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Absorption The amount of space that is leased and taken off the market during a given time frame.
Absorption Analysis A series of tests designed to identify (a) the likely and probably occupancy rate to be expected from a project and (b) the time required before full absorption is likely to be realized.
Active Participation A threshold definition used in tax law to define whether or not an individual is allowed to deduct losses in real estate investments; active participation requires a minimal recurring involvement in tenant selection, maintenance of properties, and decisions concerning rent levels and timing of a property purchase or sale.
Adjusted Gross Income (AGI) An individual’s gross income before deducting tax exemptions and itemized or standard deduction.
Anticipation A principle of valuation, stating that market value often is affected by expectations about future events.
Appraisal The process of estimating a property’s current value, based on comparison to similar properties and recent sales; or based on income levels for multi-unit investment properties or retail properties.
Asset Allocation The spreading of risk through an expanded form of diversification, in which investment capital is placed in several different markets (such as real estate, stocks, bonds and the money market) rather than in one market.
BANANA Acronym for Build Absolutely Nothing Anywhere, Not Anytime, describing those opposed to all types of new development; NIMBYs who want nothing to change in their neighborhoods.
Base Year The 12 month period upon which a direct expense escalation of rent is based. Typically the calendar year the lease commences.
Big Box Retail stores typically serving as anchor tenants in larger malls, so called due to their cube-shape and name recognition.
Business Plan A general description of a document intended to justify a business venture, notably for lenders; plans include narrative descriptions of a proposed course of action; revenue forecasts, cost and expense budgets and cash flow projections; and biographies of the business owners.
Business Travelers In the lodging industry, a potential guest whose primary reason for travel is business-related. This group includes the solitary business traveler, corporate small groups, and convention business.
Cap Rate Abbreviated form of “capitalization rate,” the rate of return used in income properties. It is a comparison between net operating income and sales prices of properties, used by appraisers to estimate value based on similar income property sales in the same area.
Capitalization the overall funding of a project; capitalization may consist of debt (financing provided by lenders) or equity Capitalization (through capital formation provided by investors). Capitalization may be raised directly between developer and lenders or investors, or indirectly through conduit investment programs, such as real estate investment trusts (REITs).
Capitalization Rate A percentage rate composed of return on investment, risk factors and rate of recapture. Principally used to determine the economic value of an investment by dividing the rate into the net operating income.
Cash Flow Projection An estimate of future cash-based revenues and cash payments (including operating expenses, capital expenditures, and debt service); as part of a project’s feasibility study, the cash flow projection is intended to demonstrate that cash flow is adequate to ensure that the project will work financially.
CAVE Acronym for Citizens Against Virtually Everything, extreme NIMBY interests against any and all forms of new development in a city, town or county.
CBD The Central Business District of a city, which includes business activity and buildings as well as financial and government areas.
Change A principle of valuation, stating that no condition remains the same indefinitely; change is part of the economic cycle.
Class A Building Most prestigious buildings competing for premier office tenants. Buildings have high quality standard finishes, state of the art systems, excellent accessibility, and definite market presence.
Class B Building Buildings competing for a wide range of users with occupancy costs for tenants in the average range for the area. Building finishes are fair to good for the area and systems are adequate, but the building does not compete with Class A buildings at the same occupancy cost.
Class C Building Buildings competing for tenants requiring functional space at gross and net rents below average for the area. Some Class C buildings are renovated historic structures that produce fairly high Amortized NPV rents, while other are not competitive in today's market.
Comparable Property In appraisal, a property that has sold recently, and that is reasonably similar to a subject property, based on condition, lot size, neighborhood, square feet, and other features; used for the purpose of estimating current value.
Competition A principle in valuation, stating that opportunities for profitable investment lead to competition.
Competitive Analysis A study of competitive forces for a project, considering the size and location, amenities, and other features of a project; the analysis includes identification of the actual competition and does not assume that all properties sharing the same zoning are competitors.
Condemnation (or, Expropriation) the act of changing status of property as part of a government’s exercise of eminent domain.
Conformity A principle of valuation, stating that a property is most likely to appreciate in value along with other, similar properties in the same neighborhood.
Consumer Price Index (CPI) A measurement of inflation published by the Bureau of Labor Statistics (BLS), compiled to report changes in the average prices paid for a basket of consumer goods and services.
Contribution A principle of valuation, stating that improvements add to market value as a factor of current supply and demand, and not necessarily on the basis of actual cost.
Convention Business In the lodging industry, customers needing not only rooms, but convenient restaurants, exhibit space and support, and access to shopping and recreational amenities.
