Commercial Real Estate Glossary (L - Z)

Absorption The amount of inventory or units of a specific commercial property type that become occupied during a specified time period (usually a year) in a given market, typically reported as the absorption rate.

Accumulated cost recovery Total cost recovery deductions taken throughout the holding period of a property.

Active income Income from salary, wages, tips, commissions, and activities in which the taxpayer materially participates. Also see passive income.

Add-on factor The ratio of rentable to useable square feet. Also known as the load factor and the rentable-to-useable ratio. Also see efficiency percentage.

Add value Fourth stage of four-stage transaction management process pertaining to a transaction manager’s planning, effort, and continual contact with key decision-makers, investors, and users, as well as contact with ancillary professionals. This ongoing process allows for feedback, establishes a network for problem solving, provides a means to offer additional services to the client, and enhances the transaction manager’s preparedness for the next assignment.

Adjusted basis The original cost basis of a property plus capital improvements, less total accumulated cost recovery deductions, and partial sales taken during the holding period.

ADS See annual debt service.

Agglomeration economies Cost reductions or savings that come about from efficiency gains associated with the concentration or clustering of firms/producers or economic activities and the formation of a localized production network.

Amortization The repayment of loan principal through equal payments over a designated period of time consisting of both principal and interest.

Annual debt service (ADS) The total amount of principal and interest to be paid each year to satisfy the obligations of a loan contract.

Annual percentage rate (APR) The true annual interest rate payable for a loan in one year taking account of all charges made to the borrower, including compound interest, discount points, commitment fees, mortgage insurance premiums. It also takes into account the time at which the principal is repaid (especially when payments of principal are made in installments throughout the year, but interest is charged at the beginning of the year), but not the actual expenses incurred by the lender in making the loan and recharged to the borrower.

Annuity Regular fixed payments or receipts over a designated period of time.

Appreciation An investment’s increase in value.

Appreciation potential The possibility or probability that a real estate investment will increase in value during the holding period.

Assessed value The value of real property established by the tax assessor for the purpose of levying real estate taxes.

Average annual effective rate The average annual effective rent divided by the square footage.

Average annual effective rent The tenant’s total effective rent divided by the lease term.

Averaging method A simple technique used to forecast next period's/year's vacancy rate by averaging previous years' vacancy rates; especially effective where vacancy rates have remained relatively flat or show little variability over time.

Balloon payment The final payment of the balance due on a partially amortized loan.

Base (in lease terminology) A face, quoted, dollar amount representing the rate or rent in dollars per square foot per year and typically referred to as the base rate.

Base rent The minimum rent due to the landlord. Typically, it is a fixed amount. This is a face, quoted, contract amount of periodic rent. The annual base rate is the amount upon which escalations are calculated.

Basic employment Employment that is considered to be export-oriented or export-driven, associated with activities that generate income from the sales of products and services in markets outside the local economy.

Basis The total amount paid for a property, including equity capital and the amount of debt incurred.

Before-tax investment value The sum of the present values of the mortgagor and mortgagee of property.

Break-even point The stage at which an investment produces an income that is just sufficient to cover recurring expenditure. For an investment in real property, the point at which gross income is equal to normal operating expenses, including debt service (the stage at which the next cash flow becomes positive). Also known as the default point.

Breakpoint The sales threshold over which percentage rent is due. It is calculated by dividing the annual base rent by the negotiated percentage applied to the tenant’s gross sales.

Business risk The uncertainty associated with the possible profit outcomes of a business venture.

Buy/rent threshold The point at which there is a recognizable shift of expenditure allocations away from owneroccupied housing and to the rental housing market (or vice-versa) as a result of changing market conditions.

CAM See common area maintenance.

CAM cap The maximum amount for which the tenant pays its share of common area maintenance costs. The owner pays for any CAM expenses exceeding that amount.

Cap rate See capitalization rate.

Capital expenditures Property improvements that cannot be expensed as a current operating expense for tax purposes. Examples include a new roof, tenant improvements, or a parking lot—such items are added to the basis of the property and then can be depreciated over the holding period. Distinguished from cash outflows for expense items such as new paint or plumbing repairs (operating expenses) that can be expensed in the year they occur. Also see operating expenses.

Capital gain Taxable income derived from the sale of a capital asset. It is equal to the sales price less the cost of sale, adjusted basis, suspended losses, excess cost recovery, and recapture of straight-line cost recovery.

Capital market The supply and demand for resources to invest in real estate and other investments.

