Glossary – X Y Z
March 24, 2008
Yield: The effective return on an investment, as paid in dividends or interest
Yield maintenance premium: A penalty, paid by the borrower, designed to make investors whole in the event of early redemption of principal
Yield spread: The difference in yields between a commercial mortgage and a benchmark value, typically U.S. Treasuries of the same maturity
Zoning: The division of a city or town into zones and the application of regulations having to do with the architectural design and structural and intended uses of buildings within such zones
Zoning ordinance: The set of laws and regulations controlling the use of land and construction of improvements in a given area or zone
Glossary – W
March 24, 2008
Waiting period: The time between the initial filing of a registration statement and its effective date
Weighted-average coupon: The weighted average of the gross interest rates of the mortgages underlying a pool as of the issue date, with the balance of each mortgage used as the weighting factor
Weighted-average equity: The denominator of the fraction used to calculate investment-level income, appreciation and total returns on a quarterly basis, consisting of net assets at the beginning of the period adjusted for weighted contributions and distributions
Weighted-average rental rates: The average proportion of unequal rental rates in two or more buildings within a market
Working drawings: The set of plans for a building or project that comprise the contract documents that indicate the precise manner in which a project is to be built
Workout: The process by which a borrower attempts to negotiate with a lender to restructure the borrower’s debt rather than go through foreclosure proceedings
Write-down: The accounting procedure used when the book value of an asset is adjusted downward to better reflect current market value
Write-off: The accounting procedure used when an asset has been determined to be uncollectible and is therefore charged as a loss
Glossary – V
March 24, 2008
Vacancy factor: The amount of gross revenue that pro forma income statements anticipate will be lost because of vacancies, often expressed as a percentage of the total rentable square footage available in a building or project. You might see 3% or 10% or more. Could be due to competition, expiring leases, economic outlook etc.
Vacancy rate: The total amount of available space compared to the total inventory of space and expressed as a percentage
Vacant space: Existing tenant space currently being marketed for lease excluding space available for sublease. Subleases may be marketed by leasee for competitive purposes.
Value-added: A phrase generally used by advisers and managers to describe investments in underperforming and/or undermanaged assets. The objective is to generate 13 percent to 18 percent returns.
Variable-rate: A loan interest rate that varies over the term of the loan, usually tied to a predetermined index. Also called adjustable-rate.
Variance: Permission that allows a property owner to depart from the literal requirements of a zoning ordinance that, because of special circumstances, cause a unique hardship. Applicant must prove a need or fault.
Virtual storefront: An online business presence for sales. Some storefronts may only be an Ebay business or other Internet only sales center. Others may include a “brick and mortar” business as well. Excellent method for testing products or business models.
Glossary – U
March 24, 2008
Under construction: The period of time after construction has started but before the certificate of occupancy has been issued
Under contract: The period of time after a seller has accepted a buyer’s offer to purchase a property and during which the buyer is able to perform its due diligence and finalize financing arrangements. During this time, the seller is precluded from entertaining offers from other buyers.
Underwriter: A company, usually an investment banking firm, that guarantees or participates in a guarantee that an entire issue of stocks or bonds will be purchased
Unencumbered: Property that is free of liens and other encumbrances
Unimproved land: Most commonly refers to land without improvements or buildings but also can mean land in its natural state
Unrated classes: Typically the most subordinated classes of CMBS
UPREIT (Umbrella partnership real estate investment trust): Organizational structure where a REIT’s assets are owned by a holding company for tax purposes
Usable square footage: The area contained within the demising walls of the tenant space that equals the net square footage multiplied by the circulation factor
Use: The specific purpose for which a parcel or a building is intended to be used or for which it has been designed or arranged
Glossary – T
March 24, 2008
Taking: A common synonym for condemnation, or any interference with private property rights, but it is not essential that there be physical seizure or appropriation.
Tax base: The assessed valuation of all real property that lies within a taxing authority’s jurisdiction. When multiplied by the tax rate, it determines the amount of tax due.