Corporate Contracts agreements entered between lodging and corporations; these include travel agencies and online travel websites committing to fill blocks of rooms; airline employees; government and military travelers; and out-of-town employees visiting a home office.
Corporate Small Groups Business travelers who reserve blocks of lodging rooms and interested in business meeting facilities on-site, such as day rooms and small meeting rooms.
Cost Method An appraisal method in which current value is based on the current cost that would be required to duplicate the improvements on the same land.
Debt Coverage Ratio In appraisal of income properties, a calculation of how well operating income is structured to make monthly mortgage payments. To calculate, net operating income is divided by the amount of debt service (principal and interest).
Declining Balance Depreciation An accelerated method of depreciation in which a greater deduction is allowed in the early years, and less in later years.
Depreciation (1) for tax purposes, a non-cash expense real estate investors claim, based on purchase price of real estate (excluding land). For real estate, depreciation is claimed on the straight-line basis (the same amount claimed each year) over 27.5 years (for residential property) or 39 years (for non-residential property). (2) for appraisal purposes, a reduction in appraised value based on the age and condition of property.
Diminishing Returns A concept in valuing real estate, recognizing that while improvements to property tend to increase market value, investment return will begin to fall when improvements exceed the natural rate of growth in market value.
Direct Capitalization In appraisal, the use of gross rent multipliers on similar properties to estimate market value of a subject income property.
Diversification The spreading of risk within a market, by placing investment capital in several different products rather than in a single product.
Due Diligence A series of tests and analyses designed to ensure that potential risks, cash shortfalls, and other feasibility-related problems have been anticipated; and also to ensure that likely problems such as project delays, have been studied as part of an overall risk evaluation of a project.
Economic Demand A shortage of supply given current economic conditions (compare to political demand).
Economic Life In appraisal, an estimate of the current condition of property, used to calculate annual depreciation of value due to condition and obsolescence.
Economic Rent The rent from income property on the basis of rent per unit, per room, or per square feet (or all three), used in appraisal to compare subject properties to comparable income properties.
Effective Age In appraisal, an estimate of the age of a property based not on when improvements were constructed, but on current condition.
Effective Gross Income Total rental income that can be earned, minus the value of rents based on vacancy rates.
Eminent Domain A legal power granted to the government and found in the Fifth Amendment. It provides that the government (federal, state or local) has the power to take private property for public use; and that upon exercise of that right, the landowner must be given adequate compensation.
Equity REIT A real estate investment trust organized to assume ownership positions in large-scale real estate projects such shopping centers, office/industrial parks, urban office buildings, and residential subdivisions.
Essential Public Facility Under growth management rules, facilities necessary for the public, but not necessarily desirable when placed in certain neighborhoods. This category includes hospitals and convalescent homes, prisons, transportation yards and facilities, airports, land fills, and utility plants. The importance of essential public facilities allows governments to override the property rights of individuals and when necessary, to enact a takings in order to free up land for the proposed construction.
Exchange Traded Fund (ETF) A type of mutual fund that trades like stocks on public exchanges. ETFs specialize in specific products or stock types, including real estate. Investors can buy or sell shares with the same liquidity as with stocks.
Exclusionary Zoning Any zoning regulations designed specifically to keep out newcomers and to prevent growth, rather than to serve a legitimate purpose.
Expense Ratio In appraisal of income properties, a comparison between expenses and income. To calculate, divide operating by effective gross income.
Feasibility Study An analysis of specific financial expectation involved with a project, based on a study of existing and anticipated demand levels; competition; the cost of construction and financing; time to completion of a project; cash flow and taxes; and risks to investors, lenders, and developer.
Free Independent Travelers (FITs) In the lodging industry, individuals whose needs are very individual and local, including discount and wholesale travelers, members of charter groups, and secondary travelers such as spouses of convention attendees.
Fundamental Analysis A study of basic financial status and potential for a real estate project; while this concept is usually applied to stock investments, its value is equally important to real estate investors.
Gross Rent Multiplier (GRM) The factor used by appraisers for the income method of valuing properties. Sales prices of comparable properties are divided by gross income (either monthly or annual) to arrive at typical GRM levels; the average or a representative GRM factor is used to estimate the market value of the subject property.
Growth Management Laws Legislation enacted in several states to control land use and development; these laws often expand local zoning and place further restrictions on how and where development will be allowed.
Heavy Industrial A specialized sub-zone of industrial reserved for land uses including toxic material, flammables, or specialized use such as rail car storage, quarries and other manufacturing uses, and any land use that may pose an environmental or health threat.
