Real Estate Investment Banking Terms

Often and commonly referred to as free rent or early occupancy and may occur outside or in addition to the primary term of the lease.
The number of units of property that will be leased or sold in a market over a specific time period. Pre-leased space in buildings under construction is not included in order to avoid double counting of tenants who are in the process of moving within the market.
The cashflow to the equity position after debt service and taxes have been paid. The ATCF is the basis for calculating the Levered IRR.
Repayment of a loan with periodic payments on both principal and interest calculated to pay off the loan at the end of a fixed period of time. The loan payment consists of a portion that will be applied to the accruing interest on the loan, with the remainder used to pay the principal. Over time the interest portion decreases as the loan balance decreases, and the amount applied to principal increases so that the loan is paid off (amortized) in the specified period.
tenant that generally occupies the largest space at a given property, serving as the primary draw of customers to the property and usually receiving a lower leasing cost. Anchor tenants are considered lynchpins to the success of a major retail center development and are normally located at the extremes of the mall in order to draw customers through the center.
The actual cost of borrowing money, expressed in the form of an annual interest rate. It may be higher than the note rate because it represents full discloser of the interest rate, loan origination fees, loan discount points, and other credit costs paid to the lender.
A typical mortgage clause that allows the lender to receive rent from a property in the event of default during the foreclosure process.
Also known as a bullet loan, it is a long-term loan, often a mortgage, granted on the basis that payments of principal will be deferred until the end of the loan period and only interest will be payable during the loan period. A balloon loan will often have the advantage of very low interest payments, thus requiring very little capital outlay during the life of the loan. Since most of the repayment is deferred until the end of the payment period, the borrower has substantial flexibility to utilize the available capital during the life of the loan.
The 12 month period upon which an expense escalation of rent is based. This 12 month period is typically the first calendar year of the lease term.
A short-term loan granted to cover an intermediate stage in business. In real estate, it is a loan primarily for borrowers who have not yet sold their previous property, but must close on a purchase property. The bridge loan becomes the source of their funds for the down payment.
An estimation of property value by a real estate broker. A BOV is often intended to provide market pricing guidance to property owners without incurring the time and expense of a real estate appraisal. However, it is important to note that a BOV is not a substitute for an appraisal. A fee may or may not be charged.
See Broker’s Opinion of Value
The space improvements put in place per the tenant’s specifications. Takes into consideration the amount of Tenant Finish Allowance provided for in the lease agreement.
An investor’s current cash investment balance in a particular investment.
Expenditures incurred to acquire property for the long term or to increase the permanent value of property. In general, money spent on improvement, alternation, or renewal is considered a capital expenditure, but money spent on repair and maintenance is not.
A ratio used to estimate the value of income-producing properties, which describes a return rate acceptable to an investor taking the risk of a capital investment. This ratio is calculated by dividing the net operating income by the sales price or value of a property expressed as a percentage, and is developed by analyzing the selling price, gross income and operating expenses of recent sales of comparable properties in a particular market place. The cap rate is one of many financial tools used by investors, lenders and appraisers to establish a reasonable purchase price for a given investment property in a specific market region.
Money set aside for unforeseen property expenses that you cannot budget for (e.g. carpet spills, accidents in garages, etc).
The cash generated by an investment after all payments have been made that are necessary to sustain the investment; it equals the income available to the owner after the payment of all operating expenses, but before depreciation and tax.
The relationship, expressed as a percentage, between cash flow (i.e. the net income receivable after debt service but before tax) and the total equity outlay on an investment. In determining such a return, the cash flow includes the effective gross income less all outgoing expenses (e.g. real estate taxes, operating expenses and interest or principal owed on financing), but no account is taken of capital appreciation, depreciation or equity build-up resulting from repayments of principal on any loan secured on the property.
The center of a ‘downtown’ area within a city. It is the core of an urban area where generally there is the greatest concentration of administrative and financial offices, retail establishments, entertainment facilities and hotels. In the United States, the CBD is the area that historically was the center of a town or city for business and shopping and was the area of highest land values, i.e. the area where economic activity is at its highest, creating the greatest amount of competition for property.
A document presented by a local government agency or building department certifying that a building and/or the leased premises (tenant’s space), has been satisfactorily inspected and is/are in a condition suitable for occupancy.
Property with buildings of the highest quality in terms of location, design, building standards, efficiency and definitive market presence. Premier businesses compete with each other to lease this property thereby driving rents far above average for the area. Property that falls short of this standard may be classified as Class B or Class C as the particular attributes merit.
