Glossary of Commercial Real Estate Terminology PDF

Glossary of General Commercial Real Estate Terminology Absorption: Number of square feet of commercial real estate (office, retail, industrial) that is leased from one time period to another. Also, the number of units of multifamily or single family units absorbed over a period of time, generally m...

Glossary of General Commercial Real Estate Terminology Absorption: Number of square feet of commercial real estate (office, retail, industrial) that is leased from one time period to another. Also, the number of units of multifamily or single family units absorbed over a period of time, generally monthly. Absorption Period: Amount of time needed to lease out an income-generating property to a stabilized occupancy level. Abundance of Caution: The lender takes a deed of trust on the property as an abundance of caution only. This means that the property collateral value is not the lender's main reliance in making the loan. Rather, the real estate is simply extra, but not necessary, collateral. The lender should be careful in ensuring that a deed taken this way is not a necessary loan support; otherwise, there could be possible FIRREA violations if the lender does not obtain an appraisal. Acquisition Cost: Total dollar amount spent to acquire a property; includes the purchase price, commissions paid, fees and other expense of the transaction. Air Rights: Rights to use, sell, lease or build in space above real property, other than ground. Ownership of land or improved property includes the right to all air above the property, which, until the arrival of the airplane was unlimited. ALTA Survey: A survey complying with the current minimum standard detail requirements for land title surveys as adopted by the American Land Title Association (ALTA) and the American Congress on Surveying and Mapping. Anchor Tenant: A major tenant representing a large portion of the leasable space in a shopping center or office building. An anchor tenant such as a major grocery store, department store or office tenant will be a primary draw for the real estate. In regional malls and large shopping centers there are often multiple anchors. Annual Debt Service: The total of principal and interest payments on a real property loan required in one year. Annual Loan or Mortgage Constant: A ratio of the annual debt service, both principal and interest (numerator) to the loan principal balance (denominator) due. The initial annual loan constant would be the debt service divided by the initial principal borrowed; however, the actual loan constant will increase as principal is repaid. Appraisal: A written statement independently and impartially prepared by a qualified appraiser, setting forth an opinion as to the market value of an adequately described property, as of a specific date, supported by the presentation and analysis of relevant market information (per FIRREA). There are several types of appraisals: Complete Appraisal: The act or process of estimating value or an estimate of value performed without invoking the Departure Provision of USPAP. To develop a complete appraisal, the appraiser uses all applicable approaches to value. The value conclusion will reflect all known information about the subject property, market conditions, and available data. A complete appraisal provides the highest level of reliability in valuing real estate. Banks will almost always insist on this level of appraisal quality. 1  Limited Appraisal: The act or process of estimating value or an estimate of value performed under and resulting from invoking the Departure Provision. Use of the term "limited appraisal" makes it clear that the assignment involved something less than, or different from the work required by the specific guidelines. The appraisal is limited because the appraiser and the client agree prior to the commencement of the assignment that the appraiser will not use all applicable approaches to value (e.g. omitting cost approach to value), or that the value conclusion will not reflect all known information about the subject property, market condition, and available data. The reliability of the value decreases as the degree of departure from a complete appraisal increases. Appraisal Report: The written appraisal of a property comes in several forms: Self Contained Appraisal Report: A written appraisal report prepared under USPAP Standards 2-2(a). The self-contained appraisal report requires that there be sufficient information included that would indicate that the appraiser complied with the requirements of Standard 1. This report requires a higher level of detail of presentation than a summary appraisal report or a restricted appraisal report, however, the amount of detail required will vary with the significance of the information to the appraisal. Summary Appraisal Report: A written appraisal report prepared under USPAP Standards Rule 2-2(b). The essential difference between the self-contained appraisal report and the summary appraisal report is the level of detail of presentation. For example, a narrative presentation of data in a self-contained appraisal report might translate to tabular presentation of data i n a summary appraisal report. The amount of detail required will vary with the significance of the information to the appraisal. Restricted Appraisal Report: A written appraisal report prepared under USPAP Standards Rule 2-2(c). The restricted appraisal report is intended for use only by the client. Before entering into an agreement to prepare a restricted appraisal report, the appraiser should establish the situation where this type of report is to be used and should ensure