Highest And Best Use A principle in valuation, stating that real estate valuation is maximized when land is utilized in the best possible way.
Hybrid REIT A real estate investment trust containing varying levels of equity, construction and mortgage features.
Improved Property That portion of real estate inventory including the top 25 percent of inventory, normally in ready to build condition and with basic services available.
Income Method In appraisal, a method for estimating market value of an income property based on its potential to generate income. In most calculations, the sales prices of comparable properties are divided by monthly or annual gross rental income, to arrive at a gross rent multiplier (GRM). The GRM for several comparable properties is used as a basis for identifying market value for the subject property.
Increasing Returns A concept in valuing real estate, recognizing that improvements to property may cause growth in market value to an extent, but not without limit.
Internal Rate of Return (IRR) A calculation of investment return including a calculation of market-rate comparative returns on periodic cash flow; return on capital invested based on the assumption that cash flow may be invested at a current assumed rate of return.
Inventory The available rental space in a specific area, either vacant or occupied, including space of a specific property type (residential, commercial, or industrial) but excluding property occupied by government offices, hospitals, schools, and other essential public facilities; expressed as a number of square feet of space.
Larger Malls Retail malls sized between 750,000 and two million square feet of retail space and with three or more anchor tenants, each with over 100,000 square feet of retail space. leisure travelers in lodging, guests whose primary purpose for travel is vacation and leisure. Interest is primarily on proximity to travel destinations, comfort, and convenience.
Lease Abstract A summary version of a lease, containing the most important facts about it in order to facilitate later reviews.
Leverage The use of borrowed funds; investors use leverage by investing a minimal amount and financing the balance. This is common practice in the stock market (via the use of margin accounts) and even more so in real estate. Some investment analysts identify three possible methods to invest: equity (ownership position such as stocks), debt (lending money through notes or bonds), and leverage (using a small amount of money to control a larger investment base).
Light Industrial The most common form of industrial zoning sharing similar impact levels with office zoning; light industrial areas often coexist with other land uses in mixed use office/industrial parks.
LIHTC Low Income Housing Tax Credits, a federal incentive program designed to encourage the development of low income and affordable housing. Developers are granted tax credits in exchange for constructing below-market rate housing.
Limited Partnership A type of investment program in which general partners manage investment properties and limited partners (who purchase equity units in the program) have limited liability but no management control. Losses from limited partnerships are passive losses and cannot be deducted except to the extent that they offset other passive gains.
Liquidity An attribute of investments, useful for comparisons between two dissimilar products. Directly-owned real estate is highly illiquid because cash can be removed only through borrowing of equity or sale of the property. In comparison, stocks are highly liquid because they can be bought or sold with minimal cost.
Load Factor In a lease, the load factor is the multiplier to a tenant's useable space that accounts for the tenant's proportionate share of the common area (restrooms, elevator lobby, mechanical rooms, etc.). The load factor is usually expressed as a percentage and ranges from a low of 10% for a full tenant to as high as 40% for a multi-tenant floor. Subtracting one (1) from the quotient of the rentable area divided by the useable area yields the Load Factor. At times confused with the "loss factor" which is the total rentable are of the full floor less the useable area divided by the rentable area. (If a full floor broken up into multiple tenancies has a useable area of 18,000 s.f. and a rentable area of 20,000 s.f., the load factor is 11.1% and the loss factor is 10%.
Loan-To-Value Ratio A ratio reporting the relationship between the current mortgage debt and market value the property. To calculate, divide the current amount due on mortgage loans, by the current value of the property.
Local Area The immediate neighborhood in proximity to a subject property.
Local Market Variables Factors contributing to real estate valuation, which are local in nature and not attributable to any regional or national economic trends.
Loss Factor A number that reflects the portion of rentable space that is attributed to the common areas of a commercial building, such as lobbies, corridors, restrooms, etc. Often also referred to as "common area factor". Usually expressed as a percentage.
LULU Acronym for Locally Unwanted Land Use, an alternate descriptor of anti-growth forces commonly called NIMBYs.
Market Analysis A study of the market for a project, to include site-specific issues as well as demand study, analysis of the competition, and other local factors.
Market Area The range in which the forces of supply and demand operate; often defined in terms of geographic markets, the true market area may involve a non-geographic base such as a type of traveler in a lodging facility; a family on vacation; or a family moving to find employment.
Market or Sales Comparison A method of appraising real estate based on market values of similar properties or on recent sales prices.
Market Share In analysis of competition, an estimate of the amount of current and future demand that a specific project is likely to absorb.
