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REITipediaA Glossary of Real Estate Investment Terms

February 27, 2017 | Equity Research

Dear Valued Investors,

We are pleased to present REITipedia, a glossary of the most frequently used terms in commercial real estate investment and real estate securities analysis. REITipedia is a living document that we hope to refine and expand with your assistance. As with our inspiration, Wikipedia, we would like REITipedia to be a collaborative document, so we welcome your suggestions on new entries, updates to existing definitions and comments.

Sincerely,

Jeffrey J. Donnelly, CFA, Senior Analyst, Managing DirectorLodging/Multifamily/Retail617-603-4262 | [email protected] Heck, CFA Senior Analyst, Vice PresidentOffice and Industrial Real Estate443-263-6529 | [email protected] Stender Senior Analyst, Managing DirectorHealth Care, Net Lease Storage, Manufactured Housing REITs562-637-1371 | [email protected] S. Belcher Associate Analyst Health Care, Net Lease Storage, Manufactured Housing REITs443-462-7354 | [email protected] DeFelice, CFA Associate Analyst Health Care, Net Lease Storage, Manufactured Housing REITs443-263-6442 | [email protected] Finn Associate AnalystOffice and Industrial Real Estate443-263-6516 | [email protected] Fique Associate Analyst, Vice PresidentLodging/Multifamily/Retail443-263-6568 | [email protected] Kesten Associate Analyst, Vice PresidentLodging/Multifamily/Retail617-603-4233 | [email protected] LaQuaglia, CFA, CMT Associate Analyst, Vice PresidentPrison REITs617-603-4263 | [email protected]

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Wells Fargo Securities, LLC | 3

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Contents

REITipedia

4 | Wells Fargo Securities, LLC

1031 Exchange or Like-Kind Exchange. The tax-deferred exchange of real property for another of similar characteristics under U.S. Internal Revenue Code Section 1031. To qualify, the seller has (1) 45 days from the sale of the relinquished property to formally identify replacement properties that must be similar in nature to the property that was sold and (2) 180 days from the sale of the relinquished property to complete the purchase and exchange. The property seller cannot exchange real property for common shares or operating partners units (OP units) in a REIT, because the assets are not of like kind. See Section 1031.

3PL or Third-Party Logistics Provider (TPL). A provider of outsourced logistics services. Industrial REITs may outsource product distribution to a 3PL.

721 Exchange. The tax-free or tax-deferred contribution of real property for a partnership interest, (typically operating partnership units) as permitted under U.S. Internal Revenue Code Section 721. Whereas a Section 1031 transaction typically involves a property-for-property exchange, a Section 721 transaction involves the exchange of property for a partnership interest. See 1031 Exchange; UPREIT.

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AA-REIT. Australian Real Estate Investment Trust.

Abatement (Rental). A temporary reduction or elimination of rental payment, typically as a tenant inducement to enter into or renew a lease. It is often provided in lieu of a tenant improvement allowance.

Abatement (Tax). A reduction in property tax as the result of an appeal to the taxing authority. Tax abatements are occasionally used as an incentive to stimulate and attract development.

Above Building Standard. Upgraded finishes necessary to accommodate a tenant’s leasehold improvements.

Absolute Triple Net Lease. See Triple Net Lease, Absolute.

Absorption Rate. The pace at which rentable space is filled. Gross absorption is the measure of total square feet leased over a specific period, with no consideration for space vacated in the same period. Conversely, net absorption is the change in occupied square footage over a period of time and takes into consideration space vacated during the period. It is typically expressed as a percentage of existing supply. See Gross Absorption; Net Absorption.

Accrual Accounting. An accounting method that recognizes revenue and expenses when they are incurred, rather than when cash is exchanged. For example, property taxes are typically paid in one or perhaps two payments in the course of a year (depending on jurisdiction), but for accounting purposes may be accrued and recognized as a monthly expense. See Cash Accounting.

Acquisition Costs. The direct costs related to a specific investment purchase. Typical costs include closing costs, brokerage fees, legal fees, title insurance, and due diligence costs.

Add-On Factor. The factor by which a tenant space in a multi-tenant building is increased to allocate common areas (rest rooms, lobbies, corridors, etc.). Rental rates are typically applied to the resulting gross area. See Load Factor.

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Adjusted Funds From Operations (AFFO). A measure of a real estate company’s cash flow generated by operations; it is considered a closer measure of economic profitability than FFO. AFFO is calculated by subtracting from funds from operations (FFO) both (1) normalized recurring expenditures that are capitalized by the REIT and then amortized, but which are necessary to maintain a REIT’s properties and its revenue stream (e.g., leasing commissions and tenant improvement allowances in commercial properties or new paint and carpeting in apartment units); (2) “straight-lined” rents included in revenue; and (3) FAS 141 adjustment. Development-related expenditures are excluded from this analysis because they are not considered a recurring expense. The AFFO calculation may also be called cash available for distribution (CAD), or funds available for distribution (FAD). The intent is to produce a cash-based measure of recurring earnings after debt services and regular capital reserves. It is a financial measure of the REIT’s ability to cover the dividend. An example of a typical REIT income statement and AFFO reconciliation is included in the Appendix. See CAD, FAS 141, Funds from Operations.

Ad Valorem. A tax imposed on the value of property typically based on the local government’s valuation.

After-Tax Yield. For taxable investors, it is the net after-tax cash flow for an annual period divided by the total equity investment in a property.

Air Rights. The right to use, control, or occupy the space above a designated property.

Americans With Disabilities Act (ADA). A civil rights law that prohibits discrimination against individuals with disabilities in all areas of public life, including transportation and all public and private places open to the general public. The purpose of the law is to ensure that people with disabilities have the same rights and opportunities as everyone else. For real estate, this means that developers and landlords need to consider the placement and number of parking spaces for disabled visitors, access through ramps, electronically controlled doors, appropriate door handles, appropriate bathroom facilities, etc. The minimum requirements can be challenging and costly to implement in small properties.

Amortization. The process of reducing the principal balance of a mortgage or cost of an asset over a period of time through a fixed payment schedule.

Anchor Tenant or Prime Tenant. The major tenant or tenants in a retail or office property; most commonly used to describe a grocery store, department store, or discount store, but can also be the largest tenant in an office building.

Annualized Return. Expressing the total return for a period other than one year as an equivalent return on an annual basis. [e.g., annualized return = (1+ cumulative return) ^ (365/days held) -1 ]. The annualized return is not the same as an arithmetic average, because it is computed on a time-value basis.

Appraisal. An opinion of value determined by an independent agent, typically one certified as an MAI by the Appraisal Institute.

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Appraised Value. Three approaches are used to determine value, as follows:

(1) The Market Value or Sales Comparison approach makes valuation adjustments to subject property based upon a comparison to recent transactions for comparable properties;

(2) The Cost Approach estimates the cost to replace with similar utility; and

(3) The Income Approach typically uses the property’s anticipated future cash flow in a discounted cash flow and/or capitalization rate analysis to establish value.

“As-Is” Condition. The acceptance by the tenant of the existing condition of the premises at the time the lease is consummated, including any defects.

Assessment (Tax). The official valuation of a property used in determining the property taxes due to the taxing authority. The assessed value is not necessarily the market value of the property.

Asset Management. The proactive management of capital to maximize total investment returns.

Assumption Of Mortgage. A sale transaction involving a mortgaged property whereby the buyer accepts liability for the existing mortgage from the seller. Unless the lender agrees to release the seller, the seller remains liable to the lender.

Assignment Of Lease. The transfer of rights a lessee (the assignor) possesses over a property to another party (the assignee). The assignee typically acquires the same rights, privileges, and obligations as the assignor, but the assignor remains liable unless released by the landlord. A frequently seen example involves a distressed retailer (e.g., filed for protection under Chapter 11 of the U.S. Bankruptcy Code) assigning leases to another party for compensation. In this example, the landlord may or may not have a right to approve the assignment. It is distinguished from a sublease, where the sub lessee acquires something less than the lessee’s entire interest. See Sublease.

Attorn. A tenant’s agreement to recognize a new owner (including a foreclosing lender) as the new landlord, and pay rent and otherwise perform under the existing lease.

Average Daily Rate (ADR). A term used in the lodging industry to measure the average rate paid for rooms sold. Calculated by dividing room revenue by the number of rooms sold. By comparison, RevPAR is calculated by dividing room revenue by the number of rooms available. The measure can be applied to a single hotel, market, or the industry, and can pertain to a single night, week, month, or year. See RevPAR.

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Balloon Payment. The lump sum required to pay off the principal balance on a debt instrument at the end of its term.

Base Building. Common in office properties. Refers to the basic building improvements before tenant improvements. Typically, the base building consists of structural elements, building envelope, and all mechanical and electrical systems provided to the tenant space. In some markets, base building may include ceiling grid, lighting, HVAC distribution, and other elements that may be considered tenant improvements in other markets. Related to “White Box” (more common term in retail properties), which means the landlord will finish the walls, ceiling grid, lighting and HVAC before turning over a “white box” to the tenant. A “white box” therefore only requires minimal improvements by the tenant (e.g., paint).

Base Rent. The initial rent that, depending on lease provisions, may change over the term of the lease by a pre-specified (i.e., +3% per annum, +$2.00 per square foot every 24 months) or variable amount (i.e., greater of consumer price inflation growth, or +3% per annum). Typically the Base Rent is the rate quoted for tenant space with standard improvements and any additional improvements are amortized into the lease to arrive a final negotiated rent. The base rent is separate from percentage or overage rent (retail properties), common area charges (retail properties), or expense pass-throughs (industrial, office properties). Also called the Minimum Rent or Base Minimum Rent. Refer to Gross Leases and Net Leases for additional information on lease payments.

Base Stop. The maximum amount of property operating expenses borne by the landlord; the incremental amount is passed through to the tenant. Common in office properties and typically expressed as an absolute figure or on per square foot basis. Each tenant may have a differing base stop and the pass-through is pro-rated in proportion to the tenant’s share of the building area. See Base Year.

Base Year. Similar to the Base Stop, but the property operating expenses in a specific year serve as the threshold, rather than a specific dollar amount. For example, the tenant will pay their proportionate share of expenses over the costs incurred in the Base Year. See Base Stop; Escalation Clause; Recovery.

Basis Point. A unit of measure used in accounting to describe the percentage change in the value or rate of a financial instrument. One basis point is equivalent to one-tenth of 1 percent, or 0.01%.

Bedroom Community. A suburban residential community near an urban employment center.

Betterment. An improvement to real property that enhances the value of a property. The term is commonly applied to public improvements (roads, sidewalks, etc.).

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Blanket Mortgage or “Portfolio Loan.” A single mortgage secured by a number of individual properties. Structurally similar to a pool of cross-collateralized, cross-defaulted individual mortgages. See Cross Collateralized; Cross Default.

Blind Pool. An investment program in which capital is invested into a trust or partnership without the investors’ prior knowledge of the assets to be purchased.

BOMA (Building Owners and Managers Association). Founded in 1907, BOMA is a professional organization for commercial real estate professionals based in the United States and Canada.

Book Cost or Undepreciated Book Value. The historical cost plus any additional capital invested in an asset. The book cost is not reduced by depreciation.

Book Value. Calculated as the book cost less depreciation, the book value is the carrying value of an asset on the balance sheet of the company. The book value is not a reflection of market value, although impairments to book value may be incurred if the market value is below the book value. Except in rare circumstances, book value is not increased for increases in market value.

Breakpoint. In retail lease, the breakpoint is the sales revenue threshold above which the tenant pays a predetermined percentage of sales (e.g., 5% of sales over a $1MM breakpoint). See Base Rent; Natural Breakpoint; Overage Rent; Percentage Rent.