that the client understands the limited utility of this type of report. The essential differences between self-contained and summary appraisal reports and a restricted appraisal report is the level of detail of presentation and a use restriction that limits the reliance on the restricted report to the client, considering anyone else using the report an unintended user. As Stabilized or As Stabilized Value: Generally referring to the value of real estate upon completion of construction and after it has been leased to a percentage considered to be "stable." Assignment of Rents: A contract between the borrower and lender that allows--after an uncured event of default--any rents from real estate to be paid to the lender. Attorn: To turnover or transfer something of value to another party. To agree to recognize a new owner of a property and to pay him rent. Base Rent: The minimum rent stipulated in a lease agreement. Brownfield: An idle, abandoned or otherwise non-useable commercial or industrial property, generally in urban locations, the redevelopment of which is complicated by either real or perceived environmental contamination. 2 Bundle of Rights: The collection of rights the owner of real estate enjoys through ownership in fee simple. 3 CAM: See Common Area Maintenance. Capitalization Rate (Cap Rate): A rate that is considered a reasonable return on an investment given the risk and opportunity cost. The cap rate is used to estimate the value of real estate property. A value estimate is obtained by dividing a property's net operati ng income by the appropriate cap rate. Chattel(s): Items of personal property which would include trade fixtures and things attached to real estate and used by a tenant such as restaurant equipment, gas station equipment, hotel FF&E, etc. Common Area Maintenance: Common Area Maintenance, or CAM. This represents additional expenses in a commercial lease, typically added on to base rent as additional rent. A landlord typically will try to pass through as much of the overhead as possible through CAM charges. It is common to find administrative and maintenance fees, costs for repair of roofs, lighting, plumbing, electrical wiring, HYAC, etc., for the common areas in a building. Community Property: Property acquired by husband, wife or both during marriage which gives each spouse an interest in the property whether each appears in title or not. The concept of community property only applies to the following states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Oklahoma, Texas, Washington, and Wisconsin. Conditional Assignment of Rent: An assignment by a landlord/debtor to a lender of the rents to be received from income property giving the lender the right to notify the tenants to pay the rents to the lender. Constant, Loan Constant, Mortgage Constant: Interchangeable terms that signify the ratio of annual debt service (interest and principal) to total current loan principal outstanding. Convertible Mortgage: A loan that allows a lender to convert a lien position into ownership. Co-Tenancy Clause: A common clause in a retail lease which often allows tenants to get a reduction in rent or a concession from landlords if key tenants or a certain number of tenants leave the space. For example, a co-tenancy clause provides the non-anchor tenants with some form of protection in the form of reduced rent to compensate for loss of traffic caused by the departure of an anchor tenant. Convey, Conveyance: A term used to refer to any document that transfers title to real property. The term is also used in describing the act of transferring. Cost Approach: A set of procedures through which a real property value indication is derived for the fee simple interest in a property by: 1. Estimating the current cost to construct a reproduction of the existing structure, often referred to as the reproduction cost and often used in evaluating the cost basis for an historical property; 2. Deducting accrued depreciation from the reproduction of, or replacement for, the existing structure; 3. Deducting accrued depreciation from the reproduction or replacement cost; and 4. Adding the estimated land value plus an entrepreneurial profit. 4 Cost Approach (To Value): An appraisal technique used to estimate value. The Appraisal Institution definition is: 5  Estimating the current cost to construct a reproduction of re replacement for the existing structure, including direct and indirect costs, deducting for all evidence of accrued depreciation from the cast new of the reproduction or replacement structure, and adding the estimated land value plus an entrepreneurial profit. Replacement Cost: The estimated cost to construct, at current prices as of the effective appraisal date, a building with utility equivalent to the building appraised, using modern materials and current standards, design and layout. Reproduction Cost: The estimated cost to construct, at current prices as of the date of the appraisal, an exact duplication or replacement of the building being appraised, using the same materials, construction standards, design, layout and quality of workmanship, and embodying all the deficiencies, super adequacies and obsolescence of the subject real estate. Covenants, Conditions, and Restrictions: Private limitations that affect the use of a property, often called "CC&R's". Debt Service Coverage: The degree to which property NOI is able to cover periodic principal and interest payments on a loan. Debt Service Coverage Method: A way of computing a property's mortgage ability. This typically utilizes at least a l.25X (dependent upon property type and risk) required debt service coverage ratio and