In real estate private equity funds, closed-end funds have a finite investment horizon. In some instances, the investment time-frame may be extended to accommodate market conditions.
Monies expended by a party in completing a real estate transaction above and beyond the purchase price, including: legal fees, taxes, mortgage application charges, interest adjustments, registration fees, appraisal fees, etc.
Commercial mortgages that are originated, pooled and tranched for sale as bonds in the secondary market. CMBS creates liquidity for originators and investors by creating heterogeneous real estate debt securities.
The amount of additional rent charged to the tenant, in addition to the base rent, to maintain the common areas of the property shared by the tenants and from which all tenants benefit.
Lease rates and terms, or sale rates and terms, of properties similar in size, construction quality, age, use, and typically located within the same sub-market and used as comparison properties to determine the fair market lease rate, or sale price, for another property with similar characteristics.
Cash or cash equivalents expended by the landlord in the form of rental abatement, additional tenant finish allowance, or other compensation expended to influence or persuade the tenant to sign a lease.
A measurement of inflation in relation to the change in price of a fixed market basket of goods and services purchased by a specified population during a “base” period. In real estate, this is commonly used to increase the base rental rate periodically as a means of protecting the landlord’s rental stream against inflation.
Either multiple suites/spaces within the same building and on the same floor which can be combined and rented to a single tenant, or a block of space located on multiple adjoining floors in a building.
Most commonly refers to the transfer of title to property between parties by deed. The term may also include most of the instruments by which an interest in real estate is created, mortgaged or assigned.
As it pertains to commercial real estate, it is typically defined as an investing strategy that focuses on acquiring the best-located, highest quality and fully stabilized assets often referred to as "trophy assets". It is typically perceived to entail the least amount of risk of the four primary commercial real estate investing philosophies (see Core-Plus, Value-Added and Opportunistic) but offers in correlation, the lowest expected total returns. Core investing also typically features a range of no leverage to low-levels of leverage.
Represents the percentage of Net Rentable Square Feet devoted to the building’s common areas (lobbies, rest rooms, corridors, etc.)
The next step up from Core (see Core) in risk / return, Core-plus commercial real estate investing typically features well-located, high quality assets that are stabilized at the time of acquisition. It is generally considered a moderate risk / return strategy. A Core-plus investment strategy may entail higher levels of leverage in comparison to Core investing but at levels still considered conservative. In correlation, Core-plus is expected to deliver higher total returns than a Core strategy.
A method of appraising real property whereby the replacement cost of a structure is calculated using current costs of construction.
A written agreement inserted into deeds or other legal instruments stipulating performance or non-performance of certain acts or, uses or non-use of a property and/or land.
A debtor in possession in United States bankruptcy law is a person or corporation who has filed a bankruptcy petition but remains in possession of property upon which a creditor has a lien or equivalent security interest.
A deed instrument in which a mortgagor (i.e. borrower) conveys all interest in a real property to the mortgagee (i.e. lender) to satisfy a loan that is in default and subject to foreclosure proceedings. A deed in lieu is sometimes referred to as a form of “friendly foreclosure” in which the borrower and lender enter into such an agreement voluntarily and in good faith. A deed in lieu is designed to provide immediate relief of indebtedness to the borrower (with less damage to the borrower’s credit worthiness), while reducing time and costs associate with asset repossession to the lender.
The general failure to perform a legal or contractual duty or to discharge an obligation when due. (i.e. missing a mortgage payment, missing rent payments, failing to perform any terms in a legal contract).
Effectively a pre-payment penalty, it is the retirement of a debt in substance, but not in practice, with the substitution of one form of security for another. For example, if during a loan’s lockout period the borrower wishes to pre-pay the loan, they may use collateral (usually in the form of U.S. Treasuries) as a substitute for the mortgage securing the loan. The treasuries service the borrower’s debt at a higher rate of interest than normally would be incurred should the borrower not pre-pay.
Spreading out the cost of a capital asset over its estimated useful life or a decrease in the usefulness, and therefore value, of real property improvements or other assets caused by deteriorations or obsolescence.
A percentage of the loan amount that a lender charges a borrower for making a loan. [1 point equals 1% of the mortgage amount.]
The payoff of a loan in which the lender releases its lien for an amount less than the unpaid principal balance of the loan.
Quarterly payments to investors made on a pro-rata basis and represent cash-on-cash returns; preferred distribution at SKB is approximately 10%.