Bridge Financing. Temporary financing to cover the period prior to securing permanent capital.

Building Classifications. Building classifications usually refer to Class A, B, and C properties and locations. Classifications are subjective. Class A buildings generally feature superior construction and finish and are well located. These buildings typically command the highest rental rates in their submarket. The lower classes of buildings are progressively less desirable due to age, location, or construction. Rents decline as the class of the property declines. A property can be described as a Class A building in a Class B location or vice versa.

Building Code. Regulations established by local authorities describing the minimum structural requirements for buildings including construction materials, electrical, foundation, life-safety systems, plumbing, and roofing among other specifications.

Building Permit. A permit granted by a city or municipal- or county-level code enforcement agency for the construction or renovation of a structure. The agency reviews plans and specifications for conformance to local building codes and zoning ordinances.

Build To Suit. A property constructed to the unique needs and requirements of a particular tenant. The landowner pays for construction, and the tenant then leases the land and building.

Buy Down. The action of paying additional discount points to a lender in exchange for a reduced rate of interest on a loan.

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California Coastal Commission (CCC). Established by permit in 1972 and extended indefinitely in 1976, the CCC is a state agency with regulatory oversight over land use and public access in the Coastal Zone, which is defined as California’s 1,100-mile seaward boundary and inland for a distance of five miles (rural areas) to several hundred feet (urban areas). There are a dozen voting board members on the CCC and approximately as many enforcement officers.

Capitalization Rate

• Economic Capitalization Rate. Similar to the stabilized capitalization rate, but net operating income is reduced by an annual capital expenditure reserve.

• Going-In Capitalization Rate. Calculated by dividing the property’s net operating income in the first full year of ownership by its purchase price.

• Implied Capitalization Rate. Calculated by dividing the portfolio’s recurring annual net operating income—that is, representative of a typical year – by its enterprise value (market value of equity plus net debt). Low implied cap rates are typically reflective of more stable cash flows, higher sustainable long-term cash flow growth, and a larger, more liquid capital market environment (e.g., multifamily assets), whereas higher cap rates indicate greater risk and volatility.

• Stabilized Capitalization Rate. Determined by dividing the net operating income of a property in a representative year with no atypical expenses or revenue by either its original purchase price, or estimated value in that year. Commonly used when acquiring newly constructed properties that may have an initial lease-up period, the stabilized cap rate typically refers to the yield once the property achieves an occupancy rate typical in the market.

• Terminal Capitalization Rate. In a multiyear analysis used to estimate value, the terminal cap rate is applied to the net operating income for the first year following the terminal year of the holding period. This is analogous to the prospective future owner of a property using the net operating income in their first year of ownership to determine value.

Capital Expenditure. Typically a non-leasing capital investment necessary for the ongoing operation of the property (e.g., roof repairs or replacement).

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Capital Expenditure, Deferred. A funded or unfunded expense expressed either as a percentage of gross revenue, or on a per-square-foot basis for the purpose of anticipated future capital expenditure. The reserve is typically 3-5% of gross revenue and theoretically related to the average annual depreciation of the building and improvements including an adjustment for inflation. For example, a building with a 30-year life would require 1/30 or about 3% of its annual value reinvested to maintain the condition of the asset; however, a larger investment may be necessary for the building to remain competitive with newer product.

Capital Improvement. Typically a non-leasing capital investment that improves the competitive positioning of the property or appreciably extends its useful life. Unlike Capital Expenditures, Capital Improvements typically have a prospective return on investment (e.g., adding or upgrading the common area amenities of an apartment property, modernizing the façade at a shopping center). See ROI Project.

Capital Lease. An accounting term for a lease that transfers substantially all the risks and rights of ownership to the lessee. See Operating Lease.

Capital Expenditure Reserve. A funded or unfunded expense expressed either as a percentage of gross revenue, or on a per square basis for the purpose of anticipated future capital expenditure. The reserve is typically 3-5% of gross revenue and theoretically related to the average annual depreciation of the building and improvements including an adjustment for inflation. For example, a building with a 30-year life would require 1/30th or about 3% of its annual value reinvested to maintain the condition of the asset; however, a larger investment may be necessary for the building to remain competitive with newer product.

Carrying Costs. Costs such as property taxes, interest, and leasing costs associated with the retention of an asset under development. Such costs are usually capitalized into the cost basis of the asset.

Cash Accounting. An accounting method calling for receipts to be recorded in the period received and expenses recorded in the period they are paid. See Accrual Accounting.

Cash Available For Distribution (CAD). See Adjusted Funds From Operations.

Cash Flow. The cash remaining after various expenses and expenditures are deducted from income. Cash flow can be defined several ways, depending upon the expenses and how expenditures are deducted. The unqualified term usually means net cash flow. See Cash Flow from Operations; Cash Flow Before Tax.

Cash Flow, Before Tax. Cash remaining after deducting all expense and expenditures, with the exception of income taxes.

Cash Flow From Operations. The cash remaining from net operating income after deduction of debt service and ground lease payments, but not capital expenditure or income taxes.

Cash-On-Cash Return. The cash return on equity. Commonly used to express the initial return on a new investment. For an equity REIT, funds available for distribution per share divided by the equity price per share is analogous to the cash-on-cash return of real property.

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Central Business District (CBD). The commercial and business center of a city typically consisting of government, entertainment, hotel, retail, and office uses.

Certificate Of Occupancy (CO). A document presented by a local government agency or building department certifying that a building and/or the leased premises has been satisfactorily inspected and is/are in a condition suitable for occupancy.

Chattel. Personal property.

Class A, B, C. See Building Classifications.

Clear Height. Most commonly used in industrial properties, refers to the clearance under the lowest point of the roof decking.

Clear-Span Facility. A building, most often a warehouse or parking garage, with vertical columns on the outside edges of the structure and a clear span between columns.

Closing. The final stage in the sale of a property when ownership transfers from seller to buyer in accordance with the purchase and sales agreement.

Closing Costs. Fees and expenses paid at the time of closing (e.g., title insurance premium, title search fees, brokerage commissions, attorney’s fees).

Co-Tenancy Clause. A clause in retail lease agreements that allows tenants to receive a reduction in rent or potentially early termination of the lease if named key tenants or a certain number, or percentage of major tenants vacate. The purpose of the co-tenancy agreement is to protect the tenant from erosion in revenue stemming the loss of a major anchor or the deterioration of the property. There is no standard verbiage, but a modern lease with a co-tenancy clause might require several events to trigger the clause: (1) two of four+ anchors to be vacant for 6-12 months and (2) the tenant must demonstrate damages surpassing a certain threshold (e.g., sales down more than 10%). The clause may provide the tenant the right to terminate the lease (less common) or reduce rent (more common) by the demonstrated decline in sales, or by/to a fixed dollar amount. Landlords may also receive a reciprocal right to terminate the lease.

Collateral. Property that a borrower offers as a security for a mortgage or lien. If the borrower fails to repay the loan, the lender can seize the collateral to recoup its loss.

Commercial Mortgage-Backed Security (CMBS). A type of mortgage-backed security secured by a pool of mortgage loans on commercial property. Modification of a CMBS loan (e.g., restructuring, early payoff) is considered more difficult than a traditional mortgage loan provided by a bank or life insurance company because it is part of a security that is reliant upon the original terms of the mortgage. CMBS loans are commonly used for stabilized assets.

Commercial Property. Property designated for use as office, retail, industrial or hotel. Apartments are technically residential in nature, but included under the broadest sense of commercial property.

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Common Area. The area of a building or property operated for the non-exclusive benefit of all tenants or residents (e.g., shopping center parking lots, office building lobbies, and apartment swimming pools).

Common Area Maintenance (CAM). The operational expenses pertaining to the common areas. In apartment properties these costs are borne by the landlord and included in the rent. In office properties, it is more common for these costs to be included in the rent by means of a Load Factor. In retail properties these costs are typically passed through to the tenants.

Common Equity Market Capitalization. The market value of all outstanding common stock of a company.

Compression Night. A term in lodging that refers to a night in which market occupancy is in excess of 90-95%; the marginal rate for a room can be quite high relative to the average rate for the hotel on that night.

Condemnation. The process of taking private property, without the consent of the owner, by a governmental agency for public use through the power of eminent domain.

Condominium. A multi-unit structure in which owners hold a fee simple interest in individual units along with an undivided interest in the common elements of the property. Residential condominiums are the most common application, but retail, office, and industrial condominiums exist, as well.

Construction Allowance. The contribution by the landlord for the cost of tenant improvement in excess of the base building shell, often expressed as a cost per square foot with a maximum.

Construction Loan. Short-term financing advanced on a revolving basis for the period of construction of a property. Permanent financing or takeout financing at the completion of construction to retire the construction loan. See Permanent Financing; Takeout Financing.

Contiguous Space. (1) Multiple suites/spaces within the same building and on the same floor, which can be combined and rented to a single tenant. (2) A block of space located on multiple adjoining floors in a building (i.e., a tenant leases floors 8 through 12 in a building).

Continued-Care Retirement Communities (CCRC). Retirement communities with accommodations for independent living, assisted living, and nursing home care, offering residents a continuum of care and accommodating their changing needs.

Contract Rooms. A lodging industry term that pertains to rooms occupied at rates stipulated by contract, such as by airline crews.

Convertible Debt. A loan secured by real property with the ability to convert to an equity interest in the property at a specified future time. See Participating Mortgage; Hybrid Debt.

Core Factor. The portion of an office building that is not rentable area (e.g., elevators, mechanical rooms, restrooms), expressed as a percentage of the total area of the building. Skilled developers minimize the core factor without sacrificing the tenant experience. See Loss Factor.

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Cost Of Capital. The cost of raising equity (common or preferred stock) or debt capital. The cost of equity capital is based upon the anticipated long-term total return to the equity investor (income and appreciation). The cost of debt capital is merely the interest expense on the debt incurred. Leveraged and unleveraged returns on investment activity (acquisitions, dispositions, development, repurchases) are typically compared to the appropriate leveraged or unleveraged weighted cost of capital to determine the accretion or dilution to earnings and net asset value.

Cost-Plus-Percentage Contract. A construction agreement in which the contractor is provided a specified percentage profit margin over and above the actual costs of construction (e.g., cost plus 8%).

Covenants. Promises written into deeds, leases, and other instruments requiring or preventing certain uses of the property, or agreeing to the performance (positive covenant) or non-performance (negative covenant) of certain acts.

Covenants, Bond. A legally binding term of agreement between the issuer and holder. Positive covenants require the issue to meet specific requirements. Negative covenants forbid the issuer from undertaking certain actions.

Consumer Price Index (CPI). An index measuring the change in the cost of typical purchases of goods and services in some base period.

Cross Collateralized. A term used when the collateral for one mortgage is also used as collateral for another loan. For example, Property A is pledged as collateral for a mortgage on Property B and vice versa; the properties are cross collaterals and for the two mortgage loans, and the loans are considered cross collateralized.

Cross Default. A provision in a mortgage or debt instrument that puts a borrower in default if the borrower defaults on another debt obligation. For example, defaulting on a particular bond obligation could trigger a default in another debt instrument if there is a cross-default clause.

Curtain Wall. The exterior wall that encloses the space in the building but does not support the roof. High-rise buildings use curtain wall systems that consist of glass, metal, masonry panels, or other materials.

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Debt Service. The money required to make principal and interest payments on outstanding loans, mortgages, or bonds. For accounting purposes, interest payments are considered to be expenses, while principal payments are treated as capital expenditure.