also assumes monthly payments of principal and interest when calculating a mortgage ability constant. Debt Yield: A calculation where the property NOi is divided into the loan or principal balance. For example, a property with a NOi of $100,000 and a $1,000,000 loan balance would have a Debt Yield of 10%. This calculation is often used to test interest rate sensitivity on real property loans by comparing the debt yield to the rate charged on the loan to determine an interest rate cushion. This ratio is also known as a "Constant Carried". Deed: The written instrument conveying title from one party to another. Deed-In-Lieu or Deed-In-Lieu of Foreclosure: The giving of a deed to collateral by a debtor to a lender as an alternative to a Trustee Sale or foreclosure. Generally, a deed-in-lieu is negotiated in exchange for some forbearance, or forgiveness of debt or for a compromise of a guarantee. Deed of Trust: A written document by which the title to land is conveyed as security for the repayment of a loan or other obligation. It is a form of mortgage. The landowner or debtor is called the "trustor." The party to whom the legal title is conveyed (and who may be called on to conduct a sale thereof if the loan is not paid) is the "trustee." The lender is the "beneficiary." When the loan is paid off, the trustee is asked by the beneficiary to issue a "recon" or reconveyance. This reconveyance corresponds to the release that the holder of a mortgage executes when the mortgage is paid off. Departure Provision: Specific USPAP requirements that apply to an appraiser who performs an assignment that calls for something less than, or different from, the work that would otherwise be required. The appraiser must: 1. Determine that the departure would not mislead the client or users of the report, and 2. Advise the client that the assignment is less than, or different from, the work required by the specific guidelines, and that the resulting report will include a qualification stating the limitation. 6 Direct Capitalization: 1. An appraisal method used to convert an estimate of a single year's income expectancy into an indication of value in one direct step, either by dividing the income estimate by an appropriate rate or by multiplying the income estimate by an appropriate factor. 2. An appraisal capitalization technique that employs capitalization rates and multipliers extracted from sales. Only the first year's income is considered. Yield and value changes are implied, but not identified. Discounted Cash Flow: The appraisal procedure in which a discount rate is applied to a set of projected income streams and a reversion of value. The analyst specifies the quantity, variability, timing, and duration of the income streams as well as the quantity and timing of the reversion and discounts each to its present value at a specified yield rate. DCF analysis can be applied with any yield capitalization technique and may be performed on either a lease-by-lease or aggregate basis. Due on Sale, Due on Sale Cla use: A form of acceleration clause found in some mortgages, especially savings and loan mortgages, requiring the mortgagor to pay off the mortgage debt when the property is sold, resulting in automatic maturity of the note as the lender's option. This clause effectively eliminates the possibility of the new buyer assuming the mortgage unless the mortgagee permits the assumption, in which case the mortgagee might increase the interest rate or charge an assumption fee. Easement: The right to a specific use of or right to travel over land owned by another. The land being used or traveled over is the servient tenement; the land that is benefited by the use is the dominant tenement. An easement appurtenant is a property interest belonging to the owner of dominant tenement and is transferred with the land; an easement in gross is a personal right that usually is not transferable by its owner. Economic Life: The useful life of property improvements made while a property is profitable to both maintain and operate Effective Gross Income: Property income determined after deducting an appropriate percentage amount (the Vacancy Rate) for anticipated vacancies. Efficiency Ratio: The ratio of leasable area to the gross area of a building. Eminent Domain: The government's right to acquire private property for public use upon payment of just compensation Encumbrance: Any right to, or interest in, real property that may exist in one other than the owner, but which will not prevent the transfer of fee title. A claim, lien, charge or liability attached to and binding real property. Entitlements: The necessary approvals and permits that must be obtained prior to the development of a property. Escrow: A contractual arrangement under which money, securities, instruments or other property is deposited by two or more persons with a third person, to be delivered on a certain contingency or on the occurrence of a certain event. The subject matter of the transaction (the money, securities, instruments or other property) is the escrow; the terms on which it is deposited with the third person constitute the escrow agreement; and the third person is termed the escrow agent 7 Escrow Instructions: Instructions given to an escrow agent with respect to the handling of a real estate transaction 8 Estoppel: A bar against alleging or denying a fact because of one's own previous actions or words to the contrary. An estoppel will confirm or deny the status or conditions of a loan or lease agreement regardless of any previously stated terms or conditions. Estoppel Letter or Certificate: Many leases have provisions which require the tenant to prepare