19 Jul Investments from A-Z
Investment Terms Glossary
If you’re new to investing in real estate, there’s a whole new vocabulary that you’ll need to learn.
Use this glossary as a quick reference whenever you need it.
Abandonment – When a person or entity leaves a demised premises (the area that the tenant is permitted to occupy) before the end of a lease term.
Absorption rate – The net statistical changes in occupied space over a period of time. Positive absorption reflects an increase in occupied space while negative absorption reflects a decrease.
Accrued expense – Expenses incurred which are not yet payable, or have not yet been paid.
Acquisition cost – The total cost to the purchaser who made an investment in a property; includes soft costs and sales costs.
Additional Rents – When a landlord charges a tenant for the maintenance, taxation, and insurance of any common areas.
After tax yield – This is the annual profit remaining after payment of income taxes, or the annual return on equity after payment of income taxes.
After tax yield rate – The annual rate of return on equity after payment of income taxes.
Amenities – These are features that make a property more attractive, useful, and/or desirable. They are usually included in the sale price or rent calculations.
Amortization – The process of paying off a debt, together with interest, usually with equal payments at regular intervals over a period of time.
Anchor tenant – A prominent tenant occupying a large proportion of a commercial property and attracts customers and other tenants to the property.
Appraisal Estimate – This is the process that leads to an estimate of the value of a property, and can also refer to the report that states the estimate and conclusion of value.
Arrears – Money that is due or past due, but has not been paid.
Assessment – This is a levy against a property in addition to general taxes, and it is usually applied by a civic authority for improvements such as streets, sewers, etc.
Assignment – The method or manner by which one transfers a right, a specialty, or contract to another.
Basic rent – This is the rent agreed to through negotiation and does not include adjustments and additions.
Blanket mortgage – This is a single mortgage covering more than one property, such as a mortgage covering all the lots of a builder in one subdivision.
Break-even point – This is the point where the effective gross income equals the cost of all operating expenses and debt service payments. This is the point where an investment becomes positive.
Build to suit – The construction of a building or property that suits the particular needs of the occupant.
Capital improvements – These are investments in the property or improvements that enhance or extend the useful life of the property.
Capitalization – This is the anticipated stabilized rate of return from an investment. Also known as the cap rate.
Cash flow analysis – A projection of the buyer’s estimated cash flow over the holding period.
Clear title – Any property that is free of any and all competing claims, mortgages, liens, and encumbrances.
Comparables – A term used to refer to area rents, competitive rental properties, or area sales that have sold. It implies that “rent comps” and “sales comps” are comparable in size, location, condition, amenities, etc., to the subject property.
Contingent offer – This is an offer to purchase property subject to certain conditions, including the buyer’s approval of income and expense statements, title commitment, physical condition of the property, loan commitment, etc. – being met. The specific amount of time allowed to clear these provisions is called the inspection or contingency period.
Density – This is the amount of total square feet that can be built on a set land. For example, high density properties feature more floors.
Encroachment – A building, part of a building or obstruction which intrudes on another property.
Encumbrance – A claim, lien, charge or other liability attached to real property which may diminish its value.
Escalation clause – A clause in a lease providing for an increase in rent at a future time. This could be a fixed or pre-determined rate increase, or a cost of living increase that ties the rent to a cost of living index, or direct expense – the rent is adjusted according to changes in the expenses of the property such as a tax increase.
First right of refusal – An option in a lease provided to a tenant in a lease contract providing first right to occupy space or match an incoming offer on adjacent space that may be required for the tenant’s future expansion.
Floor space ratio – Also known as FSR, the maximum floor space of a building relative to its land area.
Free and clear – When there are no liens or loans against real property.
Graduated lease – A lease that details for changes in the rental rate, usually based on periodic appraisal or time.
Gross lease – A lease where the tenant pays all or part of the expenses of the leased property, such as taxes, insurance, maintenance, utilities, etc.
Gross rent multiplier – Sales price or value divided by annual effective gross income. For example if sale price is $325,000 and the effective gross annual income is $50,000 the G.R.M. is 6.5 ($325,000 /$50,000).
Gross up area – Space leased but not occupied by the tenant, usually for areas such as washrooms, lobbies, and utility centers.