An agreed 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.
An investigation or audit of a potential acquisition that serves to confirm or disaffirm known material facts in regards to a transaction. In commercial real estate transactions, due diligence is typically conducted during the “Due Diligence Period” (see Due Diligence Period).
Duration of time, typically 30 days, that allows a buyer to investigate a potential acquisition. Under normal circumstances, the buyer is granted the authority to cancel the transaction for any reason during this time period without forfeiture of its Earnest Money Deposit (see Earnest Money Deposit).
A deposit, usually made into an escrow account (see Escrow), that demonstrates a buyer’s good faith and seriousness of intent to a seller in a real estate transaction. An earnest money deposit is usually refundable during the due diligence period (see Due Diligence Period). Upon expiration of the due diligence period, an earnest money deposit usually “goes hard” (see Hard Earnest Money) if a buyer elects to proceed with the transaction.
A right granted to another person or entity to trespass upon land that the person or entity does not own. Easements are often granted to utility companies or neighboring land-locked properties. Monetary compensation may or not be given in exchange for an easement.
The market rental value of a property at a given point in time, even though the actual rent may be different.
Total income generated by a property, less operating expenses, when it is fully leased and after making allowance for vacancies and defaulting tenants.
The ratio of usable area to the rentable area of a building or a floor in a building.
The power to take private property for public use by a state.
Any right to, or interest in, real property held by someone other than the owner, but which will not prevent the transfer of fee title (i.e. a claim, lien, charge or liability attached to and binding real property).
The amount of an investor’s own funds paid over to acquire a property. It can also be the difference between the present market value of a property and the amount of debt or mortgage loans outstanding against the net worth of an owner’s interest in a property.
A common law doctrine which transfers the property of a person who dies without heirs to the state.
The deposit of deed, bond, monies, contract or other written agreements with a third person to be delivered or used only upon performance or fulfillment of set conditions, as established in a written agreement between two parties.
An estate in land that is limited only by the governmental powers of taxation, police powers, eminent domain, and escheat.
A city that serves as the entry point to a country by acting as a primary arrival and departure point by airport or seaport. Within the US commercial real estate industry, it is commonly applied to cities such as New York, Los Angeles, San Francisco and Seattle and cited as a differentiator in estimating future demand for real estate.
In real estate private equity funds, general partners are the minority equity investor. The general partner is the active manager that solicits limited partners, acquires, manages, and disposes of real estate investments. General partners have direct liability from investments in the fund.
The condition that results from a tenant’s closing its business during its lease term. “Going Dark” typically assumes that the tenant continues to maintain its lease payments. Some leases include language that allows for this possibility while other leases provide means for a landlord to void a lease and repossess the premises.
A rental agreement that stipulates a lessee pays only a fixed rent throughout the term of the lease while the lessor pays all of the building operating expenses and repairs, property taxes, insurance premiums, etc. However, the tenant is responsible for any utilities and other expenses directly relating to the occupied space.
A lease of raw land; although the lease may be secured by a building or buildings erected by the lessee at a later date. The lessee retains the right to use and occupy any of the buildings erected on the land for the term of the lease. At the end of the lease, usually granted for periods in excess of 20 years, the land together with the improvements reverts to the lessor.
An earnest money deposit (see Earnest Money Deposit) that is no longer refundable to the buyer in a real estate transaction following the expiration of the due diligence period (see Due Diligence Period). Should the buyer fail to close a transaction with hard earnest money, the earnest money is forfeited by the buyer and paid to the seller as both a penalty to the buyer for its failure to perform and as a means of compensation to the seller for its opportunity cost associated with the failed transaction.
Cash paid to acquire additional equity in an investment, especially when used to repay existing debt or required to offset an increase in the value of the property.
Heating, ventilation and air conditioning unit (large capital cost due to high maintenance fees; considered a capital expenditure).
A fee that is charged by a municipality on a new or proposed development that is intended to offset costs associated with increased use a city’s infrastructure.
Fee that the lender charges for granting a loan request, usually 1% of loan amount.
The installation of roads, sewers, water mains, electricity lines and sidewalks in residential or commercial properties, characterized as “off-site” improvements. Once present, all the “on-site” structures (house, building, etc.) can begin construction.
