Industry Glossary

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


Additional Rent:  Any amounts due under a lease that is in addition to base rent.  Most common form is operating expense increases.


Amortization:  Payment of debt in regular, periodic installments of principal and interest, as opposed to interest only payments.  May also be used in a lease where the landlord incurs costs for additional tenant improvements which are effectively treated as a debt and repaid by tenant over the term of the lease.


Base Building:  The existing shell condition of a building prior to the installation of tenant improvements.  This condition varies from building to building, landlord to landlord, and generally involves the level of finish above the ceiling grid.


Base Rent:  A specific amount used either as a minimum rent in a lease (retail) which uses a percentage of sales or overage for additional rent or sets a base onto which is added expenses and taxes in a net lease or increases in those items in a fully services lease.


Base Year:  The twelve month period upon which a direct expense escalation of rent is based.  Typically the calendar year the lease commences.


CAM Charges:  Common area maintenance charges.  Those charges levied on, or the expenses incurred in maintaining the common areas of a building.


Capitalization (Cap) Rate:  A percentage that relates the value of an income-producing property to its current or expected next year income, expressed as net operating income divided by purchase price.  Generally. It should be used only when current income is expected to remain relatively stable.  It may also be used in situations where future income is too speculative to be a measure of current value.


Class:  Class is usually used in conjunction with an office property and refers to the quality of property.  Class definitions fall with the following guidelines.  Class A+:  Landmark quality, high-rise building with prime central business district location (the best of the Class A buildings).  Class A:  Generally 100,000 SF or larger (five or more floors), concrete and steel construction, built since 1980, business/support amenities, strong identifiable location/access.   Class B:  Renovated and in good locations.  Newer buildings are smaller in size, wood frame construction, and/or in non-prime location.  Class C:  Older, unrenovated of any size in average to fair condition.


Certificate of Occupancy (COO):  A statement issued by a local government verifying that a newly constructed building is in compliance with all codes and may be occupied.


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


Defeasance:   The act of making an investment whole.  The supplementing of existing investment terms available to make the currently available market yield equivalent to that of a pre-existing investment that is being terminated.  Most commonly used in bond financing.


Discount Rate:  The percentage rate at which money or cash flows are discounted.  The discount rate reflects the market risk-free rate of interest plus a risk premium.  Common usage is when estimating current value based on projected future cash flows.


Discounted Cash Flow (DCF):  A valuation method used to estimate the attractiveness of an investment opportunity.  Discounted cash flow analysis uses future free cash flow projections and discounts these cash flow based on the assumed risk of a given investment to arrive at a present value.  See also Net Present Value.


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


Effective Gross Income (EGI):  The amount of income produced by a piece of property, plus miscellaneous income, less vacancy costs and collection losses.  Effective gross income is a metric commonly used to evaluate the value of a piece of investment property.


Effective Rent:  The average per square foot rent paid by the tenant over a term of a lease.  Takes into account only free rent and stepped rents.  Foes not include allowances, space pockets, free parking and other similar landlord concessions.


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


Escalation:  A clause in a lease providing for an increased rental at a future time.  May be accomplished by several types of clauses, such as:  (1) fixed increases – a clause which call for a definite, periodic rental increase:  (2) cost of living – a clause which ties the rent to a government cost of living index, with periodic adjustments as the index changes; (3) direct expense – the rent adjusted according to changes in the expenses of a property paid by the lessor, such as tax increases, increased maintenance costs, etc.


Estoppel Certificate:  An instrument which itself prevents individuals from later asserting facts different from those contained in the document.  Often required by the lender on commercial real estate transactions.  The tenant and landlord both sign the estoppel certificate, confirming the lease and pertinent facts thereto.  Thereafter, neither party may make claims to the contrary.


Expense Stop:  A fixed amount (typically per square foot) in a lease where the tenant is responsible for all building operating expenses and taxes in excess of said amount.


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


Gross Lease:  A lease in which all expenses associated with owning and operating the property are paid by the landlord.


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 one multiplied by a given factor (known as the gross rent multiplier extracted from the marketplace).


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


Ground Lease:  A lease of land only, (either vacant or including any buildings on it).  Usually a net lease on a long term basis (30 years+).  Ground rent should not be charged back to the tenant as an operating expense.


Holder in Due Course:  Any loan that is transferred from a lender who originated the loan to a third party.  Any buyer of indirect loans is known as a holder in due course and is now entitled to receive principal and interest payments.


HVAC:  Heating, ventilation, air conditioning.  A general term encompassing any system designed to heat and cool a building in its entirety, as opposed to a space heater.


Income Capitalization Approach:  A short-cut method used 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 equals net operating income divided by cap rate.


Landlord (Lessor):  The party (usually the owner) who gives the lease (right to possession) in return for consideration (rent).