and sign estoppel certificates (or estoppel letters) upon the landlord's request. Typically the tenant is required to certify that as of the date of the document certain things are true, including but not limited to whether the tenant's lease is in full force and effect and has not been assigned or modified. The tenant is usually required to state that its disclosures in the estoppel certificate or letter may be relied upon by the specified third party or parties. Evaluation, Evaluation of Real Property Collateral: An assessment of the probable value of a property performed by an individual who has the knowledge and experience necessary to make an informed assessment of the property's value, but who is not expected to render an appraisal of the property. Expense Stop: An amount, usually expressed in dollars per square foot of income producing real estate, exclusive of apartments, in excess of which the tenant agrees to pay expenses. Fee Simple: The maximum possible estate one can possess i n real property. A fee simple estate is the least limited interest and the most complete and absolute ownership in land; it is of indefinite duration, freely transferable and inheritable. Fee simple title is sometimes referred to as "the fee." FIRREA: Financial Institutions Reform, Recovery, and Enforcement Act of 1989. This act created regulations that lenders need to follow when making loans secured by real property. One of the most important of these is the legal requirement to obtain valid appraisals when originating new real estate loans. First Lien: The registered legal claim which stands first in line to enjoy the proceeds of a sale of the property. Liens generally are ordered according to time or registration but various statutes allow some liens (realty taxes) to jump to the head of the line. Flood Insurance: Insurance required on loans secured by real estate or mobile homes where the dwelling is located on property in a designated flood hazard area. Floor/Area Ratio (FAR): The ratio of the bulk area of a building to the land on which it is situated. Calculated by dividing the total square footage in the building by the square footage of land area. Forbearance: Any leniency a lender gives to a borrower who has not met his/her obligations under a loan agreement. Foreclosure: A proceeding, in or out of court, designed to extinguish all rights, title, and interest of the owner(s) of property in order to sell the property to satisfy a lien against it. Go-Dark Provision: A go dark provision is a tenant-driven term to a retail lease by which the tenant may elect to cease operations in its leased space, but continues to pay rent to landlord. The effect of the provision is that the tenant continues to pay money for a location that is not generating any income. Grant Deed: A type of deed in which the grantor warrants to the grantee, that he has not previously conveyed the estate, that he has not encumbered the property (except as noted in the deed) and that he will convey any title to the property he may later acquire 9 Gross Leasable Area (GLA): The total floor area designed for the occupancy and exclusive use of tenants, including basements and mezzanines, and usually measured from the center of a joint partition wall to the exterior of an outside wall. Gross Lease: A lease that provides that the landlord shall pay all expenses of the leased property, such as taxes; insurance; maintenance; utilities, etc. Also known as a Full Service lease. Ground Lease: A long-term lease of land (often 99 years) in which the tenant is allowed to improve the land and use it for the term of the lease at the end of which the land and all improvements revert to the control and occupancy of the owner. Highest and Best Use: Appraisal language used to portray the "best use" of real estate in order to achieve the optimal economic return from the property based on what is "physically possible, legally permissible, financially feasible and maximally productive" The Appraisal Institute definitions are: Highest and Best Use: The reasonably probable and legal use of vacant land or improved real estate, which is legally permitted, physically possible, appropriately supported, financially feasible, and that results in the highest value. Highest and Best Use as Vacant: Among all reasonable alternative uses, the use that yields the highest present land value, after payments are made for labor, capital, and coordination. The use of real estate based on the assumption that the parcel of land is vacant or can be made vacant by demolishing any improvements. Highest and Best Use as Improved: The use that could be made of improved real estate as it exists. Existing improvements should be renovated or retained "as is" so long as they continue to contribute to the total market value, or until the return from new or other improvements would more than offset the cost of demolishing the existing improvements and constructing new ones. Income Capitalization Approach A set of appraisal procedures through which an appraiser derives a value indication for an income-producing property by converting its anticipated benefits (cash flows and reversion) into property value. This conversion can be accomplished in two ways. One year's income expectancy can be capitalized at a market-derived capitalization rate, or at a capitalization rate that reflects a specified income pattern, return on investment, and change in the value of the investment. Alternatively, the annual cash flows for the holding period and the reversion can be discounted at a specified yield rate. Investor Owned Property: Situation in which a property is owned by a Bank borrower but is leased to a separate, third party for use and occupancy. Joint Tenancy: An estate or unit of interest in real estate that is owned by two or more natural persons with rights of survivorship. The basic idea of a joint tenancy is unity of ownership; title is held as though all owners collectively constituted one person, a fictitious entity. The death of one joint tenant does not destroy the owning unit--it only reduces by one the number of persons who jointly own the unit. The remaining joint tenants receive the deceased tenant's interest by the right of survivorship. Thus, the decedent's interest cannot be transferred by will or descent. As each successive joint tenant dies, the remaining tenants acquire the interest of the deceased. The last survivor takes title in severalty, fully inheritable at his or her death by heirs and devisees. 