The compounded annual rate of return on the investment over its life, from and after the closing date, applied to the principal amount of the closing contributions plus any subsequent contributions. It is used to compare alternative investments as investors decide if the return is sufficient to warrant parting with money or if it is worth borrowing money at a given interest to make an investment. Simply put, the IRR is a measure of the inducement to invest because it measures the return of capital, i.e. the derived return.
Ownership of property by two or more people in which the survivors automatically gain ownership of a decedent’s interest without any distinct or separate interest in the land.
The estate in land created when the fee simple owner transfers the right of exclusive use to a tenant via a lease.
The estate in land of the tenant with the right of exclusive use granted via a lease.
The costs incurred by a landlord while supervising a property, including tenant improvements (TI), leasing commissions (LC), capital reserve and capital expenses, marketing, legal fees, etc.
The internal rate of return to the equity position from a real estate asset utilizing debt financing.
In real estate private equity funds, limited partners are the majority equity investor. Limited Partners are passive and shielded from any liability incurred in the investment fund.
A type of investment structure where shareholders cannot lose more than the amount they invested in the organization. Therefore, shareholders are not personally responsible for the debts and obligations of the company in the event that those debts are not fulfilled. For example, every time SKB completes a new acquisition, the property is purchased via an LLC formed by the investors (but managed by SKB) in order to legally protect one another from losing more money than the amount they personally invested in the property should default occur.
A ratio that expresses the amount of a first mortgage lien as a percentage of the total acquisition cost of real property that includes budgeted capital expenditures and leasing costs. The LTC ratio is useful in value-added acquisitions where a meaningful percentage of the project cost is anticipated to occur after the initial acquisition of the asset and in real estate development.
A ratio that expresses the amount of a first mortgage lien as a percentage of the acquisition price of real property.
The dominant type of a value pursued in nearly every aspect of the real estate industry.
Debt scheme that incorporates equity-based options, such as derivatives, with a lower-priority debt, and schedules the payment of interest before any dividends are remunerated to owners of the equity capital. Mezzanine finance is actually closer to equity than debt because it is partially unsecured and carries a correspondingly higher risk level characterized by an interest rate several percentage points above the secured debt. It is often used to finance acquisitions and buyouts where it can be used to prioritize new owners ahead of existing owners in the event that a bankruptcy occurs.
A type of lease agreement in which the tenant pays one or more of the expenses paid by the landlord under the terms of a full service gross lease but not all of the expenses as under the terms of a triple net lease (see Triple Net Lease).
Lease arrangement under which tenants are required to pay the operating expenses resulting from their occupation of the premises and other expenses such as real estate taxes, assessments and insurance premiums.
Net income receivable from a property after all operating expenses have been paid and an allowance has been made for bad debts and defaulting tenants, but before payment of capital or interest on any loans and taxes.
Tenants who generally occupy the smallest spaces at a given property and who benefit from the customer traffic drawn to the property by anchor tenants. Non-anchor space is also referred to as “shop space” and usually involves higher leasing rents for those tenants.
In the secondary real estate market, mortgage loans are bought and sold by a variety of investor classes. Note acquisitions have become more active since 2008 as banks and lending institutions seek to rebalance their portfolios and shed sub-performing and non-performing loans.
In real estate private equity funds, open-ended funds have an infinite investment horizon.
The next step up from Value-added and furthest plotted point in the risk / return line, Opportunistic investing is generally considered a high risk / return strategy. Opportunistic investing typically involves a high degree of asset enhancement that may include entitlement changes, development, redevelopment, 100% lease ups, substantial capital investment, repositioning and, in general, correcting high levels of distress. This strategy is often deployed in a tactical manner at specific points of a real estate cycle and is typically paired with high levels of leverage.
Rent that is in addition to base rent of a property. Overage rent is most common in retail settings where leases utilize percentage rent.
Costs associated with the pre-construction phase of a project such as architectural and engineering fees, permit fees, financing fees and land option payments. Pre-development cost are typically expended to determine project feasibility or to obtain required government approval; also known as “soft costs”.
The value of the largest loss that could result from a disaster, assuming the normal functioning of passive protective features (i.e. firewalls, nonflammable materials, etc.) and proper functioning of most (perhaps not all) active suppression systems (i.e. sprinklers).
A statement ‘according to form’, i.e. one that shows how a situation might develop. For example, a schedule of the projected income and expenses for a real estate investment over a given period of time.
A class of property owned by a lender – typically a bank, government agency, or government loan insurer – after an unsuccessful sale at a foreclosure auction.