Tax lien: A statutory lien for nonpayment of property taxes that attaches only to the property upon which the taxes are unpaid
Tax roll: A list or record containing the descriptions of all land parcels located within the county, the names of the owners or those receiving the tax bill, assessed values and tax amounts
Tenant (lessee): One who rents real estate from another and holds an estate by virtue of a lease
Tenant at will: One who holds possession of premises by permission of the owner or landlord. The characteristics of the lease are an uncertain duration and the right of either party to terminate on proper notice.
Tenant improvement (TI): Improvements made to the leased premises by or for a tenant
Tenant improvement (TI) allowance: Defines the fixed amount of money contributed by the landlord toward tenant improvements. The tenant pays any of the costs that exceed this amount.
Tenant in Common (TIC): Method of Ownership whereby there are multiple owners, each owning a deed to their share of ownership.
Tenant mix: A phrase used to describe the quality of a property’s income stream. In multi-tenanted properties, institutional investors typically prefer a mixture of national credit tenants, regional credit tenants and local non-credit tenants.
Term: The lifetime of a loan
Time-weighted average annual rate of return: The constant annual return over a series of years that would compound to the same return as compounding the actual annual returns for each year in the series
Title: The means whereby the owner has the just and full possession of real property
Title insurance: A policy issued by a title company that insures against loss resulting from defects of title to a specifically described parcel of real property, or from the enforcement of liens existing against it at the time the title policy is issued
Title search: A review of all recorded documents affecting a specific piece of property to determine the present condition of title
Total acres: All land area contained within a real estate investment
Total assets: The sum of all gross investments, cash and equivalents, receivables, and other assets presented on the balance sheet
Total commitment: The full mortgage loan amount that is obligated to be funded if all stated conditions are met
Total inventory: The total square footage of a type of property within a geographical area, whether vacant or occupied
Total principal balance: The total amount of debt, including the original mortgage amount adjusted for subsequent fundings, principal payments and other unpaid items (e.g., interest) that are allowed to be added to the principal balance by the mortgage note or by law
Total retail area: Total floor area of a retail center less common areas. It is the area from which sales are generated and includes any department stores or other areas (such as banks, restaurants or service stations) not owned by the center.
Total return: The sum of quarterly income and appreciation returns
Trade fixtures: Personal property that is attached to a structure that is used in the business. Because this property is part of the business and not deemed to be part of the real estate, it is typically removable upon lease termination.
Tranche: A class of securities. CMBS offerings are generally divided into rated and unrated classes, or tranches, according to seniority and risk. Higher-rated tranches allow for internal credit enhancements; lower-rated classes offer higher yields.
Triple net lease: A lease that requires the tenant to pay all expenses of the property being leased in addition to rent. Typical expenses covered in such a lease include taxes, insurance, maintenance and utilities. Commonly referred to as “NNN” lease or “3N”. Also see CAM charges.
Trustee: The trustee oversees the flow of funds through the CMBS structure on behalf of the bondholders. The trustee is responsible for collecting principal and interest from the servicer, distributing payments to bondholders and reporting to bondholders.
Turn key project: The construction of a project in which a third party is responsible for the total completion of a building, or for the construction of tenant improvements to the customized requirements and specifications of a future owner or tenant
Glossary – S
March 24, 2008
Sale-leaseback: An arrangement by which the owner-occupant of a property agrees to sell all or part of the property to an investor, then lease it back and continue to occupy space as a tenant
Sales comparison value: A value indication derived by comparing the property being appraised to similar properties that have been sold recently
Second-generation or Secondary space, SubLease: Previously occupied space that becomes available for lease, either directly from the landlord or as sublease space
Secondary financing: A loan on real property secured by a lien junior to an existing first mortgage loan
Secondary market: A market where existing mortgage loans are securitized and then bought and sold to other investors
Secondary, or follow-on, offering: A stock offering made by an existing public company
Securities and Exchange Commission (SEC): The federal agency that supervises and oversees the issuance and exchange of public securities
Securitization: The process of converting an illiquid asset, such as a mortgage loan, into a tradable form, such as mortgage-backed securities
Security deposit: A deposit of money by a tenant to a landlord to secure performance of a lease. It also can take the form of a letter of credit or other financial instrument.
