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.

Useful Formulas

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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