Common Real Estate, Income & Expense Glossary

Glossary of Terms

• Addendum: something added as an attachment to a contract.
• Annual Rent: This is the annual gross rent received for the calendar year during the period from January 1st through December 31st.
• Assessed Value: the value established for property tax purposes.
• Building Permit: permission granted by a local government or agency to build a specific structure at a specific site.
• Bundle of Rights: ownership in real property implies a group of rights, such as the right of occupancy, use and enjoyment, the right to sell in whole or in part, the right to control the use, the right to bequeath, the right to lease any or all of the rights, the right to the benefits derived by occupancy and use of the property, etc.
• Capital Expenditure: the cost of an improvement made to extend the useful life of a property or to add to its value, such as adding a room. The cost of repairing a property is not a capital expenditure. Capital expenditures are appreciated over their useful life; repairs are subtracted from income for the current year.
• Capital Improvement: any structure or component erected as a permanent improvement to real property that adds to its value and useful life. (See Capital Expenditure).
• Capitalization (Cap) Rate: rate of return used to derive the capital value of an income stream, divide annual income by net operating income.
• Carrying Charges: expenses necessary for holding property, such as taxes and interest on idle property or property under construction.
• Cash Flow: The net operating income minus the total of all debt service payments. (See definition of "net operating income" below.)
• Comparable Sales: As part of the appraisal process, those relatively recently sold properties which will be compared to the subject property (the property being appraised) for the purpose of forming an opinion of value for the subject property. The facts and details of the comparable properties will be compared to those of the subject. In an urban setting, to be of credible assistance in this process, comparable sales must have the same use as the subject, have many similarities to the subject in terms of size of house, size of lot, construction, bedroom count, room count, floor plan, amenities, street traffic and be in the same neighborhood and have been sold in the recent past (preferably no more than six months) by way of an "arms length" transaction (i.e., not sold to a relative or friend and not sold due to a forced sale or distress sale) and be within one mile of the subject property. More liberal standards will apply for rural property and some suburban properties but the basic premise holds, the more similar the comparable sales are to the subject property, the more accurate the value assigned to the subject property will be. Lenders will often compensate for the less precise nature of rural appraised values by allowing only lower loan-to-value ratios than those in urban settings, usually 10% lower.
• Deed: written document, properly signed and delivered, that conveys title to real property.
• Deferred Maintenance: a type of physical depreciation due to lack of normal upkeep.
• Equity: The value of the unencumbered interest in real estate as determined by subtracting the total of the unpaid mortgage balances plus the sum of any current liens against the property from the property's fair market value.
• Escalation Clause: This is the amount in dollars of adjustment to base rent either preset or tied to the inflation index. For tenants subject to escalation clauses related to taxes or operating expenses, indicate the terms. Use the comments section for elaboration.
• Free Rent: This is a rent concession in the form of free rent usually for a time period and determined at the beginning of the lease.
• Gross Debt Service: the amount of money needed to pay principal, interest and taxes, and sometimes energy costs. If the dwelling unit is a condominium, all or a portion of common fees are excluded, depending on what expenses are covered.
• Gross Lease: A gross lease is when the lessor or landlord is responsible for all property operating expenses such as real estate taxes, maintenance, utilities, etc.
• Gross Monthly Income: Income before deductions for taxes, social security, saving plans, court ordered child support, etc.
• Gross Rent Multiplier: the sales price divided by the gross annual rental rate.
• Ground Lease: one that rents the land only.
• Highest and Best Use: the use that is most likely to produce the greatest net return to the land and/or building over a given period.
• Improvements: additions to raw land such as buildings, streets, sewers, etc. that increase the value of the property.
• Interest Rate: The percentage of the loan amount charged for borrowing money; i.e., the cost of the money expressed as a percentage.
• Lease: This is a contract between a property owner (lessor/landlord) and the tenant (lessee). The lease sets forth the length of time the contract is to run, the amount to be paid by the lessee for the right to use the property, and other rights and obligations of the parties.