Seisen (seizen): Possession of real property under claim of freehold estate
Self-administered REIT: When members of the management are employees of the REIT or an entity having essentially the same economic ownership as the REIT
Self-managed REIT: A REIT whose employees are responsible for performing property management functions
Senior classes: With regard to securities, describes the classes with the highest priority to receive the payments from the underlying mortgage loans
Separate account: A relationship where an investment manager or adviser is retained by a single pension plan sponsor to source real estate product under a stated investment policy exclusively for that sponsor
Servicer: An organization that acts on behalf of a trustee for the benefit of security holders
Setback: The distance from a curb, property line or other reference point, within which building is prohibited
Shares outstanding: The number of shares of common stock currently outstanding, less the shares held in treasury
Site analysis: Determines the suitability of a specific parcel of land for a specific use
Site development: The installation of all necessary improvements made to a site before a building or project can be constructed on the site
Site plan: A detailed plan that depicts the location of improvements on a parcel
Slab: The exposed wearing surface laid over the structural support beams of a building to form the floor(s) of the building
Social investing: Investments driven in whole or in part by social or political (non-real estate) objectives. Under ERISA, social investing is economically justified only if proper real estate fundamentals are considered first.
Soft cost: The portion of an equity investment other than the actual cost of the improvements themselves that may be tax-deductible in the first year
Space plan: A graphic representation of a tenant’s space requirements, showing wall and door locations, room sizes and sometimes furniture layouts
Special assessment: Special charges levied against real property for public improvements that benefit the assessed property
Special servicer: A firm that is employed to work out mortgages that are either delinquent or in default
Specified investing: Investment in individually specified properties or portfolios, or investment in commingled funds whose real estate assets are fully or partially specified prior to the commitment of investor capital
Speculative space: Any tenant space that has not been leased before the start of construction on a new building
Stabilized net operating income: Projected income less expenses that are subject to change but have been adjusted to reflect equivalent, stable property operations
Stabilized occupancy: The optimum range of long-term occupancy that an income-producing real estate project is expected to achieve after exposure for leasing in the open market for a reasonable period of time at terms and conditions comparable to competitive offerings
Step-up lease (graded lease): A lease specifying set increases in rent at set intervals during the term of the lease
Straight lease (flat lease): A lease specifying a fixed amount of rent that is to be paid periodically, typically monthly, during the entire term of the lease
Strip center: Any shopping area comprised of a row of stores but smaller than a neighborhood center anchored by a grocery store
Subcontractor: A contractor working under and being paid by the general contractor, often a specialist in nature, such as an electrical contractor, cement contractor, etc.
Sublessee: A person or identity to whom the rights of use and occupancy under a lease have been conveyed, while the original lessee retains primary responsibility for the obligations of the lease
Subordinated classes: With regard to CMBS, describes those classes with the lowest priority to receive payments from the underlying mortgage loans
Subordination: The process of sharing the risk of credit losses disproportionately among two or more classes of securities
Surety: One who voluntarily binds himself to be obligated for the debt or obligation of another
Surface rights: A right or easement granted with mineral rights, enabling the possessor of the mineral rights to drill or mine through the surface
Survey: The process by which a parcel is measured and its boundaries and contents ascertained
Synthetic lease: A transaction that appears as a lease from an accounting standpoint but as a loan from a tax standpoint
Glossary – R
March 24, 2008
Rating: Grade, assigned by a rating agency, designating the credit quality or creditworthiness of the underlying assets
Rating agencies: Independent firms engaged to rate the creditworthiness of securities for the benefit of investors. The major rating agencies are Fitch Ratings, Standard & Poor’s and Moody’s Investors Service.
Raw land: Unimproved land that remains in its natural state
Raw space: Unimproved shell space in a building
Real estate fundamentals: The factors driving the value of real property (i.e., the supply, demand and pricing for land and/or developed space in a given geographic or economic region or market)
Real property: Land, and generally whatever is erected or affixed to the land that would be personal property if not attached
Real rate of return: Yield to investors net of an inflationary factor. The formula for calculating the real rate of return is [(1 + nominal yield) / (1 + inflation rate)] – 1.