Debt Service Coverage Ratio (DSCR). A measure of the cash flow available to pay current debt obligations. The ratio of available net operating income to the total debt service payment. A DSCR of less than 1.0 means negative cash flow.

Debt-To-Total Market Capitalization.The percentage of the total market capitalization of the REIT – long-term debt plus value of outstanding shares at market price – that consists of the long-term debt portion; used to measure the degree of leverage of the REIT.

Debt-To-Gross Asset Value. The percentage of the gross asset value of the REIT that consists of the long-term debt portion; used to measure the degree of leverage of the REIT. See Gross Asset Value.

Debt Yield. Net operating income divided by the loan amount. For example, a property with $10MM of NOI and a $100MM mortgage loan has a debt yield of 10%. The debt yield is akin to the capitalization rate required such that the property value is worth the debt balance. Higher debt yields imply lower leverage and lower risk, whereas lower debt yields imply higher leverage and risk.

Declaration of Trust. A statement made by the title holder of a piece of property that said property is being held for the benefit of another party.

Dedicated Shareholder. Real estate mutual funds are considered “dedicated” REIT shareholders. In general, they tend to favor relative price/NAV and price/AFFO valuation methodologies. By comparison, generalists (non-dedicated REIT shareholders) tend to favor price/FFO or dividend yield valuation.

Deed. A written instrument transferring an interest in real property when delivered to the grantee.

Deed In Lieu. A deed in lieu of foreclosure is a deed instrument in which the borrower, to avoid foreclosure proceedings, conveys all interest in a property to the lender to satisfy a loan in default. See Deed.

Deed Of Trust. Legal title in real property is transferred to a trustee who holds said property as security for a debt between a borrower and lender. A deed of trust involves three parties: borrower, lender, and trustee, whereas a mortgage is a two-party transaction involving only the borrower and lender.

Deed Restriction. A limitation on land use appearing in a deed.

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Default. The failure to fulfill a duty or to discharge an obligation (i.e., timely payment under a lease or loan, maintaining a certain credit quality, or sufficient cash liquidity).

Defeasance. A provision that voids a bond or mortgage loan when the borrower sets aside cash or bonds sufficient to service the borrower’s debt. For example, to prepay a loan that does not have an prepayment clause, the borrower may need to defease the debt, or in effect, set aside proceeds sufficient to service the debt until maturity. From a negotiating standpoint, the borrower’s cost to defease loosely relates to the lender’s expectation for a prepayment penalty.

Deferred Income Tax. A liability recorded on the balance sheet that results from a difference in income recognition between accounting convention and tax laws. In the real estate industry, the tax deferral generated by the difference between depreciation and capital cost allowance is usually a major component of deferred income taxes.

Demising Wall. The partition wall that separates one tenant’s space from another or from the building’s common area such as a public corridor.

Demographics. The characteristics of the resident population such as age, race, sex, and household size, income, and wealth. The density and growth of these metrics are as important as the level. Daytime demographics refer to characteristics of the work force population, typically in CBD areas.

Density. Refers to the intensity of development on a particular parcel of land. For example, a CBD submarket may have a floor-to-area ratio (FAR) of 10:1 (10 square feet of buildable area per land square foot), but a residential area may require a minimum of 1 acre of land per single-family home; the urban land parcel has higher density. See Central Business District; Floor-to-Area Ratio.

Depreciation. An accounting expense that allocates the cost of an asset over its estimated useful life. Depreciation is a tax deduction for long-lived business and investment property and is permitted only for assets held for the production of income or used in a trade or business. Different types of properties have different useful lives. The U.S. Internal Revenue Service (IRS) uses the Modified Accelerated Cost Recovery System (MACRS) to specify how to depreciate business and investment property; commercial real estate owners typically use the General Depreciation System (GDS), but some may elect to use the Alternative Depreciation System (ADS). Under GDS, nonresidential Section 1250 real property has a useful life or recovery period of 39 years. Owners can choose among three GDS depreciation methods:

(1) Straight-Line Depreciation. A method of depreciating an asset by spreading the depreciation expense in equal amounts over the useful life of the asset.

= =Book Cost of AssetUseful Life

Straight Line Depreciation

$1000 Asset20 Year Life

$50 depreciationexpense

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(2) 200% Declining Balance Depreciation, or Double Declining Balance Depreciation. Similar to Straight-Line Depreciation, but depreciation is accelerated at 2 times the straight-line rate to recognize that the vast majority of depreciation occurs in the initial years of the asset’s life. Depreciation ceases when the book value of the asset is fully depreciated.

200% x Straight Line Depreciation Rate x Book Value at the Beginning of the Year

For an asset with a $1,000 asset with a 20-year life the expense would be as follows:

Year 1: 200% x (1 / 20 years) x $1,000 = $100Year 2: 200% x (1 / 20 years) x ($1,000 - $100) = $ 90Year 3: 200% x (1 / 20 years) x ($1,000 - $100 - $90) = $ 81

Continues until the asset is fully depreciated.

(3) 150% Declining Balance Depreciation. Same as above, but depreciation is 150% of the straight-line rate.

Developer. One who transforms raw land to improved property. The term is used interchangeably with redeveloper, one who transforms existing properties into a new or higher use (e.g., converting older office buildings to residential or hotels).

Developer’s Profit. The spread between the cost to develop a project and its market value upon completion.

Development. The process of adding improvements on or to a parcel of land. A specific project.

Direct Costs. Costs that pertain to the identifiable and attributable costs of construction of real estate (contractor overhead, developer profit, materials, labor, permits, etc.). Conversely, indirect costs are directly identifiable to the cost of construction, but are not easily attributable to any one job (e.g., a project manager handling multiple projects, contract supervision).

Discount Rate. A compound interest rate used to convert expected future income into a present value.

Discounted Cash Flow (DCF). A method of investment analysis in which anticipated future cash income and terminal value of the investment is estimated and converted into a rate of return on initial investment based on the time value of money. Given a specific requirement, a DCF approach can provide a more accurate assessment of value than a simple capitalization of income for properties encumbered by longer term leases, particularly if they are above or below market terms.

Distributable Net Income. Generally, net income as determined in accordance with GAAP, subject to adjustments, such as adding back depreciation and amortization, future income tax expenses, and excluding any gains or losses on asset dispositions, future income tax benefit, and any other adjustments as determined. This term is commonly used in determining the distributable net income of a real estate investment trust (REIT).

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Dividend/Distribution. Monthly, quarterly, annual, or special distributions paid by the REIT to holders of common stock and operating partnership units. Per the IRS, a REIT must distribute at least 90% of its taxable income to shareholders in order to maintain its favorable tax status. The majority of REIT dividends are paid in cash, but a minority of REITs have paid stock dividends to retain cash and manage liquidity.

Dollar Stop. An agreed upon dollar amount of taxes and operating expense (expressed for the building as a whole or on a square foot basis) over which the tenant will pay its prorated share of increases. May be applied to specific expenses (e.g., property taxes or insurance). See Base Stop.

DownREIT. A joint venture between a real estate owner and a real estate investment trust (REIT) that assists the real estate owner in deferring capital gains tax on the sale of appreciated real estate. Real estate owners who contribute property to DownREITs receive operating units in a partnership. See UPREIT.

Downtime. The period of vacancy or impairment of income between tenant lease terms.

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Easement. A right enjoyed by one party over the land of another obtained for a special purpose, rather than for the general use and occupation of land. Easements attach to properties regardless of changes in ownership of the land. The most common forms of easement are right of way (road, driveway) or utility (e.g., gas, sewer, power, drainage).

EBITDA (Earnings Before Interest, Taxes, Depreciation, And Amortization). This measure is sometimes referred to as net operating income (NOI). NOI typically refers to property-level operating earnings, whereas EBITDA refers to enterprise-level operating earnings, the difference being that general & administrative costs of the company are deducted from NOI to calculate EBITDA. See Net Operating Income.

Economic Life. The expected period during which real estate improvements are expected to generate more revenue than operating expense. See Useful Life.

Economic Occupancy Rate. Percentage of units that are currently occupied and actively paying rent in a building, city, neighborhood, or complex. Spaces that are vacant, occupied but not paying rent, or leased but not paying rent are excluded. See Leased Rate; Occupancy Rate; and Vacancy Rate.

Effective Net Rent. See Net Effective Rent.

Effective Rent. The rental income generated over the life of the lease and expressed as an annual dollar amount or annual dollar amount per square foot. This figure is typically computed as the aggregate rent to be paid under the lease, net of any concessions, rental abatements, and allowances, divided by the term of the lease. For example, a tenant paying $10 per sq. ft. on a 10-year lease with one-year of free rent is paying an effective rent of $9 per sq. ft. over the lease term. See Net Effective Rent; Net Economic Rent.

Elective Stock Dividend. Elective stock dividends are dividends comprised of a combination of cash and stock. Under IRS Revenue Procedure 2008-68, so long as a REIT provides its shareholders with a choice between cash or stock (and so long as at least 10% of the total dividend is available in cash), the entire dividend distribution is treated as a distribution of cash for purposes of the tax rules to qualify as a REIT.

Efficiency Ratio. The proportion of a building’s gross area that is leasable space. The common areas (elevators, lobby, rest rooms, hallways), physical plant, and management offices are deducted from a building’s gross area to calculate the leasable area and this figure is expressed as a percentage of the gross area. Skilled developers maximize the efficiency ratio.

Eminent Domain. The power of the government to acquire private property for public use under certain circumstances, in return for just compensation.

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Encroachment. The intrusion of a structure or other object that extends, without permission, over a property line, easement boundary, or building setback line.

Encumbrance. A claim, lien, charge, or liability attached to and binding upon real property, but that will not prevent the transfer of fee title.

Environmental Protection Agency (EPA). A federal agency that oversees land use.

Environmental Risk. Liability due to the presence of hazardous materials, such as tetrachloroethylene (PERC), asbestos, PCBs, or leaking underground storage tanks (LUSTs), on a property.

Entitlement. The uses, densities, heights, setbacks, and other development rights permitted under zoning ordinances without further governmental action or conditional approval. Compliance with zoning regulations, however, does not constitute a building permit, which is required to commence construction.

Equity Market Cap. The market value of all outstanding common stock and operating partnership units (OP units) of a company.

Equity REIT. A REIT that owns or has an equity interest in rental real estate. By comparison, mortgage REITs make loans secured by real estate collateral.

Escalation Clause. A clause in a lease that outlines the mechanism for future increases to Base Rent and/or expense reimbursements. Escalation clauses pertaining to rent may be fixed (by dollar amount or percentage), or variable (generally tied to changes in inflation indices). Escalation clauses pertaining to the recovery of operation expenses commonly refer to the tenant’s proportionate share of the increase in costs over the Base Year cost.

Estoppel Certificate. A signed statement certifying that certain statements of fact are correct as of the date of the statement and can be relied upon by a third party, including a prospective lender or purchaser. In the context of a lease, a statement by a tenant identifying that the lease is in effect and certifying that no rent has been prepaid and that there are no known outstanding defaults by the landlord (except those specified). For example, the purchaser of a property may require the seller to receive estoppel certificates from a majority (or all) of the tenants to confirm their understanding of the terms of the lease and any subsequent amendments.

Eviction. A legal proceeding by a lessor, typically the owner, to recover possession of property.

Exclusive-Use Clause. Provisions in a commercial lease that prohibit a landlord from leasing space to another tenant for the same business purpose as the existing tenant. For example, a Starbucks may seek an exclusive-use clause to prohibit the landlord from leasing to Dunkin’ Donuts Typically there are exemptions for incidental sales (e.g., a grocery store in the same property may sell coffee and coffee products). A typical cure for default under this provision might be lease termination.