Interest only mortgage – A non-amortizing loan where the lender receives only interest during the term of the loan and recovers the principal in a lump sum at the end of the term.
Landlord – Company or individual who rents property to another.
Lease – A contract where one party (the landlord) agrees to allow another party (tenant) the exclusive, common and/or joint right(s) to use a property for a specific period of time.
Lease buyout – When a landlord offers to take over the current lease of a tenant.
Leaseback – A transaction where an investor purchases property and then leases it back to the seller.
Lessee – The tenant or party that a landlord rents their property to.
Lessor – The landlord, or the one who rents the property to another.
Letter of intent – A formal method of stating there is interest in a property, but it is not an offer and creates no obligation.
Lien – A hold or claim which one person has upon property of another as security for a debt, charge, tax or judgment.
Loan-to-value ratio – This is the principal amount of a loan as a percent of lending value. For example, if a borrower purchases a property for $500,000 and has it financed by a bank loan for $300,000 the ‘loan-to-value” ratio is 60% of the property’s lending value to a borrower.
Mill rate – Equal to one tenth of a cent. Used in expressing a tax rate. Ten mills would be the same as ten dollars per thousand.
Mortgage – A legal document pledging a described property for the performance of the repayment of a loan; a loan secured by a pledge or conditional conveyance of real estate.
Negative cash flow – When the income from an investment property does not equal the usual expenses. The owner must come up with cash each month to meet these expenses.
Net income – The difference between effective gross income (property) and the operating expenses including taxes and insurance on investment property. The term is qualified as net income before debt service.
Net lease – A lease requiring the tenant to pay, in addition to a fixed rental, the expense of the property leased, such as taxes, insurance, maintenance etc.
Net operating income – Also known as NOI. This is the annual net income remaining after deducting all fixed and operating variable expenses, but before debt service and income tax.
The specific formula is: NOI = Scheduled rental income + other income – vacancy and credit losses – operating expenses.
Net rent multiplier – The factor resulting from dividing the net operating income into the sale or purchase price.
Net rentable area – Also known as net rentable square feet. The amount of square feet that a landlord can use for rental income. It typically excludes stairways, elevators, hallways, common areas, etc.
Net-net lease – A lease in which the tenant pays a rent to the landlord that includes all real estate taxes only and does not include any portion of the operating expenses.
Net-net-net lease – Also known as a triple net lease, when the tenant pays rent to the landlord that does not include all property taxes and operating expenses.
Non-conforming use – Property used for purposes that do not conform to the municipal or provincial zoning by-laws.
On-site improvements – Work completed on a property that improves its value.
Option – The right for someone to purchase or lease a property at a certain price, with the buyer paying a consideration within a designated period of time.
Payback period – The time required for the complete recovery of an investment; often used with the concept that all income is considered a return of capital until the entire investment is recaptured, and the income received after complete payback is considered profit.
Percentage lease – When the tenant pays a minimum rent then also pays a percentage of the volume of the business done on the premises, it is called a percentage lease. The percentage paid differs according to the types of business.
Phase I Level Audit – This refers to an initial environmental assessment of a facility by a qualified environmental engineering firm for potential contamination. The facility then determines the necessity of further investigations. Phase II level audit investigations would require further subsurface sampling, along with electromagnetic and hydro-geological study.
Pre-lease – The leasing of a property or space that has not been developed or constructed.
Pro Forma – Means “for form only.” A study prepared to estimate future Income, expenses and potential profit or loss.
Radius Clause – In a percentage lease, it is customary to have a clause that details the distance from the property that a competing store from the same chain may be located. This is usually a distance sufficient for two stores from the same chain not to occupy the same trade area.
Retail premises – Premises used for the sole purpose of selling goods and/or services to the general public.
Unencumbered – This is a property or land that has no liens, claims or mortgages against it.
Vacancy rate – The percentage of total scheduled rental income lost to vacancy and bad credit costs.
Yield – This is the ratio of income from an investment to the total cost over a given period of time.
Zoning – The rules of a municipality that detail the allowable uses for the real property in specific areas; and only then on specified conditions.
If you’re considering making a real estate investment, make sure to contact me and I can help you find a place to start.