Recapture: When the IRS recovers the tax benefit of a deduction or a credit previously taken by a taxpayer, which is often a factor in foreclosure because there is a forgiveness of debt. As used in leases, it is a clause giving the lessor a percentage of profits above a fixed amount of rent; or in a percentage lease, a clause granting the landlord the right to terminate the lease if the tenant fails to realize minimum sales.
Recourse: The right of a lender, in the event of default by the borrower, to recover against the personal assets of a party who is secondarily liable for the debt
Red herring: The preliminary prospectus for an initial public offering. Before the registration statement becomes effective, underwriters may use the preliminary prospectus to market the offering. The preliminary prospectus, however, must bear a legend printed in red ink stating that the offering has been filed but is not yet effective.
Regional diversification: Definitions for what constitute various regions, for diversification purposes, vary among managers, consultants and plan sponsors. Some boundaries are defined based purely on geography; others have attempted to define boundaries along economic lines.
Registration statement: Forms filed with the Securities and Exchange Commission (or the appropriate state regulatory agency) in connection with a proposed offering of new securities or the listing of outstanding securities on a national exchange
Rehab: Extensive renovation intended to cure obsolescence of a building or project
REIT (Real estate investment trust): A business trust or corporation that combines the capital of many investors to acquire or provide financing for real estate. A corporation or trust that qualifies for REIT status generally does not pay corporate income tax to the IRS. Instead, it pays out at least 90 percent of its taxable income in the form of dividends.
See the complete Guide to REITS on Rentlaw.com
REMIC (Real estate mortgage investment conduit): A product of the Tax Reform Act of 1986, REMICs are designed to hold a pool of mortgages for the exclusive purpose of issuing multiple classes of mortgage-backed securities in a way that avoids a corporate double tax.
Renewal option: A clause giving a tenant the right to extend the term of a lease
Renewal probability: Used to estimate leasing-related costs and downtime, it is the average percentage of tenants in a building that are expected to renew at market rental rates upon the expiration of their leases.
Rent: Compensation or fee paid for the occupancy and use of any rental property, land, buildings, equipment, etc.
Rent commencement date: The date on which a tenant begins paying rent
Rentable/usable ratio: A building’s total rentable area divided by its usable area. It represents the tenant’s pro-rata share of the building’s common areas and can determine the square footage upon which the tenant will pay rent. The inverse describes the proportion of space that an occupant can expect to actually use.
Rental concession: What landlords offer tenants to secure their tenancy. While rental abatement is one form of a concession, there are many others such as increased tenant improvement allowance, signage, below-market rental rates and moving allowances.
Rental growth rate: The expected trend in market rental rates over the period of analysis, expressed as an annual percentage increase
Rent-up period: The period following construction of a new building when tenants are actively being sought and the project is approaching its stabilized occupancy
REO (Real estate owned): Real estate owned by a savings institution as a result of default by borrowers and subsequent foreclosure by the institution
Replacement cost: The estimated current cost to construct a building with utility equivalent to the building being appraised, using modern materials and current standards, design and layout
Replacement reserves: An allowance that provides for the periodic replacement of building components that wear out more rapidly than the building itself and must be replaced during the building’s economic life
Request for proposal (RFP): A formal request, issued by a plan sponsor or its consultant, inviting investment managers to submit information on their firms’ investment strategy, historical investment performance, current investment opportunities, investment management fees, other pension fund client relationships, etc. Firms that meet the qualifications are requested to make a formal presentation to the board of trustees and senior staff members. Finalists are chosen at the completion of this process, and contract negotiation begins.
Reserve account: An account that a borrower has to fund to protect the lender. Examples include capital expenditure accounts and deferred maintenance accounts.
Resolution Trust Corp. (RTC): The RTC was established by Congress in 1989 to contain, manage and sell failed savings institutions and recover taxpayer funds through the management and sale of the institutions’ assets.