Extended-Stay Hotel. A type of hotel that focuses on attracting guests who typically seek longer-term accommodation. Rates are commonly quoted on a weekly or monthly basis.

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Fair Housing. The Fair Housing Act of 1968 and 1998, as well as the Fair Housing Amendments Act of 1988 prohibit discrimination in the sale, rental, or financing of housing on the basis of race, color, religion, gender, national origin, physical/mental handicap, or familial status.

Fair Market Rent. The amount that a property would command if it were now available for lease.

Fair Market Value. The value a willing buyer would pay to a willing seller for a specific property where all material facts are known to both parties.

Fannie Mae. Nickname for the Federal National Mortgage Association (FNMA). See Federal National Mortgage Association; Freddie Mac.

FAS 141. A financial accounting standard under GAAP accounting that requires the above- or below-market portion of rents of existing leases in newly acquired properties to be recognized on the balance sheet and amortized over the remaining life of the lease. Referred to as “amortization of above/below market leases” in financial statements. An adjustment for FAS 141 income is made in the calculation of AFFO to better approximate true economic cash flow, versus accounting-based cash flow.

Federal Home Loan Mortgage Corporation (FHLMC). Nicknamed Freddie Mac,” a government-sponsored enterprise (GSE) created in 1970 to expand the secondary market for residential mortgages (single-family homes, apartments, select health care facilities). Like its sister organization Fannie Mae, Freddie Mac buys mortgages and pools them to create a mortgage backed security, which is then resold to investors. See Fannie Mae.

Federal National Mortgage Association (FNMA). Nicknamed “Fannie Mae,” a government-sponsored enterprise (GSE) created in 1938 to expand the secondary market for residential mortgages (single-family homes, apartments, select health care facilities). Like its brother organization Freddie Mac, Fannie Mae buys mortgages and pools them to create a mortgage-backed security, which is then resold to investors. See Freddie Mac.

Fee Simple. The legal term referring to a permanent an absolute interest in land for an infinite period of time. In contrast a Leased Fee interest is an interest for a definite period of time. For example, a ground lessor owns a fee simple interest in the land and the improvements there upon, whereas the ground lessee holds a leased fee interest.

First-Generation Space. Generally refers to new space that is currently available for lease and has never before been occupied by a tenant. See Second-Generation Space.

FIT (Free and Independent Travelers). Hotel guests who are not part of a package or group.

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Fixed CAM. A recently popular form of lease in regional malls that is similar to a modified gross (or sometimes modified net) lease. Unlike the triple-net-lease structure, which exposed the retailer to a degree of variability in future rental costs and created the burden of auditing expense reimbursements, the fixed CAM lease has emerged as a means of providing certainty to retailers, while shifting the responsibility of cost controls to the landlord. Property taxes are typically excluded under fixed CAM leases and billed separately. See Modified Gross Lease.

Flex Space. A building providing its occupants with the flexibility of using the space. Usually provides a configuration allowing a flexible amount of office or showroom space in combination with manufacturing, laboratory, warehouse distribution, etc. Typically also provides the flexibility to relocate overhead doors. Generally constructed with little or no common areas, load-bearing floors, loading dock facilities, and high ceilings.

A term used for lightly zoned buildings. It is mainly used when referring to industrial or office space.

A term commonly used to describe industrial space. You start with warehouse space that is not air conditioned and add office or showroom space that is air conditioned. You can “flex” into larger of smaller air-conditioned spaces as you need.

Floor-To-Area Ratio (FAR). The ratio of the building’s gross or total floor area to the gross area of the land upon which it is built. FAR is used for zoning requirements. See Density; Zoning.

Force Majeure. A force that cannot be controlled by the parties to a contract and prevents said parties from complying with the provisions of the contract. This includes acts of God such as a flood or a hurricane, or acts of man such as a strike, fire, or war.

Foreclosure. The legal action taken by a creditor to realize the value of his claim against the debtor. See Power of Sale.

Forgiveness of Debt. The reduction or elimination of an outstanding debt by a lender, usually as part of a settlement regarding a problem property where the property is no longer valued in excess of the loan that it secures. For taxable investors, debt forgiveness can give rise to taxable income on which federal taxes are assessed, although no cash was received by the taxpayer (e.g., forgiveness of a $10MM loan can be viewed as a $10MM taxable gain upon which taxes are levied).

Freddie Mac. Nickname for the Federal Home Loan Mortgage Corporation (FHLMC). See Federal Home Loan Mortgage Corporation; Fannie Mae.

Free Rent. A lease concession or inducement granted by a landlord whereby the tenant is permitted to occupy its space without payment of rental charges for a period of time. Common across all major commercial property types, but more common in Multifamily and Office properties.

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Full-Service Hotel. A hotel with a broad range of guest amenities, as well as restaurant and meeting facilities. Examples of a full-service hotel brand include Hilton, Hyatt, Marriott, and Westin. See Limited Service Hotel; Select Service Hotel.

Full-Service Lease. See Gross Lease.

Funds Available for Distribution. See Adjusted Funds From Operations.

Funds From Operations (FFO). The most commonly accepted and reported measure of REIT operating performance. The NAREIT White Paper is considered the recognized standard for calculating FFO. An example of a typical REIT income statement and FFO reconciliation is included in the appendix of this document. A simple example is as follows:

GAAP Net Income+ GAAP Real Estate Depreciation and Amortization- Gains on Real Estate (in GAAP Net Income)+ Losses on Real Estate (in GAAP Net Income)+/- Adjustments for Non-Controlling Partnerships+ Impairments= Funds From Operations

Funds From Operations, Recurring (FFO). A company-defined metric that adjusts NAREIT-defined FFO for extraordinary or one-time items to provide a better estimate of recurring cash flow.

Furniture, Fixtures & Equipment (FF&E). The hard goods found in a hotel.Movable furniture, fixtures or other equipment that have no permanent connection to the structure of a building or utilities. These items depreciate substantially over their long-term use, but they are definitely important costs to consider when valuing a company, especially during liquidation procedures.

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GAAP (Generally Accepted Accounting Principles). A common set of accounting principles, standards and procedures that companies must follow when they compile their financial statements.

General Partner. In a partnership, a partner whose liability is not limited. All partners in an ordinary partnership are general partners. A limited partnership must have at least one general partner.

General Partnership. A partnership in which each partner has unlimited liability with respect to partnership debts and also has influence over the business operation. See Limited Partnership.

Government-Sponsored Enterprise (GSE). Commonly refers to Fannie Mae (FNMA) and Freddie Mac (FHLMC). See Fannie Mae; Freddie Mac.

Grace Period. The period during which one may fail to perform without being considered in default.

Gross Absorption. A measure of demand. Equal to the amount of space leased over a specified time period with no consideration of space vacated during the period. See Absorption Rate; Net Absorption.

Gross Area. The total floor area of a building, usually measured from its outside walls.

Gross Asset Value (GAV). The gross market value of all a company’s assets, including, but not limited to, its properties. See Net Asset Value.

Gross Leasable Area. The total floor area available to be rented by tenants plus all common areas of the building. See Net Leasable Area.

Gross Lease. A lease structure that shifts the obligation of operating expenses (i.e., property tax, property insurance, maintenance expenditures, and utilities) to the landlord. The tenant is required to pay a base rent and the landlord pays the operating expenses. By comparison, in a net lease the obligation of paying operating expenses is borne by the tenant. Gross leases are typical in the office and multifamily sector. See Net Lease; Modified Gross Lease; Triple Net Lease.

Gross Lease With Escalations. A lease in which the landlord pays operating expenses during the initial year or term, but passes through incremental expenses, or a portion thereof, to tenants.

Gross Potential Rental Income. The income a property would generate if fully leased at market rent.

Gross Sales. The total retail sales produced by a tenant used in the computation of percentage rent. Usually expressed in dollars per square foot per year.

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Ground Lease. A lease that grants the right of use for a parcel of land to the lessee. Ground leases are typically granted for lengthy periods (up to 99 years) to make development economically viable for the lessee. Ground leases with less than 30 years of remaining term can be more difficult for the lessee to sell or finance and are often considered shorter life ground leases.

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Hard Costs. Direct costs of construction or renovation capitalized into the cost of the property for tax purposes. See Soft Costs.

Hold-Over Rent. The rent paid by a hold-over tenant. If specified in the lease, hold-over rent is typically a material premium over the prior base rent. See Hold-Over Tenant.

Hold-Over Tenant. A tenant retaining possession of the leased premises after the expiration of a lease. See Hold-Over Rent.

Hurdle Rate. The room rate at which a hotel would be better off leaving a room unsold, rather than selling it, the logic being that the revenue would not justify the cost of cleaning and resetting the room. For transient guests, it is called the hurdle rate; but for group business, it may be called the lose-it rate.

HVAC (Heating, Ventilation, And Air Conditioning). The climate control system in a building.

Hybrid Debt. A loan having some of the characteristics of an equity investment. Hybrid debt has a coupon like conventional debt, but also participates in the performance of the asset through various means, such as a participation in income or conversion to equity. See Participating Debt; Convertible Debt.

Hybrid REIT. A REIT that combines the investment strategies of both equity REITs and mortgage REITs. These are less common. See Equity REIT; Mortgage REIT.

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Impaired Asset. An asset that has a market price that is less than the book value on the balance sheet. Under U.S. GAAP, an impairment for long-lived is recorded when an asset’s carrying value is not recoverable. An asset is not recoverable if the carrying value exceeds the expected future cash flow to be derived from the asset on an undiscounted basis.

Implied Equity Market Capitalization. The market value of all outstanding common stock of a company plus the value of all UPREIT partnership units (or operating partnership, or OP units) as if they were converted into the REIT’s stock. It excludes convertible preferred stock, convertible debentures, and warrants, even though these securities have similar conversion features. OP units are included because they are typically structured to be identical to common equity shares (valuation, voting rights, and dividends). See Operating Partnership; UPREIT.

Indirect Costs. Indirect costs are directly identifiable to the cost of construction, but are not easily attributable to any one job (e.g., a project manager handling multiple projects, contract supervision). In contrast, direct costs are identifiable and easily attributable to the cost of a project. See Direct Cost.

Infrastructure. Basic public improvements such as roads, sewers, water, drainage, and other utilities that are necessary to prepare raw land for buildings and future development.

Insured Loss. Any loss that can be compensated by insurance. See Insured Risk.

Insured Risk. A risk of loss or damage that may be covered by insurance.

Insured Value. The value for which a property may be insured. Insured value may be defined in the insurance policy as full replacement cost, reproduction cost, depreciated value, or some other measurement. Insured value is not the same as the fair market value – a vacant building will cost as much to replace as an identical, but fully leased building.

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J-REIT. Japanese Real Estate Investment Trust.

Joint And Several Liability. Enforceable against either or both parties involved in a transaction. Joint and several liability is commonly specified in lease guarantees to allow enforcement of the lease obligation in its entirety against either the guarantor, tenant, or both without releasing either of the parties.

Joint Tenancy. The joint ownership of real property by two or more persons, or Joint Tenants, each of whom has an equal ownership in the property an equal undivided right to keep or dispose of the property. Upon the death of an owner, title to the property passes to the remaining Joint Tenants. See Tenancy In Common; Undivided Interest.

Joint Tenant. A party subject to joint tenancy ownership agreement. See Joint Tenancy.

Joint Venture. An arrangement whereby two or more parties enter into an agreement to contribute part of their respective resources to a specific project. The partners typically execute an agreement to stipulate the terms of the ownership, and management and leasing of the property. This is a common arrangement in development projects where several participants and skillsets are necessary.