10 Just Compensation: Equitable value given to the owner and the public when property is obtained by the government through condemnation under the right of eminent domain. 11 Kick Out Provision: A lease provision allowing a landlord allowi ng a landlord to terminate a lease and "kick" the tenant out of the property. Also, a lease condition whereby a tenant can terminate their lease if a certain level of sales are not achieved within a specified period of time. Landlord's Waiver and Consent: An agreement between a landlord and a lender who holds a lien against personal property located in or on the landlord's real estate, but does not have a lien against the real estate itself, by which the landlord gives the lender permission to enter the real estate to repossess the collateral provided the lender indemnifies the landlord for any damage which might result from the removal of the collateral. Landlord's Warrant: A written document in which the landlord gives permission to a lender to enter a property and repossess collateral located in or on the property. Lease Rollover: When a lease expires and the space is re-leased to either the existing tenant or a new tenant. Leasehold Interest or Estate: The limited interest in a property held by a tenant, primarily the right to inhabit it for a period of time. At the end of the lease the property reverts to the land owner or landlord. Leasehold Improvements: Improvements or additions to leased property made by the tenant. Lessee: The person to whom property is rented or leased; called a tenant in most residential leases. Lessor: The person who rents or leases property to another. In residential leasing, he or she is often referred to as a landlord. Lien Waiver: Generally, a waiver of mechanic's lien rights signed by a general contractor and his subcontractors. See Mechanic's Lien. Loan-to-Value Ratio (LTV): The ratio between the amount of a loan and the appraised (or other determination of value) of the collateral. LTV is the percentage or ratio that is derived at the time of loan origination by dividing an extension of credit by the market value of the collateral plus the amount of any readily marketable collateral and other acceptable collateral that secures the extension of credit. The total amount of all senior liens on or interests in such property (ies) is to be included in determining the LTV ratio. Many banks also calculate "Exposure to Value" or ETV, a ratio similar to LTV where any additional exposures are added to the loan amount and divided by the collateral value. Exposure includes items such as re-tenanting costs, costs of non-occupancy, and deferred equity amounts. If a real estate loan is underwritten with mortgage i nsurance or additional collateral that is used i n the LTV calculation and such credit enhancements are later released or replaced, the LTV ratio is to be recalculated. LOI:.Letter o f Intent, a legal document outlining an agreement between two or more parties before the agreement is legally finalized. MAI: Member, Appraisal Institute; a member of the American Institute of Real Estate Appraisers. Management Fee: The expense incurred by a property owner under a Management Agreement with a real estate property management company. 12 Market Rent: The rental income that a property would most probably command in the open market, indicated by the current rents paid and asked for comparable space as of the date of appraisal. 13 Market Value: The most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby: 1. Buyer and seller are typically motivated, 2. Both parties are well-informed or well-advised and acting in what they consider their own best interests, 3. A reasonable time is allowed for exposure in the open market, 4. Payment is made in terms of cash in U.S. dollars or in terms of financial arrangements comparable thereto, and 5. The price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale. Master Lease: A primary lease that controls subsequent leases and which may cover more property than subsequent leases Maximum Bank and/or Regulatory LTV Limits: These are maximum LTV's as described by the Bank and/or regulators. Lenders should be aware of possible exceptions. These vary by the type of property being financed. Mechanic's Lien: A claim created by state statutes for the purpose of securing priority of payments for the price or value of work performed and materials furnished in construction or repair of improvements to land, and which attaches to the land as well as to the improvements Mixed Use: Space within a building or project provided for more than one use (e.g. an apartment building with office space, a hotel with office space, or a retail establ ishment with apartments) Mortgage: The instrument that evidences an interest in real estate and created to provide a pledge as security for