Lessee (Tenant):  The party to whom a lease (the right to possession) is given in return for consideration (rent).


Load Factor:  In a lease, the load factor is the multiplier to a tenant’s useable space that accounts for the tenant’s proportionate share of the common area (restrooms, elevator lobby, mechanical rooms, etc.).  The load factor is usually expressed as a percentage and ranges from a low of 5% for a full tenant to as high as 15% or more for a multi-tenant floor.  Subtracting one (1) from the quotient of the rentable area divided by the useable area yields the load factor.  At times confused with the “loss factor” which is the total rentable area of the full floor less the useable area divided by the rentable area.  (If a full floor broken up into multiple tenancies has a useable area of 18,000 SF and a rentable area of 20,000 SF, the load factor is 11.1% and the loss factor is 10%.


Loan to Value Ratio (LTV):  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.


Master Lease:   A lease controlling subsequent leases.  May cover more property than subsequent leases.  For example, “A” leases an office building, containing ten offices to “B” as sublessor are controlled by the lease from “A” to “B” (master lease).


Mezzanine Debt: Any debt which is paid after a first mortgage. Often refers to a shortterm second or third mortgage which will be taken out (paid off or earned out) in the short term upon changes in property performance. The term “mezzanine” implies temporary indebtedness, but a long-term second mortgage is technically mezzanine 


Mezzanine Pieces: Those security classes (or tranches) rated in the middle range of a multi-class security, i.e., more secure than the first-loss tranche but less secure than senior class(es).


Mezzanine Investor: A party who actively invests in mezzanine debt either by issuing such debt or pooling mezzanine security classes.


Net Cash Flow:  A company’s total cash income minus cash used to pay operating expenses, debt service, capital expenditures and for other purposes.  Net cash flow is not a measure of a company’s profitability.


Net Lease:  (See also “Triple Net”).  Today this generally indicates a lease in which the stated rent excludes the insurance, utilities, operating expenses and real estate taxes for the building.  The tenant is then responsible for the payment of these costs either directly or as additional rent.  Opposite of Gross or Full Service Lease.


Net Operating Income (NOI):  A company’s operating income after operating expenses are deducted, but before income taxes and interest are deducted.  Operating expense do not include such things as (a) owner’s expenses unrelated to the day-to-day operations of a building; capital expenditures versus normal repairs and maintenance; or debt service.  If it is a positive value, it is referred to as net operating income, while a negative value is called a net operating loss (NOL).


Net Present Value (NPV):  In finance, the net present value of a time series of cash flows, both incoming and outgoing, is defined as the sum of the present values (PVs) of the individual cash flows of the same entity.


The Present Value (PV) is the amount that must be invested now to produce the known future value.  For any sum invested at a given interest rate, the amount one would receive at the end of the period can be determined by taking the investment times one (1) plus the interest rate of the period to the power of the period.  For example if $10 is invested in an interest rate of 10% for one year, the investment would grow to $11 at the end of the year.  It follows, then that $11 one year from now is worth $10 today; that is, $10 is the present value of $11.


Net Present Value can be calculated on a leveraged or unleveraged basis, where leveraged means the cash has been borrowed, and unleveraged means it has not been borrowed.  The NPV of a sequence of cash flows takes as input the cash flows and a discount rate or discount curve and outputs a value.


Net Rentable Area:  (Same as Rentable Area):  The area (square footage) for which rent can be charged.  Generally it is the gross area of the full floor less the area of all vertical penetrations (elevator shafts, stairwells, mechanical shafts, etc.).  Rentable area can be measured in many ways, but the most common measurement for office buildings is according to BOMA standards.  Net rentable area includes the tenant’s premises plus an allocation of the common area directly benefiting the tenant, such as restrooms, common corridors, mechanical and janitor’s rooms and the elevator lobby on the tenant’s floor.


Nondisturbance:  So long as lease is not in default, its rights to occupancy under the leaser will not be disturbed by the lessor or its successors or assigns.


Pass Throughs:  An increase in operating expenses over the base year amount that is billed to the tenant as additional rent. 


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


Subordination:  A clause in an agreement which states that the current claim on any debts will take priority over any other claims formed in other agreements made in the future.  Subordination is the act of yielding priority.


Substantial Completion:  Generally used in reference to the construction of tenant improvements (Tis).  The tenant’s premises are typically deemed to be substantially completed when all of the Tis for the premises have been completed in accordance with the plans and specifications previously approved by the tenant.  Sometimes used to define the commencement date of a lease.


Triple Net:  A lease requiring the tenant to pay in addition to a fixed rental, the expenses of the property leases, such as taxers, insurance, maintenance, utilities, cleaning, etc.  The terms “net net”, “net net net”, “triple net”, and other such repetitions are used.