Junior Debt. Any secured debt that is subordinate in right to a superior, or senior, debt obligation. The foreclosure of senior debt typically extinguishes junior debt, but the foreclosure of junior debt has no effect on senior debtholders.

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Kick-Out Clause. A lease provision that allows the landlord or tenant to terminate the lease upon the occurrence of some specified event (e.g., termination of a retail lease if a sales threshold is not met).

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Landlord. One who rents property to another party. A property owner who surrenders the right to use property for a specific time in exchange for the receipt of rent. The lessor is commonly the property owner.

Leased Fee. The legal term referring to an interest in land for a definite period of time. In contrast, a Fee Simple interest is an interest for an infinite period of time. For example, a ground lessor owns a fee simple interest in the land and the improvements thereupon, whereas the ground lessee holds a leased fee interest. See Fee Simple.

Leased Rate. Percentage of units that are currently leased in a building, city, neighborhood, or complex. A leased space does not mean it is currently occupied or actively paying rent; it is common for tenants to sign a lease that does not commence until a point in the future. See Economic Occupancy Rate; Occupancy Rate; Vacancy Rate.

Leasehold Improvements. The cost of improvements for a property typically paid by the tenant.

Lease. A contractual agreement whereby the lessor (typically the owner of real property) grants the lessee the right to the possession and use of the property for a specific amount of time in return for a stipulated rent.

Lease Assignment. A form of credit enhancement. An agreement between the property owner and lender that assigns lease payments from tenants to the lender. Lease payments are made directly to the loan servicer or lender in lieu of to the landlord, who forwards payment to the lender. See Lease.

Lease Buyout. Either (1) a lump sum payment, usually equal to some percentage of the present value of the rental payments remaining for the balance of the lease, made to a landlord by a tenant in exchange releasing the tenant from future obligations under the lease, or (2) a lump sum payment, usually equal to some percentage of the present value of the difference between market and contractual rent, made by the landlord to the tenant in exchange for the termination of a lease and the recapture of the leased space. See Lease.

Lease Commencement Date. The commencement date of the term of the lease for all purposes, whether or not the tenant has actually taken possession so long as beneficial occupancy is possible. See Lease.

Lease Option. An agreement within a lease that provides the tenant with a right to lease additional space in the property or to extend the lease upon expiration at predetermined terms and conditions. See Lease.

Lease-Up Period. The period of a development during which the project is being marketed for lease and the building is being brought to stabilized occupancy. See Lease.

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Lease Termination Fee. A payment received for the early termination of a lease. See Lease.

Lessee. An entity to whom property is rented under a lease. A tenant. See Lease.

Lessor. One who rents property to another under a lease. A landlord. See Lease; Landlord.

Letter of Intent (LOI). A document expressing an intent to take action (invest, develop, lease, or purchase) without creating any firm legal obligation to do so. Letters of intent are frequently used to negotiate critical business points of a transaction before preparing a formal binding contract.

Leverage. The amount of debt or debt and preferred equity in relation to enterprise value (equity plus preferred debt, plus net debt).

LIBOR or London Interbank Offered Rate. The most common benchmark interest rate that international banks dealing in eurodollars charge each other for large loans.

Lien. A claim or encumbrance against property used to secure a debt, charge, or the performance of some act. Includes liens acquired by contract or by operation of law. Note that all liens are encumbrances, but all encumbrances are not liens.

Lien Waiver. A waiver of mechanic’s lien rights, signed by a general contractor and his subcontractors, that is often required before the general contractor can receive a draw under the payment provisions of a construction contract. May also be required before the owner can receive a draw on a construction loan.

Like-Kind Exchange. See 1031 Exchange.

Limited Liability. The restriction of one’s potential losses to the amount invested.

Limited Partnership. A form of business venture undertaken between two classes of participants, a general partner and limited partners. The general partner manages the partnership and is fully liable for partnership liabilities. The limited partners are passive investors whose liability is limited to the amount that they agreed to contribute to the partnership. See General Partnership.

Limited-Service Hotel. A hotel without restaurant or banquet facilities and with a limited range of amenities. Examples of a limited service hotel brand include Fairfield Inn by Marriott or Hampton Inn by Hilton. See Select-Service Hotel; Full-Service Hotel.

Liquidity. Refers to either (1) a measure of the ease and frequency with which assets are actively traded in the market; or (2) the volume of readily accessible investment capital (cash, undrawn credit facility, or other reasonable and accessible borrowing capacity).

Load-Bearing Wall. Any wall that supports a floor or a roof. Load-bearing walls can be exterior or interior structures and are challenging to move without extensive structural modifications to the building.

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Load Factor. The factor by which a tenant space in a multi-tenant building is increased to allocate common areas (rest rooms, lobbies, corridors, etc.). Rental rates are typically to the resulting gross area. See Add-On Factor.

Loan-To-Value Ratio (LTV). The ratio of the amount borrowed compared to the value of the property.

Long-Term Acute Care Medical Facility (LTAC). A specialty-care hospital designed for patients with serious medical problems that require intense, special treatment for an extended period of time—usually 20 to 30 days.

Loss Factor. See Core Factor.

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Manchised. A hotel that is managed and franchised by the same company.

Market Comparable. A recent sale or lease that is similar to the subject property being analyzed.

Market Lease. A lease at rates and terms comparable to those of typical new leases being executed in the market at the current time.

Master Lease. A lease under which the leasehold is further subleased by the tenant to one or more subtenants. For example, the direct tenant of the ultimate owner of a property may be able to sublease his interest to another party. The sublease is subject to all terms in the controlling or master lease and cannot extend for a period beyond the controlling or master lease.

Mechanic’s Lien. A claim created by state statutes for the purpose of securing priority of payment of the price and value of work performed and materials furnished in constructing, repairing, or improving a building or other structure, and that attaches to the land, as well as to the buildings and improvements thereon.

Metes And Bounds. The boundary lines of land, with their terminal points and angles, described by listing the compass directions and distances of the boundaries. “Metes” refer to distance, and “bounds” refer to direction.

Mill Rate. Used by local taxing authorities to express the rate of local property tax assessment in mills (one-tenth of $0.01) per dollar of assessed value. The mill rate may be thought of as dollars of tax per $1,000 of assessed valuation.

Mineral Rights. More properly known as the “mineral interest” or “mineral estate,” the right of the owner to exploit, mine, and/or produce any or all of the minerals lying below the surface of his/her property. Increasingly, we are seeing jurisdictions place limitations of the depth of mineral rights, particularly as it pertains to water.

MOB. Medical Office Building.

Modified Gross Lease (sometimes Fixed Cam or Modified Net Lease). Similar to a gross lease in that the rent is a fixed lump sum rather than a base rent plus a series of expense recoveries (as seen in a triple net lease). Tenants and landlords negotiate which expense items are included in the base rental rate (e.g., property tax, insurance, common are maintenance costs). Unlike a triple net lease, if costs increase, the lease rate may not change; but if costs decline, the expense savings accrue to the landlord. Modified gross leases have become more popular in regional malls, as tenants desire a single, predetermined payment, and the burden of common area maintenance cost is shifted to the landlord; property taxes are typically excluded from fixed CAM leases. See Fixed CAM.

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Month-To-Month Tenant. A tenant that occupies real property under an agreement whereby the tenancy may be terminated by either the landlord or tenant upon one-month’s advance notice to the other.

Mortgage. A loan granted in exchange for the conveyance of a lien against real property such as land or buildings that becomes void upon repayment of the debt. A mortgage typically occurs between two parties (the borrower/property owner and the lender/lien holder). See Deed of Trust.

Mortgage-Backed Security. An interest in a pool of mortgages that are purchased from lending institutions and packaged for resale to investors.

Mortgage Bonds. An issue of bonds that are secured by real property.

Mortgage REIT. A REIT that makes or owns loans and other obligations that are secured by real estate collateral.

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NACORE (National Association of Corporate Real Estate Executives). A trade association of real estate professionals who manage the real estate assets of corporations, retailers, and other commercial users.

NAIOP (National Association of Industrial and Office Properties). A trade association for developers, owners, investors, and asset managers of commercial real estate in Canada and the United States.

NAREIT (National Association of Real Estate Investment Trusts). The primary trade organization of the REIT industry. Typically pronounced “nay-reet.”

NAREIT White Paper. The broadly accepted standard for calculating funds from operations; most REITs adhere to the NAREIT White Paper calculation. https://www.reit.com/sites/default/files/2002_FFO_White_Paper.pdf

Natural Breakpoint. In a retail lease where a tenant is paying overage rent, the natural breakpoint is calculated by dividing the tenant’s annual base rent by the percentage rent; the tenant then pays overage rent on all sales revenue over this natural breakpoint. For example, a tenant that pays $50,000 per year in base rent plus 5% percent of sales over a natural breakpoint would pay 5% of all sales over $1MM ($50,000 / 5%). In this example, if the tenant generated $1.25MM in sales, he would pay $50,000 in base rent plus an additional $12,500 in overage rent (5% x $250,000).

NCREIF (National Council of Real Estate Investment Fiduciaries). An association of pension fund advisors who conduct research, provide commercial real estate performance indices utilized by institutional property investors, and organize educational activities to further the understanding of real estate as an investment vehicle for pensions and foundations.

Net Absorption. A measure of demand. Equal to the amount of space occupied at the end of a period minus the amount occupied at the beginning of a period. The measure takes into consideration space vacated and constructed during the period. See Absorption Rate; Gross Absorption.

Net Asset Value (NAV). The net market value of all a company’s assets, including, but not limited to, its properties, after subtracting all its liabilities and obligations. The calculation of NAV is akin to determining the equity in a home utilizing market prices, rather than the original purchase price.

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Net Economic Rent. Typically calculated as the net effective rent less any initial tenant-specific capital expenditures (tenant improvements, leasing commissions) amortized over the term of the lease at the landlord’s cost of capital. For example, the initial $20 per sq. ft. of tenant improvement costs is amortized over the year and represents about $3.25 per sq. ft. of annual cost; and it is this annual figure that is reduced from the net effective rent to determine the net economic rent. An alternative presentation involves calculating the net present value of all lease cash flow (rent, concessions, abatements, tenant improvements, operating expenses, etc.), and that amount is converted to a level payment over the term of the lease that would produce an equivalent net present value using the landlord’s target discount rate. See Effective Net Rent; Net Present Value.

Net Effective Rent or Effective Net Rent. Calculated as the effective rent less any operating expenses borne by the landlord. Net effective rent provides a means of comparability across leases and buildings. The effective rent represents the tenant’s actual cost of occupancy, but the net effective rent applies to the landlord’s return on the capital investment in the lease. See Effective Rent; Landlord; Operating Expenses.

Net Leasable Area or Net Rentable Area. The floor space available for rent; the area upon which rental payments are based. Can refer to a tenant’s specific space or the cumulative leasable area in a building. Generally excludes common areas and space devoted to operations (elevators, HVAC, etc.).

Net Lease. A lease structure that places the obligation of paying operating expenses (property taxes, property insurance, maintenance, and utilities) in addition to the base rent on the tenant. This additional rent is referred to as expense reimbursement or recovery income. Consequently, the base rent can be structured as operating profit from the lease. The term “triple net lease” is used to refer to a lease being net of maintenance, property tax, and property insurance expenses. In common parlance, a net lease is shorthand for a triple net lease and should not be confused with the older term, “single net lease” (tenant pays only operating expenses, but not property tax and insurance). By comparison, under a gross lease the obligation of paying operating expenses is borne by the landlord. Net leases are typical in retail (malls, shopping centers, single-tenant properties) and industrial properties. See Fixed CAM; Gross Lease; Modified Gross Lease; Triple Net Lease.