Market Study An analysis of level of demand and competition for a proposed project, to include identification of financing methods.
Marketability A feature of investments, reflecting the ability to buy or sell. In a soft market, it may be difficult to obtain an asked price for real estate, meaning that marketability is poor. An owner of limited partnership units may be unable to locate a secondary market purchaser, in which case marketability is at zero. Marketability may also refer to obsolescence, or to loss of equity value. For example, a highway store may be obsolete when the highway is rerouted, losing marketability; or a house may lose marketability because the cost required to make repairs exceeds the equity in the property.
Marketability Analysis Part of a market analysis, in which the market for a project is evaluated – which may mean a potential buyer or potential tenants or customers.
Mixed Use Land use involving a coordinated application of two or more different zoning types (residential, commercial and industrial); one variety mix use includes varying densities of housing.
Modified Accelerated Cost Recovery Systems (MACRS) The current system used for federal income tax calculations of depreciation, which has been in effect since 1986.
Modified Adjusted Gross Income An individual’s AGI with adjustments, used to determine the total amount allowed as a loss on real estate investments for federal income tax purposes.
Mortgage REIT A real estate investment trust formed specifically to lend money to developers to fund projects.
Multi-Unit Residential A variation of residential zoning with higher density than single-family housing; this includes duplex, triplex, four-plex and apartment projects.
Neighborhood-Specific Shopping Centers Small-sized malls or expanded strip malls including grocery store anchor tenants, with the entire mall size not exceeding 150,000 square feet.
NIMBY Acronym for Not In My Back Yard, an individual or citizens’ group opposed to development in their neighborhoods.
Occupancy Rate A formula, expressed as a percentage, used in the study of occupancy trends; the amount of space occupied is divided by the total available space; occupancy rate may be calculated on the basis of units or square feet.
Operating Expenses The expenses involved in operating real estate investment properties, including general and administrative expenses.
Outside CBD/Suburban Areas removed from the central business district (CBD) and including both suburban and urban-style development (highly concentrated urban clusters).
Passive Income or Loss Profit or loss from investments that are subject to tax restrictions. Passive losses may not be deducted except to the extent that they apply against passive gains. The general exception is a provision allowing individual real estate investors to deduct annual losses, subject to both dollar limits and income limits.
Penetration A formula demonstrating the occupancy rate of a specific site, in comparison to occupancy rates for the entire market. To calculate, the occupancy rate for a subject property is divided by the occupancy rate for the entire market. The result is expressed as a percentage.
Planned Unit Development (PUD) A provision in a zoning ordinance providing developers methods for building mixed use projects, including exceptions to other zoning laws, in exchange for innovative design, notably allowing higher density or reduced setbacks.
Plottage A principle of valuation, stating that land values tend to increase when adjacent lots are combined into single ownership and put to a single zoning or use.
Political Demand A distortion of economic demand based on local sentiment regarding growth; when local sentiment is opposed to further growth, political demand may be at zero, even when economic demand is strong.
Prime Industrial Building A building defined as belonging in the top 25 percent of local buildings in terms of available inventory.
Principles of Valuation Ten concepts that collectively define real estate valuation; these are progression, regression, conformity, substitution, change, anticipation, contribution, plottage, highest and best use, and competition.
Pro Forma (Lt. “for the same of form”) a type of financial presentation based solely on estimates of future revenue, expenses, profits and cash flow – an overall financial and cash budget based on underlying assumptions concerning costs, financing, income levels, and time involved to complete a project.
Profitability The difference between a sale price and original purchase, adjusted for interim costs and taxes; the most common method for establishing valuation in real estate.
Progression A principle of valuation, stating that a property’s value may increase due to the existence of similar properties in similar locations, containing greater quality.
Rate of Return An investment calculation, usually comparing operating income to the purchase price (net operating income is divided by the basis in property).
Real Estate Investment Trust (REIT) A conduit (pass-through) program in which investment funds of many investors are pooled together to fund real estate development; REITs may be classified as mortgage, equity, or hybrid. Trust shares are as liquid as shares of stock, and are traded on public stock exchanges.
Real Estate Market
Recovery Period The number of years over which specific classes of capital assets can be depreciated.
Regional Centers Also called power centers or regional malls, these range between 250,000 and one million square feet of retail space and normally include at least three anchor tenants, typically “big box” stores.
Regression A principle of valuation, stating that a property’s value may decrease due to the existence of similar properties in similar locations, containing lower quality.
Replacement Value The value required to replace current improvements, based on both the cost of construction and duplication of the quality of workmanship (for example, handmade fixtures in older homes).