• Lease Option: a lease combined with an option agreement that gives the lessee (tenant) the right to purchase the property under specified conditions.
• Lease Purchase: a lease combined with a purchase agreement that obligates the lessee (tenant) to purchase the property under specified conditions.
• Leasehold: the interest or estate on which a lessee (tenant) of real estate has a lease.
• Leasehold Estate: A way of holding title to a property wherein the mortgagor does not actually own the property but rather has a recorded long-term lease on it.
• Legal Blemish: Blemishes on a piece of property, such as a zoning violation or fraudulent title claim.
• Legal Description: legally acceptable identification of real estate by government survey, metes and bounds, or recorded plat.
• Lessee: a person to whom property is rented under a lease.
• Lessor: one who rents property to another under a lease.
• Loan-to-Value (LTV): The ratio of the size of the loan to the value of the property. If the loan is $80,000 and the value of the property is $100,000 the LTV is 80% ($80,000 / $100,000).
• Leased area (square feet): This is usually the floor area that is occupied by the tenant. It is usually recorded on the lease in square footage.
• Monthly Rent: Indicates the monthly rent for leased areas as of January 1 of the reported year.
• Net: This references a net lease, where the lessee assumes payment of some of the property operating expenses, such as taxes, insurance, maintenance.
• NN: This is an acronym for a double net lease. Tenant pays expenses related to taxes and insurance for the property.
• NNN: This is an acronym for a triple net lease. Tenant pays all operating expenses related to the property.
• Net Cash Flow: Investment property that generates income after expenses such as principal, interest, taxes and insurance are subtracted.
• Net Operating Income (NOI): From income producing property, the gross income minus the total of all expenses except for debt service. Cash flow is defined as NOI minus the total of all debt service payments.
• Overage: This is an additional fee or rental income added to the lease terms. This is usually based on a percent of sales or income.
• Percentage Rent: A lease that provides for rent based on a percentage of business income or retail sales level.
• Renewal Option: A lease provision that gives the tenant the right to extend a lease at the expiration of a primary term of previously executed renewal period. The amount of rent, and other provisions may be set at the time of the original execution of the lease, or may be negotiable at the time of renewal.
• Reserve for Replacement: This is an allowance in the annual operating statement to provide for replacement of shorter life items.
• Right of First Refusal: opportunity of a party to match the terms of a proposed contract before the contract is executed.
• Sandwich Lease: lease held by a lessee (tenant) who becomes a lessor (landlord) by subletting to another lessee (subtenant), typically the sandwich leaseholder is neither the owner nor the user of the property.
• Section 1031: section of the Internal Revenue Code dealing with tax-free exchanges of like-kind property.
• Section 8: privately owned rental dwelling units participating in the low-income rental assistance program created by 1974 amendments to Section 8 of the 1937 Housing Act.
• Security Deposit: cash payment required by landlord to be held during the term of the lease to offset damages incurred due to actions of the tenant.
• TAW: This is an acronym for “tenant at will”. The agreement is usually on a month-to-month term and can be terminated by either the tenant or landlord at will.
• Tenant Name: This is the name of the lessee who occupied the unit as of January 1st.
• Total Collection Loss: This indicates the total amount of revenues lost due to bad dept and collection losses for the calendar year.
• Total Concessions: This indicates the total amount of revenue foregone through rent concessions (free rent) for the calendar year.
• Total Other Income: This indicates the total amount of miscellaneous income not listed elsewhere derived from the property for the calendar year.
• Total Parking Income: This indicates the total amount of parking income collected from the property for the calendar year.
• Total Potential Gross Income: This indicates the total amount of income that the property would have generated during the calendar year if all units or area are at full occupancy.
• Total Rent Collected: This indicates the total amount of miscellaneous income derived from the property during the calendar year.
• Total Vacancies: This indicates the total amount of revenue loss due to vacancies in the calendar year.
• Use: Examples of uses include business activities such as retail, restaurant, office, warehouse, manufacturing, etc.
• Zoning: legal mechanism for local governments to regulate the use of privately owned real estate to prevent conflicting land uses and promote orderly development.