Retail investor: When used to describe an investor, retail refers to the nature of the distribution channel and the market for the services – selling interests directly to consumers.
Retention rate: The percent of trailing 12-month earnings that have been ploughed back into the company. It is calculated as 100 minus the trailing 12-month payout ratio.
Return on assets: The income after taxes for the trailing 12 months divided by the average total assets, expressed as a percentage
Return on equity: The income available to common stockholders for the trailing 12 months divided by the average common equity, expressed as a percentage
Return on investments: The trailing 12-month income after taxes divided by the average total long-term debt, other long-term liabilities and shareholders equity, expressed as a percentage
Reversion capitalization rate: The capitalization rate used to determine reversion value
Reversion value: A lump-sum benefit that an investor receives or expects to receive at the termination of an investment
RevPAR (Revenue per available room): Total room revenue for the period divided by the average number of available rooms in a hospitality facility
Risk management: A systematic approach to identifying and separating insurable risks from non-insurable risks, and evaluating the availability and costs of purchasing third-party insurance
Risk-adjusted rate of return: Used to identify investment alternatives that can be expected to deliver a positive premium, after taking into consideration the expected volatility. The risk-adjusted rate of return is defined as the expected rate of return of a given asset, less the expected return for T-bills, divided by the expected standard deviation of the returns for the assets.
Road show: A tour made by executives of a company that plans to go public, where they travel to various cities to meet with underwriters and analysts and make presentations regarding their company and IPO. The road show takes place during the marketing period before the registration statement becomes effective.
Roll-over risk: The risk that a tenant’s lease will not be renewed
Glossary – Q
March 24, 2008
Qualified plan: Any employee benefit plan that is qualified by the IRS as a tax-exempt plan. Among other requirements, the plan’s assets must be placed in trust for the sole benefit of the employees covered by the plan.
Quitclaim deed: A deed operating as a release that is intended to pass any title, interest or claim that the grantor may have in the property, but not guaranteeing such title is valid
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Glossary – P
March 24, 2008
Parking ratio: 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.
Partial sales: The sale of an interest in real estate that is less than the whole property. This may include a sale of easement rights, parcel of land or retail pad, or a single building of a multi-building investment.
Partial taking: The taking of part of an owner’s property under the laws of eminent domain
Participating debt: In addition to collecting a contract interest rate, participating debt allows the lender to have participatory equity rights through a share of increases in income and/or increases in residual value over the loan balance or original value at the time of loan funding.
Party in interest: Under ERISA’s 2002 Modernization Act: Parties in interest include employers, unions and, in certain circumstances, fiduciaries. It excludes service providers and their affiliates. Fiduciaries would only be parties in interest where they act on behalf of a plan sponsor in entering into a transaction. An affiliate of a party in interest does not include remote affiliates of employers, unions and fiduciaries (e.g., 10 percent owners), as well as employees of such remote affiliates.
Pass-through certificate: Payments of principal and interest from the underlying pool of mortgages are passed through to the holders of the certificates.
Payout ratio: The percentage of the primary earnings per share, excluding extraordinary items, paid to common stockholders in the form of cash dividends during the trailing 12 months
Pension liability: The total amount of capital required to fund vested pension fund benefits
Percentage rent: Rent payable under a lease that is equal to a percentage of gross sales or gross revenues received by the tenant. It is commonly used in retail center leases.
Performance: The quarterly changes in fund or account values attributable to investment income, realized or unrealized appreciation, and the total gross return to the investors both before and after investment management fees. Formulas for calculating performance information are varied, making comparisons difficult.
Performance bond: A surety bond posted by a contractor guaranteeing full performance of a contract with the proceeds to be used to complete the contract or compensate for the owner’s loss in the event of nonperformance
Performance measurement: The process of measuring an investor’s real estate performance in terms of individual assets, advisers/managers and portfolios. The scope of performance measurement reports varies among managers, consultants and plan sponsors.