the performance or repayment of a loan. The borrower (i.e. mortgagor) retains possession and use of the property Mortgage Insura nce: A policy of insurance which promises to pay out the amount owing in the event that the borrower defaults. Mortgage Loan Servicing: The lender's actions in collecting mortgage payments, allocating payments to principal, interest and escrow accounts, paying out property taxes and insurance over the life of the loan Mortgageability: The loan amount which a property is capable of supporting, as determined by various methods such as use of a mortgage constant or a percentage loan to value against estimated value. Mortgagee: In a mortgage transaction, the party who receives and holds a mortgage as security for a debt, the lender. A lender or creditor who holds a mortgage as security for payment of an obligation. Mortgagor: In a mortgage transaction, the buyer/borrower is the mortgagor. The mortgagor is required to sign a promissory note for the amount borrowed and to execute a mortgage to secure the debt. The mortgage note creates a personal liability for payment on the part of the mortgagor. Net Effective Rent or Effective Rent: The average per square foot rent paid by the tenant over 10 the term of the lease, taking into account only items such as free rent and stepped rents. Generally does not include allowances, free parking and other landlord concessions. 11 Net Lease: A lease in which the tenant pays, in addition to rent, certain costs associated with a leased property, including property taxes, insurance premiums, repairs, utilities, and maintenance. There are also "net-net" (double net) and "net-net-net" (Triple net) leases, depending upon the degree to which the tenant is responsible for operating costs. Net Operating Income (NOi): The amount of income produced by a property after the payment of all operating expenses (see Operating Expenses ) and before deductions for debt service (principal and interest or interest alone), depreciation, and taxes are taken. Net Leasable Area: The area in a building which is available for rent to tenants (excludes common areas, wasted space, etc.). Net Rentable Area: The space occupied by a tenant plus additions for a proportionate share of common areas. Nondisturbance Clause: A term of a mortgage which guarantees that leases regarding the subject property will be allowed to continue uninterrupted in the event of mortgage default. Non-Recourse Loan: A loan which does not allow for a deficiency judgment against a borrower in the event of default. The borrower cannot be held personally liable. The lender's only available recourse in the event of default is the collateral or property. Often certain "carve-outs" or exceptions to full recourse are negotiated by the bank and the borrower. Obsolescence: The loss of value or usefulness resulting from advances in technology and the passage of time. Two types of obsolescence include: Economic Obsolescence Loss of useful life and desirability of a property through economic forces, such as change in zoning, changes in traffic flow, etc., rather than deterioration Functional Obsolescence Loss in value due to out-of-date or poorly designed equipment while newer equipment and structures have been invented since its construction Occupancy Rate: The percentage of available rental space that is actually rented and in use in a given building or community. Operating Expenses: Those recurring expenses that are essential to the continuous operation and maintenance of a property. Operating expenses are generally divided into the following categories: fixed expenses such as real property taxes and building insurance; variable costs such as utilities, payroll, administration and property management fees; and reserves for replacement. Operating expenses do not include items such as mortgage payments, capital expenditures and depreciation. Owner's Title Policy: A policy of title insurance usually insuri ng an owner of real estate against loss occasioned by defects in, liens against or unmarketability of the owner's title. Owner/User Property: If the borrower who owns the property is also the entity (or also owns the entity) which occupies and leases it, then the property may be considered owner/user. The typical situation involves a deal where the principals own a commercial enterprise and also have a separate, 12 personally owned partnership that owns the warehouse the company operates in. 13 Percentage Lease: A lease, commonly used for commercial property, whose rental is based on the tenant's gross sales at the premises. It usually stipulates a base monthly rental pl us a percentage of any gross sales above a certain amount the "break point". Percentage Rent: Rent paid, generally be a retail tenant, over and above the base rent stated in a lease and usually calculated as a percentage of a tenant's periodic retail sales (monthly, quarterly, annually) over a base amount stated in a lease: Perpetual Easement: An ongoing easement. Phase I, Phase II, Phase III Environmental Site Assessment: A document that reports environmental concerns or problems on a real estate property. A Phase I (Phase I Report) is the first level of research on a property's environmental condition. If a problem is suspected, a Phase II would be conducted to verify the lack or presence of environmental contamination on the property and the level of contamination if it is present. Phase III involves remediation of the contaminated site. Physical Life: The expected amount of time that a property will remain useful, given proper maintenance Plat, Plat Ma p: A map or plan of a subdivision, section or town, required to be filed with