CDN Global Ltd
Commercial Real Estate Services
Definition of
Investment Terms
Basis Point (bp) 1/100th of a percentage point (0.01%).
Development yield Face rate divided by total construction costs, including
entrepreneurial profit, hard/soft costs and land.
Gross Rent to Sales Ratio Also referred to as GROC (gross rent to occupancy cost),
gross rent comprises base rent, C.A.M., taxes, HVAC, promotion, advertising, etc.
divided by gross annual sales.
Ground Lease A lease that grants the right to use and occupy land. Improvements
made by the ground lessee typically revert to the ground lessor.
Internal Rate of Return (IRR) The annualized yield rate or rate of return on capital
that is generated or capable of being generated within an investment or portfolio over
a period of ownership. The IRR is the rate of discount that makes the net present value
of the investment equal to zero. The IRR discounts all returns from the investment,
including returns from its reversion, to equal the original capital outlay.
Lag (turnover) Vacancy A method of calculating vacancy allowance that is estimated
or considered as part of the potential income estimate when using discounted cash flow
(DCF) analysis. As units or suites turn over and are available for re-leasing, the periodic
vacancy time frame (vacancy window) to re-lease the space is considered.
Leasehold Interest The interest held by the lessee (the tenant or renter) through
a lease transferring the rights of use and occupancy for a stated term under certain
conditions. The leasehold interest can be created through the leasing of the underlying
land or a space lease.
Lessor One who holds property title and conveys the right to use and occupy the
property under a lease agreement; the leased fee owner or landlord.
Lessee One who has the right to use or occupy a property under a lease agreement; the
leaseholder or tenant.
Market Rent The most probable rent that a property should bring in a competitive and
open market reflecting all conditions and restrictions of the specified lease agreement
including term, rental adjustment and revaluation, permitted uses, use restrictions, and
expense obligations; the lessee and lessor each acting prudently and knowledgeably, and
assuming consummation of a lease contract as of a specified date and the passing of the
leasehold from lessor to lessee under conditions whereby:
1.
2.
3.
4.
5.
Lessee and lessor are typically motivated.
Both parties are well informed or well advised, and acting in what they
consider their best interests.
A reasonable time is allowed for exposure in the open market.
The rent payment is made in terms of cash in Canadian dollars, and is
expressed as an amount per time period consistent with the payment
schedule of the lease contract.
The rental amount represents the normal consideration for the property
leased unaffected by special fees or concessions granted by anyone associated with the transaction.
Economic Rent Represents from landlord’s or lessor’s perspective the amount of
rent that should be received to provide a reasonable return on the landlord’s capital
investment. This typically translates into a rental amount or payment necessary to
attract all factors of production to justify new construction. It is presumed to be the
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CDN Global Ltd
Commercial Real Estate Services
Definition of
Investment Terms
rent required by a developer to fully recover the cost of a new development based
upon the presumed investment horizon. The reference to “Face” refers to the inclusion
within the rental rate of the landlord’s tenant inducements and commissions’ payable.
Net Effective Rent Net rental rate adjusted for lease concessions.
Net Lease A net lease under which the lessee assumes all expenses of operating
a property, including both fixed and variable expenses and any common area
maintenance that might apply, but the landlord is responsible for structural repairs.
Net Operating Income (NOI) The actual or anticipated net income that remains
after all operating expenses are deducted from effective gross income, but before
mortgage debt service and book depreciation are deducted; may be calculated before or
after deducting replacement reserves.
Overall Capitalization Rate An income rate for a total real property interest that
reflects the relationship between a single year’s net operating income expectancy
and the total property price or value; used to convert net operating income into an
indication of overall property value.
Tenant Retention Ratio Percentage probability of a property’s rentable area that is
anticipated to be released by the existing tenants at lease rollover.
Marketing Time (aka Marketing Period) Reasonable marketing time is an estimate
of the amount of time it might take to sell an interest in real property at its estimated
market value during the period immediately after the effective date of the appraisal; the
anticipated time required to expose the property to a pool of prospective purchasers
and to allow appropriate time for negotiation, the exercise of due diligence, and the
consummation of a sale at a price supportable by concurrent market conditions.
Marketing time differs from exposure time, which is always presumed to precede the
effective date of the appraisal.
Replacement Cost The estimated cost to construct, at current prices as of the effective
appraisal date, a building with utility equivalent to the building being appraised, using
modern materials and current standards, design, and layout.
Terminal Capitalization Rate The rate used to convert income, e.g. NOI, cash flow,
into an indication of the anticipated value of the subject real property at the end of an
actual or anticipated holding period. The terminal capitalization rate is used to estimate
the resale value of the property. Also called reversionary capitalization rate or going-out
capitalization rate. See also going-in capitalization rate.
Third Party Management Fee An expense item representing an arm’s length contract
for the sum paid or the value of management service for a stand alone real estate
asset; a variable operating expense, usually expressed as a percentage of effective gross
income (without regards to multiple or portfolio management). The expense disregards
portfolio or multiple property discounts.
Vacancy and Credit Allowance An allowance for reductions in gross potential income
attributable to projected vacancy (physical or economic) and potential collection loss
considerations. Vacancy is an expected loss in income as a result of periodic vacant
space attributable to unrented space and tenant turnover. Credit loss considers nonpayment of rent. Vacancy and collection loss is usually estimated on a property-specific
basis as part of the reconstructed operating statement in the income capitalization
approach and applied, as a percentage, to potential gross income or as a percentage of
rentable area of the property.
T 877.326.5579
E info@cdnglobal.ca
www.cdnglobal.ca
Learning Globally, Applying Locally