of vacant land or an improved property that is physically possible, appropriately supported, financially feasible, and that results in the highest value.
Hold Period
The length of time an investor intends to hold an investment before selling.
Hurdle Rate
The minimum rate of return required by investors in a real estate syndication or fund before the sponsor can begin earning their promoted interest.
I
Improvements
Buildings or other structures that have been erected on land.
Income Approach
A real estate appraisal method that estimates the value of a property based on the income it is expected to generate.
Inflation
The rate at which the general level of prices for goods and services is rising and, consequently, the purchasing power of currency is falling.
Internal Rate of Return (IRR)
The discount rate at which the net present value of all cash flows (both positive and negative) from a project or investment equal zero.
Investment Committee
A group of individuals responsible for making investment decisions on behalf of an investment firm or fund.
Investment Memorandum
A document that outlines the key terms and risks of a proposed investment, used to solicit interest from potential investors.
Investment Period
The period during which a private equity fund is actively investing in new assets.
Investment Thesis
A reasoned argument for a particular investment strategy, backed up by research and analysis.
J
Joint Venture (JV)
A business arrangement in which two or more parties agree to pool their resources for the purpose of accomplishing a specific task.
K
Key Principal
An individual who has significant control over an investment and whose presence is considered essential to the successful operation of the investment.
L
Lease
A contract by which one party conveys land, property, services, etc. to another for a specified time, usually in return for a periodic payment.
Leasing Commissions
Fees paid to a broker or agent for negotiating a lease between a landlord and tenant.
Leverage
The use of borrowed money to increase the potential return of an investment.
Limited Partner (LP)
An investor in a limited partnership who has limited liability and is not involved in the daytoday management of the partnership.
Loan to Cost (LTC)
The ratio of the loan amount to the total cost of the project, expressed as a percentage.
Loan to Value (LTV)
The ratio of the loan amount to the value of the property, expressed as a percentage.
Loss to Lease
The difference between the actual rental income of a property and the rental income that could be achieved if the property were fully leased at current market rates.
M
Market Analysis
A study of the supply and demand factors affecting a particular property type in a specific market area.
Market Rent
The rental income that a property would command in the open market, indicated by current rents paid for comparable space.
Market Value
The most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale.
Master Lease
A lease in which the master tenant has the right to sublease the property.
Mezzanine Debt
Debt that is subordinate to senior debt but senior to equity in the capital stack.
Modified Gross Lease
A lease in which the tenant pays base rent plus some of the property's operating expenses, such as utilities, maintenance, or insurance.
Multifamily
A type of residential real estate that contains multiple separate housing units in one building or complex.
Multiple On Invested Capital (MOIC)
The total cash distributions received from an investment, divided by the total capital invested. Also known as Equity Multiple.
N
Net Absorption
The net change in occupied space over a given period of time, calculated as the difference between space occupied at the end of a period and space occupied at the beginning of a period.
Net Asset Value (NAV)
The value of an entity's assets minus the value of its liabilities.
Net Lease
A lease in which the tenant pays some or all of the property's operating expenses in addition to base rent.
Net Operating Income (NOI)
A property's gross operating income minus operating expenses, excluding debt service, capital expenditures, depreciation, and amortization.
Net Present Value (NPV)
The difference between the present value of cash inflows and the present value of cash outflows over a period of time.
Net Square Feet
The usable or rentable area of a floor or building, excluding common areas such as lobbies, stairwells, and mechanical rooms.
O
Occupancy
The percentage of total rentable space that is currently leased and occupied by tenants.
Offering Memorandum
A document that provides potential investors with information about a securities offering, such as a real estate syndication.
Operating Agreement
A document that outlines the rules and procedures for the operation of a limited liability company (LLC).
Operating Expenses
The costs associated with operating and maintaining a property, such as utilities, property management fees, insurance, and property taxes.
Opportunistic
A highrisk/highreturn investment strategy that typically involves properties requiring significant rehabilitation or redevelopment.
Option
A contract that gives one party the right to buy or sell an asset at a specified price within a specific period of time.
P
Pari Passu
A Latin phrase meaning "on equal footing" or "ranking equally." It describes situations where two or more assets, securities, creditors or obligations are equally managed without preference.
Partnership
A business entity in which two or more coowners engage in business for mutual profit.
Permanent Financing
A longterm mortgage loan, typically with a maturity of 5 years or more, used to replace shortterm financing after a property has been stabilized.
Preferred Equity
An equity investment which has a higher claim on the assets and earnings than common stock. Preferred equity typically receives a stated dividend and has priority over common stock in the payment of dividends and upon liquidation.
Preferred Return
A term used in the private equity world referring to the threshold return that the limited partners of a fund must receive, prior to the GP receiving its carried interest.
Private Equity
An alternative investment class that involves investing directly in private companies or engaging in buyouts of public companies, resulting in the delisting of public equity.
Private Placement
The sale of securities to a relatively small number of select investors as a way of raising capital. Investors involved in private placements are usually large banks, mutual funds, insurance companies and pension funds.
Private REIT
A REIT that is exempt from SEC registration and whose shares do not trade on national stock exchanges.
Pro Forma
Financial statements that are prepared in advance of a planned transaction, such as a merger, an acquisition, a new capital investment, or a change in capital structure such as incurrence of new debt.