the municipality in which property is located, generally after receiving a favorable recommendation from the Building Department and/or Planning and Zoning Commission and final approval from the appropriate Governmental Authority. Preliminary Title Report: A written report issued by a title company, preliminary to issuing title insurance, which shows the recorded condition of title of the property in question. Prime Tena nt: The major tenant in building, shopping center, etc. Also known as a "Credit Tenant". Quiet Enjoyment: The right, generally of a tenant, to privately and "quietly" enjoy possession of property without disturbances from the property owner or others. Re-Ma rgining: Where a principal balance is reduced or additional collateral is pledged, or a combination of both actions are taken to remedy the situation where a loan balance fails to meet a stated index, for example, a debt coverage ratio or loan-to-value ratio. Reciprocal Easement Agreement (REA): An agreement where the owners of different parts of the same site allow others to use their portion of the site. Example: At a shopping center, Store A allows customers for Store B to park in front of their store and vice versa. Reciprocal Operating Agreement (ROA): An agreement made by tenants in the same property to keep the same operating conditions. Example: In a shopping mall, all of the tenants agree to keep their stores open from 10AM-7PM. Recou rse: The majority of real estate loans extended by banks are done on a recourse basis, i.e., the lender has legal recourse to the owners of a property in a distressed situation. A loan is non-recourse if the agreement contains explicit exculpatory language that denies lender access to the owners. Lenders should be very careful in assessing the extra risks involved in non-recourse financing. Life companies, CMBS lenders, and many non-bank lenders make the majority of their loans on a "non-recou rse" basis. Rent Roll: A document that typically includes a list of the names of the tenants, the total area occupied 14 by each tenant, the contract rent (usually per square foot or per month) of each tenant, as well as the start date, expiration date, and expense basis (net, full service, etc) of each lease. 15 Rentable Area: The amount of space on which rent is based. Rentable area is calculated in different ways in different parts of the country and in different markets. Rent-Up Period or Lease Up Period: The period of time following construction of a new building when tenants are actively sought and the project is approaching stabilized occupancy. Replacement Reserve, Reserve For Replacement: Either a significant initial cash deposit, or periodic deposits, usually taken from a property's NOi, into an account which may be used to replace worn out short lived items in real estate, or part of the real estate such as the roof, parking lot, amenities, or other depreciating assets such as stoves, refrigerators, etc., in a multi-family project. Also known as an "FF&E Reserve" for hotel properties. Retainage or Retention: A deduction from the amount due to a contractor/subcontractor that is held by the owner/general contractor. The funds are held until construction has been satisfactorily completed, at which point the "retained" funds are transferred to the contractor/subcontractor. Right of First Refusal: A clause occasionally inserted in a lease that gives a tenant the first opportunity to buy a property if the owner decides to sell. The owner must have a legitimate offer which the tenant can match or refuse. Also known as a tenant’s right to lease additional space in a commercial property if it is offered for lease to another potential tenant. Sale-Leaseback: A financing arrangement in which a property owner sells al l or part of the property to an investor and then leases it back. Although the lease actually follows the sale, both are agreed to as part of the same transaction. Sales Comparison Approach (to Value): A set of appraisal procedures in which a value indication is derived by comparing the property being appraised to similar properties that have been sold recently, applying appropriate units of comparison, and making adjustments to the sale prices of the comparables based on the elements of comparison. The sales comparison approach may be used to value improved properties, vacant land, or land being considered as though vacant; it is the most common and preferred method of land valuation when comparable sales data are available. Single Action Rule: Some States restrict a lender's ability to both liquidate property and call on guaranties in a distressed situation. These "single action" States may require lenders to first liquidate the property, after which they may then proceed against the owners/guarantors in order to recover any remaining payoff deficiency. Lenders need to be aware if they are making loans in these States. Other states are referred to as "Dual Action" States. Special Purpose Property: If a property has been constructed for a specific use, its marketability may be adversely affected in the event of foreclosure. These less saleable types of properties should be approached with more caution by lenders. Examples include: Self Storage/Mini-Storage, Churches, Nursing Homes/Assisted Living Facilities, Convenience-Store Gas Stations, Casinos, Parking Structures, Theme Parks, Restaurants, and Refrigerated/Cold Storage Warehouses. Appraisers may value them at their "highest and best use", which may approximate one of the more fungible property types, such as office, industrial warehouse, etc. Square Foot: An area that forms a square of 12 inches by 12 inches; freq uently used as the basic unit on which real estate rental rates are established. There are 43, 560 sf. in an acre. Stabilized Occupancy: The optimum, long-term occupancy level of a property that produces a stable and 16 continuous source of income. 