Net Operating Income (NOI). One of the primary income metrics in the commercial real estate and REIT industry. NOI is calculated by subtracting operating expenses (i.e., property tax, property insurance, maintenance expenditures, and utilities) from property-derived gross income (typically rent and tenant reimbursements of expenses). NOI does not include depreciation, income tax, or financing expenses.

Net Rentable Area (NRA). An area measurement of a building or tenant suite upon which rent is calculated. There is a BOMA standard in use, but the method of net rentable area calculation can vary widely depending upon local convention. See BOMA.

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Non-Competition Clause. A provision sometimes found in retail leases prohibiting the tenant from operating an identical or competing business within a certain radius. The provision is intended to prevent a tenant from siphoning off sales to another location that would have been counted in the calculation of percentage rent paid to the landlord.

Non-Recourse Debt. A debt obligation under which the lender’s claim against the debtor is limited to the value of the property on which his claim is secured. There is no personal liability of the borrower and the loan bars the lender from seeking a deficiency judgement against the borrower. See Recourse Debt.

Net Sales Proceeds. Proceeds from the sale of an asset less brokerage commissions, closing costs, and other marketing expenses.

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Obsolescence. Commonly pertains to outmoded design or condition that affects the value of the property (e.g., exterior corridor motels, low clear-height industrial building, drive-in theaters).

Occupancy Rate. Percentage of currently occupied units in a building, city, neighborhood, or complex. See Economic Occupancy; Leased Rate; Vacancy Rate.

Operating Expense Ratio. Calculated by dividing operating expenses by gross income.

Operating Expenses. The amounts paid to maintain a property including management fees, common area maintenance costs, property taxes, utility costs, hazard/liability insurance, and supplies. Income taxes, depreciation, and financing costs including principal and interest payments are excluded.

Operating Lease. The accounting term given to a lease in which the lessor retains substantially all the risks and benefits of ownership. Rental income and expenses are recognized in the accounts when paid. See Capital Lease.

Operating Partnership. In the case of REITs, partnership in an UPREIT or DownREIT structure that holds the real property assets. The REIT common shareholders typically hold a majority interest in the operating partnership and the operating partnership unitholders typically hold a minority interest. See DownREIT; REIT; UPREIT.

Operating Partnership Unit (OP Units). Interest in the operating partnership of a REIT. Owners of real property may execute a Section 721 exchange for operating partnership units. See UPREIT; DownREIT; Operating Partnership; Section 721.

Option To Purchase. The right granted to a party for a finite period of time to purchase a property under stipulated terms.

Organization Costs. Costs such as legal fees, corporate filing fee, and registration fees incurred to set up a commingled fund, joint venture, or advisory account.

OTA (Online Travel Agent). An internet-based hotel and travel reservations system.

Overage Rent. In a retail lease, overage rent is additional rent equal to a predetermined percentage of gross sales over a predetermined breakpoint. See Breakpoint; Natural Breakpoint; Percentage Rent, Tenant Sales.

Over-Allotment Option. An option granted by a REIT to the underwriters of a capital issuance, exercisable for a period of typically 30 days after closing, to purchase up to a stated additional number of shares (typically 15%) on the same terms as the offering.

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Parking Ratio. A method of expressing the amount of parking available at a given building. Dividing the total rentable square footage of a building by the building’s total number of parking spaces provides the amount of rentable square feet per each individual parking space (expressed as 1/xxx or 1 per xxx). Dividing 1,000 by the previous result provides the ratio of parking spaces available per each 1000 rentable square feet (expressed as x per 1000). Zoning rules typically dictate a standard for parking ratios, depending upon the building use and specific lot or area.

Participating Debt. Debt that allows the lender to share in a portion of the income and/or sale proceeds in addition to a regular mortgage payment. The debt may be convertible to equity.

Partnership. An agreement between two or more entities to go into business or invest together. Either partner may bind the other within the scope of the partnership. Each partner is liable for all the partnership’s debts. A partnership normally pays no taxes. The individual partners pay personal income tax on their share of income. See General Partner; Limited Partnership.

Passive Activity Income. A term defined under the Tax Reform Act of 1986. Passive activity income is generated by (1) any trade or business conducted for profit in which the taxpayer does not materially participate or (2) any rental activity, regardless of whether or not the taxpayer materially participates. Rental activities are presumed to be passive. These include all activities that generate income from payments for the use of property, rather than for the performance of a service. Rental activities include rentals of apartments, net leased property, office equipment, etc.; but the rental of hotel rooms or transient apartments and short-term car rentals are not passive because of the extent of the service provided.

Passive Income. Income from rents, royalties, interest, dividends, and gains from the sale of securities or other enterprise in which the individual is not materially involved.” See Passive Activity Income.

Passive Investor. One who invests money, but does not manage the business or property.

Payback Period. The amount of time required for cumulative estimated future income from an investment to equal the amount initially invested. Commonly used in investment opportunities.

Payout Ratio. The annual dividend divided by FFO or AFFO. As AFFO is a closer proxy of recurring cash flow than FFO, it is preferable to assess dividend sustainability. See AFFO; FFO.

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Percentage Lease. A lease of property in which the rental is based exclusively on a percentage of the volume of sales made upon the leased premises. It usually stipulates a minimum rental and is regularly used for retailers who are tenants. See Overage Rent; Percentage Rent.

Percentage of Completion Method. A method of accounting that recognizes revenue proportionately with the degree of completion of goods or services rendered under a contract. Common in development of a for-sale product (e.g., condominiums) where unit sales proceeds are recognized on a percentage of completion basis as physical construction is completed.

Percentage Rent. In a retail lease, percentage rent is additional rent equal to a predetermined percentage of gross sales. For example, 5% of tenant sales. See Breakpoint; Natural Breakpoint.

Permanent Financing. A long-term mortgage loan, typically obtained at the time of purchase or after completion of construction.

Piggyback Loan. (1) A mortgage held by multiple lenders, but with one lender holding the rights of the others in subordination; or (2) The combination of the construction loan with the permanent loan commitment.

Plat. A map of a specific area, such as a subdivision that shows the boundaries of individual parcels of land together with streets and easements.

Plenum. A space provided for HVAC air circulation typically located between the structural ceiling and a drop-down ceiling.

Power of Sale. The legal right of a secured creditor to sell property in order to realize his claim against the debtor.

Prepayment Clause. A clause in a mortgage that gives a mortgagor (borrower) the privilege of paying the mortgage indebtedness before it becomes due. Sometimes there is a penalty for prepayment with waiver of the interest that is not yet due. See Defeasance.

Prepayment Penalty. Fees paid by borrowers for the privilege of retiring a loan early.

Prepayment Premium. A penalty paid by the borrower for any prepayments made on a mortgage loan. The premium is usually set at a fixed rate, which decreases as the loan matures.

Prime Rate. The lowest commercial interest rate charged by banks on short-term loans to their most creditworthy customers.

Prime Tenant. See Anchor Tenant.

Property Improvement Plan (PIP). A requirement by hotel brands that property owners undertake period renovations and upgrades to meet the current standards of the brand. PIPs are generally required when a hotel joins a brand, the hotel is sold, or when a franchise is renewed. The cost of the PIP should be taken into consideration in these circumstances.

Property Management. The operation, control, and oversight of real property as a business. Services commonly include rent collection, accounting, and property maintenance, and may include leasing.

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Proposition 13 or “Prop 13”. An amendment to the Constitution of California in 1978 that restricts property taxes to 1.0% of assessed value (roughly equivalent to property value at the time of sale or transfer) and an increase of no more than 2.0% per annum until the property has a another change of ownership. The limitation on tax increases is a sought after benefit, particularly when operating margin is under pressure. Property values in California have historically increased at a rate in excess of 2.0% per annum; accordingly, an appropriate valuation of long-held property with a low assessment should take into consideration the step-up in the property tax for the new owner upon sale.

Private Placement. The sale of stocks, bonds, or other securities directly to an investor, rather than through a public offering.

Property Tax. A tax on the assessed value of real property. Property taxes are typically assessed by a government authority, paid annually or semi-annually, and based upon an assessed value that is o-3 years behind the assessor’s estimate of market value.

Procurement Costs. The expenditure incurred to obtain a tenant, not including concessions. Typical procurement costs include marketing expenses, lease commissions, tenant improvements, moving allowances, and the cost of satisfying remaining lease obligations at the property the tenant is vacating.

Proportionate Share. See Pro Rata Share.

Pro Rata Share or Proportionate Share. TThe allocated share of operating expenses charged to a specific tenant, usually based upon the area of the tenant’s premises divided by the total area in the building or complex.

Punch List. An itemized list, typically prepared by the architect or construction manager, documenting incomplete or unsatisfactory items after the contractor has notified the owner that the tenant space is substantially complete.

Purchase & Sale Agreement. A written agreement between seller and purchaser that finalizes all terms and conditions of the transfer of a property.

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Quiet Enjoyment Clause. A lease covenant that promises the undisturbed use and enjoyment of real property without disturbance by hostile claimants; in effect, it is an implied warranty of habitability.

Quitclaim Deed. A deed that transfers only the grantor’s rights or interest in real estate, without stating the nature of the rights and with no warranties of ownership.

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Rates Of Return. The income and realized or unrealized gain on an investment expressed as a percentage of the investment. Rate of return may be further segregated by source or character into specific return measurements such as:

• Appreciation Return. That portion of total return produced by a change in the value of the asset during the holding period. This change may consist of appreciation or depreciation, whether realized or unrealized.

• Cash-On-Cash Return. Cash income as a percentage of cash invested.

• Income Return. That portion of total return produced by income from operations.

• Internal Rate Of Return. A calculated implicit rate of return equal to the discount rate at which the present value of the future cash flow of an investment equals the cost of the investment.

• Real Return. A rate of return adjusted for inflation and calculated in real dollars, rather than nominal dollars.

• Total Return. The total of income return plus appreciation return.

Raw Land. Land with no added improvements, undivided, and without zoning regulations, which would permit higher use.

Real Estate Investment Trust Act Of 1960. The federal law that authorized REITs. Its purpose was to allow small investors to pool their investments in real estate in order to get the same benefits as might be obtained by direct ownership, while also diversifying their risks and obtaining professional management.

Real Estate Investment Trust (REIT). A REIT is a company dedicated to owning, and in most cases, operating income-producing real estate as a long-term investment, e.g., apartments, shopping centers, offices, and warehouses. Some REITs also engage in financing real estate. REITs may avoid paying certain taxes provided certain conditions are adhered to, including distributing an amount at least equal to the taxable income. Pronounced “reet.”

Real Estate Owned (REO). Real estate that has come to be owned by a lender through foreclosure or deed-in-lieu transaction in satisfaction of a default.

Recapture Clause. A retail lease clause giving the lessor a percentage of sales above a fixed amount of rent; see Percentage Rent, Overage Rent; or (2) a clause granting the landlord a right to terminate the lease and recapture the space if the tenant fails to realize minimum sales.

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Reciprocal Easement Agreement (REA). Most commonly found in Regional Malls when the ownership of the anchor tenant space is separate and distinct from the ownership of the mall. If the anchor tenant spaces were under common ownership, a lease would govern the rights and obligations of the parties; but when ownership is separate, yet the parties wish to develop and operate an integrated property, a reciprocal easement agreement sets forth the terms of the relationship. The REA typically addresses major areas, such as easements for parking (can affect redevelopment and outparcel development), building access (e.g., maintaining ingress/egress between the properties), architectural compatibility (e.g., can be a factor in redevelopment), the operation of common areas, payment of property taxes, permitted uses (this can be a point of leverage if the anchor seeks to vacate and re-tenant the anchor space), continuous operating clauses, recapture rights, rights of first offer or first refusal (typically by the mall owner to purchase the anchor tenant space), land covenants, and other conditions.