Pro Rata
Refers to the proportionate allocation of rights, obligations, or ownership, typically in proportion to the respective party's share or ownership stake.
Promote
A bonus paid to a syndicator above the amount of the syndicator's contributed capital. The promote compensates the syndicator for its work and is subordinate to the investors' preferred return.
Property Management
The various functions that are carried out at the property level to ensure the real estate investment provides a competitive return.
Q
Qualified Opportunity Fund
An investment vehicle created as part of the Tax Cuts and Jobs Act of 2017 that provides tax incentives for investing in designated Opportunity Zones.
Qualified Opportunity Zone
An economicallydistressed community where new investments, under certain conditions, may be eligible for preferential tax treatment.
R
Real Estate Investment Trust (REIT)
A company that owns, operates or finances incomeproducing real estate. Modeled after mutual funds, REITs provide investors with regular income streams, diversification and longterm capital appreciation.
Real Estate Owned (REO)
Property owned by a lender, typically a bank, after an unsuccessful sale at a foreclosure auction.
Real Estate Portfolio
A collection of real estate assets owned by an individual, a group of investors, or a fund.
Recourse Loan
A type of loan where the borrower is personally liable for the debt, meaning the lender can seize the borrower's assets if they default on the loan.
Refinancing
The process of replacing an existing mortgage with a new loan, often to lower the interest rate, reduce monthly payments or access equity.
Rehabilitation
The restoration of a property to a better condition, often through repairs or improvements.
Return on Cost (ROC)
The ratio of a property's net operating income to its total development cost, expressed as a percentage.
Return on Investment (ROI)
The ratio of the money gained or lost on an investment relative to the amount of money invested, expressed as a percentage.
RevPAR (Revenue Per Available Room)
A performance metric in the hotel industry, calculated by dividing a hotel's total guestroom revenue by the room count and the number of days in the period being measured.
Risk Adjusted Return
A measure of an investment's return that factors in the degree of risk that must be accepted in order to achieve it.
S
Sale Leaseback
A transaction in which the owner of a property sells the property and then leases it back from the new owner, becoming a tenant.
Solvency
A company's ability to meet its longterm financial obligations.
Special Purpose Vehicle (SPV)
A separate legal entity created by an organization for a specific purpose, typically to isolate financial risk.
Sponsor
The individual or company responsible for organizing and managing a real estate investment, also known as the syndicator or operator.
Spread
The difference between the interest rate and the index on which it is based.
Stabilized Occupancy
The longterm average occupancy rate that an incomeproducing property is expected to achieve after exposure for leasing in the open market for a reasonable period of time.
Straight Line Rent
The average rent paid over the term of the lease, calculated by dividing the total rent by the number of months in the lease.
Subordinated Debt
Debt that ranks below other debts with regard to claims on assets or earnings.
Syndication
The process of pooling capital from multiple investors to fund a real estate investment.
T
Tenant
A person or entity who rents a property from a landlord.
Tenant Improvements (TI)
The customized alterations a building owner makes to rental space as part of a lease agreement, in order to configure the space for the needs of that particular tenant.
Term
The duration of a loan or a lease.
Total Return
The actual rate of return of an investment over a given evaluation period, including income and appreciation.
Triple-Net Lease (NNN)
A lease agreement where the tenant is responsible for paying all operating expenses associated with the property, including real estate taxes, building insurance, and maintenance, in addition to rent and utilities.
U
Under-Improvement
A situation in which the value of the improvements on a parcel of land is less than the highest and best use of the land.
Underwriting
The process of evaluating the risk and potential return of a proposed real estate investment.
Unlevered Return
The return on an investment before the impact of debt.
Untraded REIT
A REIT that is not traded on a securities exchange and is often more illiquid than publicly traded REITs.
V
Vacancy Rate
The percentage of all available units or space in a rental property that are vacant or unoccupied at a particular time.
Value Add
A real estate investment strategy that involves buying a property, improving it, and selling it at a higher price.
Variance
The difference between the actual performance of an investment and its expected performance.
Vintage
The year in which a real estate fund began investing or the year in which a property was built.
W
Weighted Average Cost of Capital (WACC)
A calculation of a firm's cost of capital in which each category of capital is proportionately weighted.
Weighted Average Lease Term
The average lease term remaining for all tenants in a property, weighted by the size of each tenant's space.
White Knight
A friendly investor that acquires a company at fair consideration with support from the company's board and management.
Workout
A mutuallyagreed upon plan between a lender and a financially troubled borrower to renegotiate terms on a loan that is in default.
X
XIRR
The internal rate of return for a series of cash flows that occur at irregular intervals, unlike the standard IRR which assumes equalinterval periodicity.
Y
Yield
The income return on an investment, expressed as an annual percentage rate based on the investment's cost, its current market value, or its face value.
Yield Curve
A line that plots the interest rates, at a set point in time, of bonds having equal credit quality but differing maturity dates.
Yield Maintenance
A prepayment premium that allows investors to attain the same yield as if the borrower made all scheduled interest payments up until the maturity date.
Z
Zero Cash Flow Property
A property that generates just enough income to cover its operating expenses and debt service, leaving no cash flow for distribution to investors.
Zoning
The laws, regulations, and codes that dictate how a property can be used and developed, as specified by the controlling municipality.