Common Terminology

Broker Opinion of Value (BOV) – also known as Broker Price Opinion (BPO), used by CRE professionals to estimate the value of commercial properties

Capitalization Rate – also known as Cap Rate, used to calculate the rate of return on an investment, high Capitalization Rates are better for the investor, Capitalization Rate = Net Operating Income (NOI) / Property Sales Price

Certificate of Occupancy (CO) – also known as Use-and-Occupancy Certificate, certifies that a property is fit for occupancy and complies with all codes and regulations of the local building or zoning authority

Commencement Date – the starting date of when the tenant begins to pay the landlord for use of property

Credit Rating – an evaluation of a borrower or tenant’s “creditworthiness”, or their likelihood to honor their lease commitments

Creditworthy Tenant – a business that is seen as likely to honor its lease commitments due to things such as being a large market presence, having strong financial statements, or operating successfully for several years

Debt Service Coverage Ratio – a measurement of the ability to pay current debt obligations, or the ratio of Net Operating Income (NOI) to debt

Demographics – descriptive statistics relating to a population, includes categories such as age, sex, nationality, etc.

Double Net Lease – a lease in which the tenant is responsible for paying taxes, maintenance, property insurance, and operating expenses  and the landlord is responsible for the roof, structure, and sometimes the parking lot or foundation

Gross Lease – a lease in which the tenant pays a flat rent fee and the landlord is responsible for all operating expenses (ie. utilities, insurance)

Gross Rent Multiplier (GRM) – compares the value of a property to its gross rent, meaning operating expenses (ie. utilities, insurance) are unaccounted for

Ground Lease – a contract in which a landowner leases a property for a period of time (typically 20 years or more) to a third party, during which development is permitted as per the contract’s specifications, and after which the property and its improvements are returned to the landowner

Internal Rate of Return (IRR) – the rate of return or discount rate that sets the net present value of all cash flows equal to zero, used to estimate profitability of investment, excludes external factors (ie. inflation, cost of capital)

Lease Expiration – refers to the last day of a lease term

Lease Guaranty – a separate contract in which a creditworthy guarantor agrees to honor the responsibilities of the tenant to the landlord

Lease Term – the minimum period in which a tenant is contractually expected to stay in the rented space

Leasehold – a property held by lease and not the real estate, the investor does not own the improvements

Loan to Value (LTV) – a ratio used to evaluate lending risk by comparing the value of the loan to the value of the asset, a higher ratio usually means higher risk

Letter of Intent (LOI) – a document showing the intent of two or more parties to do business with each other before the transaction is finalized, as a whole the LOI may not be binding but can have binding provisions to protect those involved

 Mechanical, Electrical, and Plumbing (MEP) – an acronym for the mechanical, electrical, and plumbing aspects of building construction

Net Cash Flow – refers to the total gain or loss of cash for a period of time after all debt is paid

Net Operating Income (NOI) – total income after paying operating expenses (ie. utilities, insurance) but before paying finance expenses

Renewal Options – the portion of the lease detailing the terms for renewing or extending the original contract

Rent – the payments made to a landlord by a tenant for the use of property

Request for Proposal (RFP) – a document containing the specifications of a project that asks for bids from potential contractors and vendors to help complete it

Request for Qualifications (RFQ) – used to screen potential contractors and vendors for those qualified to respond to Requests for Proposals (RFP)

Tenant Improvements (TI) – refers to the customized modifications made by a property owner so a property fits the needs of a specific tenant

Termination Rights – a provision of a contract that details the rights of a party to end the agreement for Cause/Fault or No-Cause/No-Fault

Triple Net Lease – a lease in which the tenant is responsible for paying taxes, maintenance, property insurance, and all operating expenses

1031 Exchange – also known as Like-Kind Exchange, found in Section 1031 of the US Internal Revenue Code, allows investors to defer capital gains taxes by selling an investment property and reinvesting the proceeds into one or more like-kind properties, sale (not exchange) of the replacement property makes the original deferred gain and any additional gain subject to tax