Performance-based fees: Fees paid to advisers or managers based on returns to investors, often packaged with a modest acquisition and asset-management fee structure
Permanent loan: The long-term mortgage on a property
Plan assets: The assets of a pension plan
Plan sponsor: The entity that establishes, contributes to and is responsible for the administration of an employee benefit plan, often used interchangeably to describe staff who administer the plan and trustees or investment board members who govern it
Plat: Map of a specific area, such as a subdivision, that shows the boundaries of individual lots together with streets and easements
Portfolio management: The portfolio management process involves formulating, modifying and implementing a real estate investment strategy in light of an investor’s broader overall investment objectives. It also can be defined as the management of several properties owned by a single entity.
Portfolio turnover: The average time from the funding of an investment until it is repaid or sold
Power of sale: Clause inserted in a mortgage or deed of trust giving the mortgagee (or trustee) the right and power, upon default in the payment of the debt secured, to advertise and sell the property at public auction
Preferred shares: Stocks that have prior claim on distributions (and/or assets in the event of dissolution) up to a definite amount before the common shareholders are entitled to anything. As a form of ownership, preferred shareholders fall behind all creditors in dissolutions.
Preleased: Space in a proposed building that has been leased before the start of construction or in advance of the issuance of a certificate of occupancy
Prepayment rights: Rights given to the borrower to make partial or full payment of the total principal balance prior to the maturity date without penalty
Price to earnings ratio: This ratio is calculated by dividing the current share price by the sum of the primary earnings per share from continuing operations, before extraordinary items and accounting changes, over the past four quarters.
Primary issuance: The initial financing of an issuer
Prime space: Typically refers to first-generation space that is available for lease
Prime tenant: The major tenant in a building, or the major or anchor tenant in a shopping center
Principal payments: The return of invested capital to the lender
Private placement: A sale of a security in a manner that is exempt from the registration rules and requirements of the Securities and Exchange Commission. An example would be a REIT directly placing an issue of stock with a pension fund.
Private REIT: An infinite- or finite-life real estate investment company structured as a real estate investment trust. Shares are placed and held privately rather than sold and traded publicly.
Pro rata: In the case of a tenant, the proportionate share of expenses for the maintenance and operation of the property
Production acres: The area of land that can be used in agriculture or timber operations to produce income, not including areas used for crop or machinery storage, or other support areas
Prohibited transaction: ERISA defines the following transactions as prohibited between a pension plan and a party in interest: the sale, exchange or leasing of any property; a loan or other extension of credit; and the furnishing of goods or services. Other prohibited transactions include the transfer of plan assets to a party in interest or use of plan assets by a party in interest, and the acquisition of employer real property in excess of limits set by ERISA.
Prudent man rule: The standard to which a fiduciary is held accountable under ERISA. “Act with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent man, acting in a like capacity and familiar with such matters, would use in the conduct of an enterprise of a like character and with like aims.”
Punch list: An itemized list documenting incomplete or unsatisfactory items after the contractor has notified the owner that the tenant space is substantially complete
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Glossary – O
March 24, 2008
Offer: Term used to describe a stated price or spread to sell whole loans or securities
Open space: An area of land or water dedicated for public or private use or enjoyment
Open-end fund: A commingled fund that does not have a finite life, continually accepts new investor capital and makes new property investments
Operating cost escalation: Although there are many variations of escalation clauses, all are intended to adjust rents by reference to external standards such as published indexes, negotiated wage levels, or expenses related to the ownership and operation of a building.
Operating expense: The actual costs associated with operating a property, including maintenance, repairs, management, utilities, taxes and insurance
Opportunistic: A phrase generally used by advisers and managers to describe investments in underperforming and/or undermanaged assets that hold the expectation of near-term increases in cash flow and value. Total return objectives for opportunistic strategies tend to be 20 percent or higher. Opportunistic investments typically involve a high degree of leverage – typically 60 percent to 100 percent on an asset basis and 60 percent to 80 percent on a portfolio basis.
Originator: A company that sources and underwrites commercial and/or multifamily mortgage loans
Out-parcel: Individual retail sites in a shopping center
Overallotment: A practice through which underwriters offer and sell more shares than they have agreed to buy from the issuer
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