Recourse Debt. A debt obligation under which the lender’s claim against the debtor is not limited by the value of the real property on which it is secured. A loan with personal liability. See Non-Recourse Debt.

Recovery. Pertaining to the charges levied against tenants for their share of operating costs; commonly referred to as Expense Recovery or Tenant Recoveries. See Escalation Clause; Base Stop.

REIT Investment Diversification And Empowerment Act Of 2007 (RIDEA). Prior to the passage of this legislation, health care REITs held health care properties in a net lease structure. Subsequent to RIDEA, health care REITs were permitted to participate in the operating income of the enterprise provided that there was a third-party manager, in effect, their income statement transition from lease payments to operating income. The legal structure involves creating a taxable REIT subsidiary (TRS) with a lease between the landlord and tenant entities (both are typically owned by the REIT). See Taxable REIT Subsidiary.

REIT Modernization Act Of 1999. Federal tax law change that went into effect in 2001 (and that is sometimes referred to as the REIT Modernization Act of 2001), the provisions of which allow a REIT to own up to 100% of stock of a taxable REIT subsidiary that can provide services to REIT tenants and others. For example, hotel REITs were able to participate in the operating profit of the hotel provided that there was a third-party manager, whereas previously the hotels had to be held in a lease structure. The law also changed the minimum distribution requirement from 95% to 90% of a REIT’s taxable income, consistent with the rules for REITs from 1960 to 1980. The REIT Modernization Act was part of H.R. 1180, the Work Incentive Improvement Act of 1999.

Related Party. An entity controlled by, or under common control of, another.

Rent. Payment made by to a landlord by a tenant in consideration of the right to use and occupy a specified unit of real property.

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Rent Commencement Date. The date on which a tenant begins paying rent. The dynamics of a marketplace will dictate whether this date coincides with the lease commencement date or if it commences later (i.e., as an inducement the tenant may be granted free rent). The rent commencement date will never begin before the lease commencement date. See Lease Commencement Date.

Rent Control. Local laws that govern the rental rate that may be charged for space. Typically there may be accompanying laws prohibiting eviction or other common lease terms. Rent control almost exclusively pertains to residential uses. The intent is typically to sustain some level of affordable housing in markets with low affordability (e.g., San Francisco); but, depending upon its structure, it can discourage new development and ultimately, increase market rents, due to supply-demand imbalance.

Rent Roll. The landlord’s record of the rental information including monthly payment of rents, recoveries, rental arrears, vacancies, etc. in addition to basic information such as tenant name, location, and lease commencement and expiration dates.

Rent-Up Period. See Lease-Up Period.

Rentable Space. The area of a property or suite, measured in square feet, upon which rent is collected.

Rental Rate. The periodic charge per unit for the use of a property. The period may be a month, quarter, or year. The unit may be a dwelling unit, square foot, cubic foot, or other unit of measurement.

Replacement Cost. The cost to construct a building of equal economic utility or usefulness. The cost of construction (labor, materials) and related costs such as architectural fees, permits, property taxes, and interest during construction are considered. Contrast with Reproduction Cost.

Reproduction Cost. The cost to construct an exact duplicate of the structure at today’s costs using the same materials, construction standards, design, layout, and quality of workmanship.

Return on Investment. Expressed as a percentage and calculated by dividing earnings before interest, taxes, and dividends by total invested capital.

Residual Value. The estimated net market value of a property at the end of its holding period.

Revenue Per Available Room (RevPAR). A term in the lodging industry used to measure the nightly room revenue. The measure can be applied to a single hotel, market, or the industry and can pertain to a single night, week, month, or year. RevPAR is calculated as either (1) the product of the average daily rate (ADR) and occupancy rate, or (2) dividing room revenue by the number of rooms available. See ADR; RevPAR Index.

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RevPAR Index. A measure of a hotel’s market share in its competitive set, submarket, or market. The hotel’s RevPAR (or ADR or occupancy) is expressed relative to the competitive set whereby a RevPAR index of 100 means that the hotel is capturing its fair share; greater than 100 means more that the hotel is capturing more than its fair share, and less than 100 means less than its fair share. See RevPAR.

Right Of First Offer (ROFO). A form of option agreement typically between joint venture partners to offer a property for sale to a specific party for a finite period before a broadly marketed offering. For a seller, the right of first offer is preferable to the right of refusal because the owner is free to offer the property, typically without limitation or restriction, if the first offer is inadequate. It is not uncommon for partners to have both a right of first offer and a right of first refusal. Less common, major tenants may negotiate a right of first offer for additional space or to purchase their building. See Right Of First Refusal.

Right Of First Refusal (ROFR). A form of option agreement, typically between joint venture partners to allow a finite period to match or exceed a written purchase offer received on the open market. The right of first refusal is an encumbrance that can dampen demand, because purchasers are reluctant to undertake the effort to negotiate a transaction only to have to wait while the holder of the right of first refusal is given the opportunity to match the negotiated transaction terms.

ROI (Return On Investment) Project. Typically a non-leasing capital investment that improves the competitive positioning of the property or appreciably extends its useful life. Unlike capital expenditures, an ROI project typically has a prospective return on investment (e.g., adding or upgrading the common area amenities of an apartment property, modernizing the façade at a shopping center). See Capital Improvements.

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Sale-Leaseback. A form of financing whereby the owner (and typically, tenant) of a property sells and concurrently leases back a property from purchaser, generally under a long-term lease. For example, Home Depot or the U.S. Postal Service could sell its facility to a third-party owner, such as a REIT, and lease back the facility under a long-term agreement. GAAP requires that any gain recorded by the seller must be recognized as income over the term of the new lease.

Second-Generation Space. Refers to previously occupied space that becomes available for lease, either directly from the landlord, or as sublease space. See First-Generation Space.

Section 1031. See 1031 Exchange; Like Kind Exchange.

Section 721. See 721 Exchange.

Secured Debt. Mortgage debt secured by real property.

Securitization. The process of raising funds through the sale of securities that represent an undivided interest in a pool of assets such as commercial mortgage loans or property.

Security Deposit. A cash payment required by a landlord, to be held during the term of a lease to offset damages incurred due to actions of the tenant. Such damages may include physical damage to the property, theft of property, failure to pay back rent, and breaking the lease. Forfeiture of the deposit does not absolve the tenant of further financial liability. Laws in most states require landlords to hold the deposit in a separate account and refund the amount within a specified time after termination of the lease.

Select-Service Hotel. A hybrid of limited service and full-service hotels, a select service hotel offers the fundamental basic service of a limited-service hotel, but includes a 1- or 2-meal per day restaurant and a select number of amenities (e.g., fitness room, business center). Examples of select-service hotel brands include Hilton Garden Inn and Courtyard by Marriott. See Limited-Service Hotel; Full-Service Hotel.

Servicing. The act of billing, collecting payment, and filing reports for a mortgage loan, among other administrative services. Often performed for a fee by mortgage bankers after loans are sold to investors.

Shopping Center. An integrated complex of retail stores designed to accommodate certain shopping and service needs of a specific market area. Shopping centers are generally categorized as follows:

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General Formats

• Super-Regional/Regional Mall. The largest shopping centers, providing a complete range of general merchandise and fashion-oriented offerings. Typically enclosed with inward-facing stores, multiple department stores, and connected by a common walkway. Often located at major highway interchanges near major urban markets. Typically 400,000 sq. ft. or larger, with an average size of about 1.2MM sq. ft. for a super-regional mall (3+ anchors) and 600,000 sq. ft. for a regional mall (2+ anchors). Anchors occupy approximately 50-70% of the leasable area. There are approximately 1,200 malls in the United States.

• Community Center. Midsize shopping centers featuring convenience-oriented goods and services, general merchandise, and grocery stores. Wider range of apparel and other soft goods offerings than typically found in a neighborhood center. The typical size ranges from 125,000 sq. ft. to 400,000 sq. ft., with two or more anchors making up 40-60% of the area. There are an estimated 10,000 such centers in the United States.

• Neighborhood Center. The smallest open-air, anchored shopping center format, neighborhood centers serve a limited trade area and offer convenience-oriented goods and services such as dry cleaning, hair salons, banking, gift/card shops, and are usually anchored by a supermarket or drug store. The typical size is 50,000-125,000 sq. ft., with one or more anchors occupying a total of 30-50% of the area. There are more than 30,000 such properties in the United States.

• Unanchored Strips. A small row of retail stores that is either unanchored, or anchored by a drug or convenience store. Typically smaller than 30,000 sq. ft. There are 70,000+ such centers in the United States.

Specialty Formats

• Power Center. A large open-air shopping center anchored by category dominant “big-box” anchors including discount department stores, off-price stores, wholesale clubs or other “category killers.” There are a limited number of smaller shop spaces. Typical size is 250,000-1,000,000 sq. ft., with an average size of about 450,000 sq. ft. Approximately 75-90% of leasable area is occupied by anchors.

• Lifestyle Center. Typically a center comprised of upscale, national specialty stores with a heavy focus on dining and entertainment. There are fewer than 500 such centers in the United States.

• Outlet/Factory Outlet. Manufacturer and retailer stores selling brand-name goods at a discount. Historically, outlets sold last-season merchandise, production overruns, flawed products, etc., but today most inventory is produced specifically for sale in the outlet channel. There are 250-350 such properties in the United States today.

• Theme/Festival. Leisure/tourist offering with entertainment as a unifying theme. There are fewer than 100-150 such properties in the United States today.

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Shell Building. Common in industrial buildings, a building without specific tenants or their improvements. See Base Building (office); White Box (retail).

Slab. The exposed wearing surface laid either (1) over the structural support beams of a building to form the floor(s) of the building, or (2) slab-on-grade in the case of a non-structural, ground-level concrete slab.

Single Tenant Building. A building with one tenant occupying all of the available space. Some can be converted to multi-tenant buildings for little cost, whereas for others it may not be economically feasible.

Skilled Nursing Facility (SNF). A special facility or part of a hospital that provides medically necessary professional services from nurses, physical and occupational therapists, speech pathologists and audiologists. Skilled nursing facilities provide round-the-clock assistance with healthcare and activities of daily living subject to federal guidelines.

SMERF (Social, Military, Educational, Religious and Fraternal). Segments of the group travel market.

Soffit. The area under the roof extension of a structure.

Soft Costs. Costs associated with construction or development such as interest expense, property taxes, fees, permits, fees, etc., which can be written off for income tax purposes under certain circumstances.

Space Plan. A graphic representation of a tenant’s space requirements, showing wall and door locations, room sizes, and sometimes, furniture layouts. A preliminary space plan will be prepared for a prospective tenant at any number of different properties, and this serves as a “test-fit” to help the tenant determine which property will best meet its requirements. When the tenant has selected a building of choice, a final space plan is prepared that speaks to all of the landlord and tenant objectives and is then approved by both parties. It must be sufficiently detailed to allow an accurate estimate of the construction costs. This final space plan will often become an exhibit to any lease negotiated between the parties.

Stabilized Capitalization Rate. See Capitalization Rate, Stabilized.

Stacking Plan. A two-dimensional chart that displays the arrangement of tenants on floors of a high-rise office building. Typically they are color-coded and shaded based on lease expiration and lessee.