A corporation, business trust, or association managed by one or more trustees or directors who pool the resources of individual investors for passive investment in real estate, whether by direct investment, by financing, by leasing arrangements, or by a combination of such methods. Its unique feature is its tax status which enables small investors to participate in large real estate ventures without the income derived from the underlying investments being subjected to taxation at both a corporate and at an individual level; in effect it subjects the beneficial owners of the REIT to only one level of taxation.
Free rent provided by a landlord to a tenant that may or may not be included in the terms of a lease. It is typically offered as an inducement for a prospective tenant to take occupancy.
Also known as the earnings yield, it is a measure of how well a company used reinvested earnings to generate additional earnings. As a formula, it is equal to a fiscal year's after-tax income divided by book value, expressed as a percentage. ROE is used as a general indication of the company's efficiency; in other words, how much profit the company will generate given the resources provided by its investors.
A contractual right that gives its holder the option to enter into negotiations with an asset owner before the asset owner is entitled to enter into a transaction with a third party but not at specified terms (see Right of First Refusal). If the rights holder and asset owner are unable to reach agreement on transaction terms, the asset owner has no further obligation to the rights holder and may then freely sell the asset.
A contractual right that gives its holder the option to enter into a business with an asset owner, according to specified terms, before the owner is entitled to enter into a transaction with a third party. In essence, it functions similarly to a call option.
Percentage rent payments that fluctuate based on the sales or revenue of a tenant using a landlord’s property. This is common with retail rents wherein the landlord gets a percentage of the tenant’s gross sales dollars.
The process of creating a financial instrument by pooling and tranching assets for sale in the secondary market.
An anchor tenant that is not a part of the asset being acquired, e.g. a store appearing to be part of a shopping center but owned outside of the commercial real estate asset. The shopping center enjoys the traffic generated by the shadow anchor but not the rental income.
The condition of a vacant space before any improvements have been constructed.
In CMBS, subordination is the level of junior bonds that will incur losses before principal in the senior tranches will be reduced.
Similar to an impact fee (see Impact Fee), an SDC is a one-time fee paid to a municipality on a proposed new use or increase in use of a property. An SDC is intended to offset costs associated with increased use of a city’s infrastructure.
An affiliate of SKB that exists solely to allow SKB’s business model to comply with SEC regulations, and serves as the primary vehicle for acquisition of new properties.
A form of co-ownership that arises when two or more persons have distinct but undivided ownership rights to the same property, ownership that may be separately and freely disposed of by grant or devise. Each owner may deal with their portion of the property as they wish (giving it away, mortgaging it, selling it, bequeathing it, etc.) and, upon their death, their interest passes to a chosen representative and not to the surviving owner(s). Thus, the owners have sole and several interests in the property as against the other owners.
Improvements to leased premises carried out by the tenant.
The total expenditure incurred by a purchaser of property. Acquisition cost includes the actual price paid, plus the transaction costs of obtaining the title including legal fees and expenses, brokerage fees, interest charges on mortgages, land transfer taxes, title insurance, discounts, closing costs and any other incidental costs directly related to the acquisition.
All of the expenses arising in the normal course of managing a property investment and which are necessary in the long run to maintain a given level of income from the property and to ensure its proper upkeep and operation. Includes contract services, utilities, repair and maintenance, management fee (about 3% of EGR), insurance, property taxes, etc.
Classes of CMBS bonds that appeal to different investors based on credit risk, weighted average life (WAL), and subordination (credit enhancement), as well as other characteristics.
A lease that requires the tenant to pay all costs of property ownership so that the landlord receives his rent clear of all expenses and outgoings, or at least, the three major expenses, namely taxes, insurance and repairs. In return, tenants are usually allowed to make drastic changes to the property to suit their needs so long as the owners of the property approve the changes.
The internal rate of return of an asset without the use of debt financing. Also known as the asset level return or 100% equity return.
The ratio of the number of vacant units or the area of vacant space to the total number of units or total area of the property available, normally expressed as a percentage.
The next step up from Core-plus (see Core-plus) in risk / return, Value-added is generally considered a medium-to-high risk / return strategy. This strategy will often involve acquiring a property, improving it and then selling it an opportune time for a gain. Methods deployed to improve a property or "add value" may include correcting operational deficiencies, leasing vacancies, implementing physical enhancements and curing capital constraints.
A prepayment penalty that seeks to maintain the lender’s original yield. Borrower must make a lump sum payment equal to the present value of the difference between the prevailing market interest rate and the contract rate of the loan.