17 Stabilized Expense: Actual or projected operating expenses of a property that is expected to remain stable and not vary over a period of time. Stabilized expense excludes debt service and depreciation. Stabilized Income: A property's projected income based on a rental and vacancy level that is expected to remain steady for a period of time. May not be the current income generated by the property. Sublease: A lease given by a lessee for a portion of the leasehold interest, while the lessee retains some reversionary interest. The sublease may be for all or part of the premises, for the whole term or part of it, as long as the lessor retains some interest in the property. Leases normally contain a clause prohibiting subletting without prior consent of the lessor. The lessee remains directly liable to the lessor for the rent, which is usually paid by the sublessee to the lessee and then from the lessee to the lessor. The sublessee does not have a contractual obligation to pay rent to the original lessor. Subordinated Ground Lease Payment(s): Where the lessor under a ground lease agrees to subordinate the rental income to the payment of debt service to the lender. Subordination, Non-disturbance and Attornment Agreement (SNDA): An agreement between a lender, tenant and landlord that involves three parts: 1. Subordination: The tenant agrees to subordinate its lease with the landlord to the lender's mortgage. 2. Non-disturbance: The lender agrees to not disturb the tenant's rights under its lease provided that all lease terms are met 3. Attornment: The tenant agrees to attorn to the lender as landlord in the event of foreclosure Survey: The process by which boundaries are measured and land areas are determined; the on-site measurement of lot lines, dimensions and position of a house on a lot, including the determination of any existing encroachments or easements. Survey Certification: A statement on a survey that certifies that the survey was completed in accordance to ALTA/ACSM standards. Tenancy at sufferance: A tenancy (or estate) in which a person wrongfully holds or occupies a property after the expiration of a lease without the consent of the landlord. No notice of termination is required for the landlord to evict the tenant. Tenancy at will: A tenancy (or estate) in which a person holds or occupies real estate with the permission of the owner, for a term of unspecified or uncertain duration: i.e., there is no fixed term to the tenancy. Tenant: One who holds or occupies real property owned by another party in accordance with a lease. A tenant is a lessee. Tenant Improvements (Tis): Improvements to land or buildings to meet the needs of tenants. May be new improvements or remodeling, and may be paid for by the landlord, the tenant, or shared. Tenancy In Common: Ownership of property in which several owners each own a stated portion of the property (a percentage). Each owner may deal with his/her portion of the property as he/she wishes (giving it away, mortgaging it, selling it, bequeathing it, etc.) and, upon his/her death, his/her share becomes part of his/her estate. 14 Title: Evidence of ownership. 15 Title Company: Also known as "title insurance company" or "title insurer". A corporation which is in the business of selling policies of insurance guaranteeing the ownership and quality of title to land. Title Endorsement: Additions to a title insurance policy covering specific issues relative to the property. For example, a policy covering a property to be built may have a setback endorsement insuring against violations of municipal setback requirements. Title Insurance: An indemnity policy issued by a title insurance company protecting named insureds and their heirs against loss or damage resulting from defects or failure of title to real property, or from enforcement of liens which existed against the property at the time the policy is issued and not specifically listed and excluded from the policy. USPAP: Uniform Standards of Professional Appraisal Practice, commonly referred to as USPAP, is considered the quality control standards applicable for real property, personal property, intangibles, and business valuation appraisal analysis and reports in the U.S. While USPAP provides a minimum set of quality control standards for the conduct of appraisal, it does not attempt to prescribe specific methods to be used. Rather, USPAP simply requires that appraisers be famil iar with and correctly utilize those methods which would be acceptable to other appraisers familiar with the assignment at hand and acceptable to the intended users of the appraisal. USPAP directs this through what is called the Scope of Work rule. At the onset of an assignment, an appraiser is obligated to gather certain specified preliminary data about the project, such as the nature of the property to be appraised, the basis of value (e.g. market, investment, impaired, unimpaired), the interests appraised (e.g. fee, partial), important assumptions or hypothetical conditions, and the effective date of the val uation. Based on this and other key information, the appraiser relies on peer-reviewed methodology to formulate an acceptable work plan. Vacant Space: Existing space which is currently being marketed for sale or lease, excluding sublet space. Vacancy Rate: The relationship between the amount of vacant space, either existing or projected, and the total leasable space in a building. 16