Straight-Line Rent. GAAP requires REITs to average a tenant’s rent payments over the life of the lease. If the lease contains fixed escalations in rent, the actual cash received can vary from the straight-lined, or “GAAP rent.” GAAP rent overstates revenue in the early years of leases and understates it in later years. If the escalations are inestimable for accounting purposes (i.e., annual increases at the rate of inflation), there is typically no straight-line rent adjustment. FFO is an earnings metric that adjusts for the distortion to cash earnings created by straight lining. See GAAP; FFO

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Sublease. The leasing of a property by a tenant to a subtenant. The primary tenant remains responsible to the landlord under the original lease, which is in contrast to an assignment of lease, whereby all rights and obligations of the original lease are transferred to the new tenant. See Assignment of Lease; Lease.

Subordination. An arrangement whereby one party puts their claim against an entity after (or junior to) the claim of another creditor.

Subordination Clause. A lease clause whereby the tenant accepts the leased premises subject to any recorded mortgage or deed of trust lien and all existing recorded restrictions, and the landlord is often given the power to subordinate the tenant’s interest to any first mortgage subsequently placed upon the leased premises. See Lease, Deed Of Trust.

Surface Rights. A right or easement enabling the possessor of the mineral rights to drill or mine through the surface. See Mineral Rights.

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Takeout Financing. A commitment to provide permanent financing upon completion of a planned development. The takeout commitment is usually predicated upon specific conditions (e.g., percentage leased) for the permanent loan to take out the construction loan. Construction lenders typically require a commitment letter from a permanent lender to ensure there is takeout financing for the construction loan. See Permanent Financing.

Taxable REIT Subsidiary (TRS). Under the REIT Modernization Act of 1999, REITs were allowed to engage in ancillary business activities to more effectively compete with other real estate owners. Under this legislation, REITs were able to provide tenants or third parties with services, such as landscaping, cleaning, and concierge. Income of the TRS is taxable. The size of the TRS is limited to 25% of the REIT’s assets.

Tax Reform Act Of 1986. Federal law that substantially altered the real estate investment landscape by permitting REITs to not only own, but also operate and manage, most types of income-producing commercial properties. It also stopped real estate tax shelters that had attracted capital from investors based on the amount of losses that could be created.

Tenancy In Common. An ownership of real property by two or more persons, each of whom has a distinct and separately transferable interest. Unlike joint tenancy, whereby the title to the property passes to the surviving owner(s) upon an owner’s death, tenancy in common allows the owner to select the beneficiary. See Joint Tenancy; Undivided Interest.

Tenant. One who is given possession of real estate for a fixed period or at will. See Tenant At Will.

Tenant At Will. One who holds possession of a premises by permission of the owner or landlord, the characteristics of which are an uncertain duration (i.e., without a fixed term) and the right of either party to terminate on proper notice.

Tenant Concessions. Lease adjustments that either reduce rent obligations or include up-front cash expenditure/allowances given by the landlord to induce lease-up or renewal of property space (i.e., build-out or retrofit of spaces). Concessions are generally a sign of market softness and are normally capitalized, not expensed. Free Rent.

Tenant Fixtures. Fixtures added to leased property by a lessee that, by contract or by law, may be removed by the lessee upon expiration of the lease. Rules vary around what is considered the landlord’s versus the tenant’s property (e.g., items bolted to the property such as HVAC units, and kitchen equipment) may be considered the property of the landlord at the conclusion of the lease and can be a source of negotiating leverage for the landlord in a renewal.

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Tenant Improvements (TI). Costs incurred in making physical improvements to the space occupied by either new, or re-leasing tenants.

Tenant Sales. In a retail property, the gross sales of the property or a specific tenant. Typically expressed on a per-square-foot basis utilizing the entire gross leasable area of the property or tenant, as opposed to just the selling area (area used by customers and excluding any back room).

Term Loan. A loan with a set maturity date and typically without amortization.

Third-Party Management. This is an arrangement in which a party assumes day-to-day responsibility for the management and/or leasing of a property or portfolio of properties it does not own in return for a fee. Fees typically range from 2% to 5% of rents collected.

Title. Evidence that the owner of land is in lawful possession of said land; evidence of ownership. Title to land does not imply the right of possession because one may have the right to possession, but have no title.

Title Abstract. A summary of the information obtained from a title search of real estate. Typical information gathered includes past ownership, transfers, conveyances, and registered mortgages, as well as existing leases, easements, liens, and any other relevant encumbrances to title.

Title Report. A report prepared by a title examiner stating the current condition of title to a property and listing recorded encumbrances, such as mortgages or liens.

Title Search. An examination of the public records to determine what defects, if any, may exist in the title to specific real property.

Total Market Capitalization or Enterprise Value. The total market value of a REIT’s (or other company’s) outstanding common stock and indebtedness.

Transfer Tax. A tax paid upon the passing of a property title. In high-transfer tax markets (e.g., New York City), it is common to see the sale of minority interests (which do not trigger the tax).

Triple Net Lease. The term “triple net” is drawn from a lease being (1) net of operating expenses, (2) net of insurance premiums, and (3) net of property taxes. This arrangement is commonplace in industrial and retail assets. Leases can be double net (tenant pays operating expense and insurance) or single net (operating expense only), but these are rare.

Triple Net Lease, Absolute. Less common, and more rigid and binding than a triple net lease. An absolute triple net lease places every conceivable real estate risk (e.g., rebuilding after catastrophe, paying rent despite condemnation) upon the tenant.

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Undeveloped Land. See Raw Land.

Undivided Interest. Concurrent ownership of land by two or more parties. Each owner has the right to the property and to its income as determined by his percentage ownership in the property. In the absence of special arrangements, concurrent owners are deemed “tenants in common.” See Tenancy in Common; Joint Tenancy.

Unimproved Land. Land that may be zoned and subdivided, but without physical improvements such as street, drainage, and utilities. See Raw Land; Undeveloped Land.

Unsecured Debt. Financing guaranteed at the parent-company level and not on individual properties.

UPREIT (Umbrella Partnership REIT). An entity structure that REITs use that allows property owners to contribute their real estate property in exchange for operating partnership units that can be converted into REIT shares. The partnership units are worth the same as the contributed property, but unlike selling the property, this transaction does not create a taxable event. See DownREIT.

Useful Life. An accounting concept that provides the basis for depreciation and relates to the period of time over which a building is expected to be used by an enterprise.

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Vacancy. The absence or lack of tenant.

Vacancy Allowance. An allowance, usually a percentage of gross income, which is deducted from gross income to adjust appraisal analyses for a normalized level of vacancy.

Vacancy Rate. The percentage of all space or units that is unoccupied or unleased.

Variance, Zoning. Refers to permission granted to a property owner by zoning authorities that allows the owner to depart from the requirements of a zoning ordinance because of special circumstances or a unique hardship. For example, compliance with zoning ordinances creates an unsafe condition or practical difficulty, or the owner is deprived of reasonable use due to the physical constraints of the site or building. For example, the configuration of the site and building prohibit the placement of the minimum number of parking spaces abutting the building.

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White Box. The basic building improvements before tenant improvements. Typically means the landlord will finish the walls, ceiling grid, lighting, and HVAC before turning over a “white box” to the tenant. A white box requires minimal improvement by the tenant (e.g., paint, tile/carpet). Common in retail properties. See Base Building.

Workout. A mutual effort by a lender and property owner to avoid foreclosure or bankruptcy. A workout can involve a loan extension or substantial reduction in the debt service burden or outstanding in exchange for a participation in future income or equity creation. See Participating Mortgage.

Wraparound Mortgage. A loan arrangement typically employed by a property seller as an inducement. An existing loan is retained and an additional wraparound loan, larger than the existing loan, is made. The wraparound lender accepts the obligation to make payments on the existing loan. The wraparound mortgage is a form of seller financing.

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Zoning. The division of a municipal area into zones and the application of regulations having to do with the intended use (i.e., public space, office, single-family residential, manufacturing) and structural elements (height, setback, etc.) of buildings within each designated zone. Zoning can also extend to architectural design.

Zoning Ordinance. The permitted use (i.e., office, single-family residential, manufacturing) and applicable regulations for an area designated by local authorities. Within each zone, each use may have specific requirements (minimum percentage of affordable residential units) or limitations (building size, density, height, setback, or frontage). Zoning can typically be modified only through an appeal to the zoning authority to obtain a variance. See Variance, Zoning.

Z

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Appendix

Line Reference Typical REIT Income Statement Comments

Revenue

a Minimum Rent Base or minimum rents due from tenants

b Overage Rent Landlord participate in tenant sales

c Tenant Reimbursements Tenant reimbursement of operating expense, real estate tax and insurance

d Other Income Miscellaneous fees and income

e=sum (a:d) Total Revenue

Expenses

f Property Operating Expenses Primarily repairs, maintenance, and on-site management costs

g Real Estate Taxes Property taxes

h General & Administrative Corporate overhead

i Depreciation & Amortization Depreciation of property and FF&E

j Provision for Credit Losses Primarily uncollectible rents

k Impairment Charges Write-off of permanently impairment asset

l=sum (f:k) Total Expences

m=(l-e) Operating Income Revenues less Expense

Net Operating Income (NOI, valuation metric) NOI refers to the cash-based Operating Income used in valuation

Other Income/(Expense)

n Interest, Dividends, Investment Income Income from investments, stock holdings or mortgages made by REIT.

o Other Income, Net Miscellaneous other income

p Interest Expense Interest expense associated with debt financings

q Benefit/(Provision) for Income Tax Taxes associated with property transactions

r Equity in Income of Joint Ventures Effectively the REIT’s prorata share of net income from joint ventures

s Gain/(Loss) on Sale of Properties Gains or losses from the sale of operating properties or developments

t=m-sum(n:s) Income from Continuing Operations

u Income from Discontinued Operations Net income from non-core assets sold.

v Gain/(Loss) on Sales of Properties Gains or losses from the sale of non-core properties

w=t-u-v Consolidated Net Income

x Net Income/(Loss)Attributable to Non-Controlling Interests Portion of net income allocable to partners, typically OP Unitholders

y Preferred Stock Dividends Preferred stock financing distributions and costs.

z=w-x-y Net Income to Common Shareholders

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Reconciliation of Net Income to Funds From Operations (FFO) and Adjusted Funds From Operations (AFFO)

w=t-u-v Consolidated Net Income

+ Real Estate Depreciation & Amortization Add back real estate related depreciation and amortization

+ Real Estate Depreciation & Amortization in Joint Ventures, pro-rata Add back real estate related depreciation and amortization, prorata share

- Gain/(Loss) on Sale of Operating Properties Deduct the gain on sale of operating properties in net income

- Gain/(Loss) on Sale of Joint Venture Properties, pro-rata Deduct the gain on sale of operating properties in net income

+ Impairments of Operating Properties Add back any impairments recognized in net income

- Benefit/(Provision) for Income Tax Deduct Benefit/(Provision) for Income Tax

+ Non-Controlling Interest’s Portion of Gains, Depreciation, Impairments Add back partner share (OP Unitholder) of Gains, Depreciation, Impairments

- Preferred Stock Dividends Deduct preferred stock financing costs

Funds from Operations (Consolidated)

-/+ Straight-Line Rent Adjustment Eliminate any straight-line rent (non-cash item) in Revenue

- Recurring Capital Expenditure Deduct recurring capital expenditures (e.g., capitalized maintenance items)

-/+ FAS 141, Amortization of Above/Below Market Rate Leases Eliminate any above/below market rent adjustment (non-cash item) in Revenue

+ Stock Based Compensation (in G&A Expense) Add back stock based compensation recognized in G&A expense

Adjusted Funds from Operations (Consolidated)

Source: Wells Fargo Securities, LLC

Line Reference Typical REIT Income Statement Comments

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