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Definitions of commonly used terms and phrases
ASSESSED VALUE: The value established by a local tax assessor.
ABSOLUTE NET LEASE: The tenant pays all operating expenses and is responsible for all maintenance, also known as a NNN lease. Acts of eminent domain may or may not be covered by this lease.
CAPITALIZATION RATE (CAP RATE): Expressed as a percentage, a function of the NOI vs purchase price. Generally used to compare similar properties.
CASH FLOW: The amount left over within a given period (generally expressed annually) after all expenses, debt service, and reserves. May be computed pre and post tax.
CASH ON CASH RETURN: Generally expressed as a percentage, a function of the initial investment vs the cash flow. Very useful when comparing different types of investments.
COMPOUNDING: The calculation of the future value of an investment.
DISCOUNTING: The calculation of the current amount of a value to be recieved in the future.
DOUBLE NET LEASE (NN): A lease in which some responsibilities are the responsibility of the owner, generally certain maintenance items such as the parking lot, roof, HVAC, etc.
DUE DILIGENCE (DD): The evaluation process of a potential commercial investment property to include: lease, title, records, survey, environmental studies, and physical condition.
EQUILIBRIUM: The point on a graph where the supply and demand curves meet, supply and demand are in balance.
ESCROW: Items and monies held in a specific trust for a specific purpose under specific conditions.
GROUND LEASE: A lease in which only the land is the property of the owner, all improvement belong to the tenant.
INTERNAL RETURN RATE (IRR): The return rate, expressed as a percentage, of a commercial investment property. The computation of the IRR assumes future cash flows and the proceeds after disposition of the property.
LIQUIDITY: The ability to convert an asset to cash quickly.
MARKET VALUE: The most probably price that a commercial investment property would sell for in a a fair and open sale.
METROPOLITAN STATISTICAL AREA (MSA): Large geographic area used for reporting and comparison purposes.
NNN Lease: The tenant is responsible for all costs associated with the operation of the property. These costs include, but are not limited to, maintenance, taxes, insurance, and utilities. A NNN lease is generally used for a free standing building.
PRO-FORMA: Projection of the possible cash flows and returns of a commercial investment property.
RATED TENANT: Any commercial tenant who is evaluated and reported upon by a recognized credit reporting firm such as S&P or Moody's.
Cap Rate Formula is NOI/Purchase price = Cap Rate (%)
Net Operating Income (NOI) is the Gross income minus all regular annual expenses
Annual Cash Flow is the NOI minus debt service (and allowance for replacement reserves if applicable)
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