Scientific Method An objective method for evaluating questions of fact, premised on the belief that an original hypothesis may or may not be true; that such a hypothesis may be verified or disproved through a series of tests; and that the outcome of such tests should be conclusive in either direction because of the overall validation of information. The method has five steps: validation, hypothesis, prediction and testing.
Second Home As defined for tax purposes, a second residence; deductions of mortgage interest and property taxes are deductible by individuals on second homes when they are used as part-year residences.
Secondary Market A market for resell of investments; in the mortgage business, an active secondary market exists to purchase mortgages from lending institutions; package those mortgages into pools; and sell pool shares to investors. Programs performing secondary market services include the General National Mortgage Association (GNMA) and the Federal National Mortgage Association (FNMA). In some forms of investment, a secondary market may not exist or may be expensive.
Site Evaluation Comparative analysis of a specific site’s physical properties such as topography, shape of the land, surrounding uses, proximity to important features; and of the locational features such as off-site visibility and access to transportation routes such as freeway off-ramps or commuter stations.
Site Specific Attributes The features of a specific site including size, shape and topography, that affect or contribute to market value.
Small-Scale Mall A mall with between 100,000 and 300,000 square feet of retail space, sited on 20 to 30 acres with one to two anchors.
Solitary Business Traveler A business person traveling alone and primarily interested in convenience of a site to transportation and local business districts.
Spread The difference between asked and sale prices in residential real estate; trends in spread are indicative of the overall supply and demand trend.
Straight-Line Depreciation A method of calculating depreciation in which the same amount is deducted each year until the full value has been deducted.
Strip Mall A very small retail shopping area, located on primary roads and consisting of limited retail space and parking; typically, five to 10 shops and stores are found in the strip mall.
Subsidized Housing A program of incentives provided by the government in the form of tax credits and other financial incentives, designed to encourage affordable and low-income housing developments.
Substitution A principle of valuation, stating that a property’s greatest potential market value is limited by the market value of other, similar properties.
Supply and Demand An economic comparison that affects pricing of all products and commodities; the analysis of supply and demand recognizes that prices rise and fall as a direct result of changes in both supply and demand of a particular product. In real estate, three distinct supply and demand markets coexist: for properties (reflected in prices of real estate); for rentals (“rental demand” is a comparison between the demand among tenants and the supply of rental units); and for financing of real estate purchases and developments.
Sweat Equity Appreciation in market value derived from the owner’s individual efforts, usually relating to improvements and renovations to run-down properties.
Takings Limitations on development activity, changes in zoning that prevent an owner from using land as intended or desired, or the requirement by a city or county that in order to gain approval, a developer must pay for additional benefits or donate land.
Tax Incentives Tax provisions and rules designed to encouragement investment in a particular product, such as real estate. Incentives for individuals include allowance for deduction of annual losses on real estate investments that are managed directly.
Time on the Market In residential real estate, a test of a market’s trend. As the average time on the market between listing and final sale changes, analysts may judge the broader trend in residential supply and demand.
Trade Area The area where the entire potential customer base is found, which may extend beyond the primarily geographic market area. The trade area is defined based on a project’s attributes; location and drive times; population and competition distances; and demand features.
Transition An observed trend in a neighborhood that will affect valuation; a transition may be either positive or negative, and is an important aspect of judging investment value for a project.
Urban Growth Area Under growth management laws, defined areas where development will be allowed, beyond zoning classifications. In many states, UGA infill is a requirement before additional development is allowed outside of the UGA boundary.
Vacancy Rate The percentage of total potential gross income, representing vacant units. This rate is usually expressed as a percentage of dollar amounts, but may also be reported on the basis of square feet or number of units.
Vacant Inventory The currently available rental space, normally expressed in the number of square feet.
Weighted Average Rental Rate A calculation of “average” rental rates that is adjusted to reflect exceptional features, location, or desirability of a specific project.
Yield A specialized calculation in the lodging industry, reflecting a comparative penetration between a subject property and the entire market. To calculate, three steps are required. (a) Multiply a subject property’s occupancy rate by the average daily room rate. (b) Multiply the entire market’s occupancy rate by the market’s average daily room date. (c) Divide the result of (a) by the result of (b) to arrive at yield; it is expressed as a percentage.
Zoning Ordinance A rule imposing rules and restrictions on how and where development may occur. The broad zoning classifications of land are residential, commercial and industrial. Zoning originated in New York City in 1916 to prevent industrial land use in Manhattan’s office and shopping districts.