Capitalization rate A percentage that relates the value of an income-producing property to its future income, expressed as net operating income divided by purchase price. Also referred to as cap rate.

Capital tax Any tax on a change in capital value (including capital gains tax, estate tax, or inheritance tax); as distinguished from a tax on income.

Cash flow The net cash received in any period, taking into account net operating income, debt service, capital expenses, loan proceeds, sale revenues, and any other sources and uses of cash.

Cash flow after tax/es (CFAT) For properties, it is the result of first calculating the net operating income, less mortgage and construction loan interest, less cost recovery for improvements and personal property, less amortization of loan points and leasing commissions to arrive at real estate taxable income. Next, real estate taxable income is multiplied by the applicable marginal tax rate to result in the tax liability (savings). Then, from the net operating income, annual debt service is subtracted to equal the cash flow before taxes (CFBT). Finally, the cash flow after taxes (CFAT) is calculated from the CFBT, less the tax liability (savings), plus investment tax credit. The Cash Flow Analysis Worksheet can be used to calculate a property’s gross operating income, net operating income, real estate taxable income and tax liability or (savings), CFBT, and CFAT.

Cash flow before tax/es (CFBT) For properties, it is the result of calculating the effective rental income, plus other income not affected by vacancy, less total operating expenses, less annual debt service, funded reserves, leasing commissions, and capital additions. The Annual Property Operating Data form can be used to calculate a property’s effective rental income, gross operating income, total operating expenses, net operating income, and cash flow before taxes.

Cash flow model The framework used to determine the cash flow from operations and the cash proceeds from sale.

Cash-on-cash rate A return measure that is calculated as cash flow before taxes divided by the initial equity investment.

Cash proceeds from sale The sales price less sales costs, mortgage balance, and tax liability on sale. Also known as sales proceeds after tax.

Central place theory A location theory that accounts for the size, distribution, and organization of settlements, places, market areas, and establishments in a competitive and interdependent urban system, to explain differences in the locational tendencies and preferences of businesses as they seek to maximize market accessibility, sales, and profits.

CFAT See cash flow after tax.

CFBT See cash flow before tax.

City An urban settlement or system containing various functions, agents, institutions, and components which interact and work together to satisfy the wants and needs of its inhabitants (as well as a portion of the population in surrounding rural areas).

Class life The useful economic life of an asset set by the Internal Revenue Service.

Close Third stage of four-stage transaction management process pertaining to bringing the parties together and consummating an agreement. The acronym CLOSE represents the contingencies, legal instruments, obstacles, signatures, and execution involved in the close stage.

Commercial real estate Any multifamily residential, office, industrial, or retail property that can be bought or sold in a real estate market.

Common area For lease purposes, the areas of a building (and its site) that are available for the nonexclusive use of all its tenants, such as lobbies, corridors, and parking lots. (Real Estate Information Standards)

Common area maintenance (CAM) Charges paid by the tenant for the upkeep of areas designated for use and benefit of all tenants. CAM charges are common in shopping centers. Tenants are charged for parking lot maintenance, snow removal, and utilities.

Community center A community center is a retail property type that typically offers a wider range of apparel and other soft goods than the neighborhood center does. Among the more common anchors are supermarkets, super drugstores, and discount department stores. Community center tenants sometimes contain off-price retailers selling such items as apparel, home improvement/furnishings, toys, electronics, or sporting goods. The center is usually configured as a strip, in a straight line, “L”, or “U” shaped. Of the eight center types, community centers encompass the widest range of formats. For example, certain centers that are anchored by a large discount department store refer to themselves as discount centers. Others with a high percentage of square footage allocated to off-price retailers can be termed off-price centers.

Comparative advantage The principle that cities or regions tend to produce those items or support those activities for which they have the greatest advantage over other areas as defined by the factors of production, demand, supporting industries, and quality of life considerations, as defined in relation to human, financial, and physical resources, and opportunity costs—costs expressed in terms of opportunities foregone.

Competition (retail) A market condition or setting in which numerous firms compete for a share of the retail market in a given geographic area; a term which is also used to denote rivals or competitors.

Compound interest Interest computed on the original principal and accumulated interest.

Compounding A type of calculation in which interest earned is reinvested and earns additional interest.

Confidence range method (95%) A statistical method of estimating a range of vacancy rates with a 95% confidence such that the expected vacancy rate for the next time period falls within that range (using the sample mean vacancy rate and corresponding standard deviation as input).

Contract rent The total rental obligation, expressed in dollars, as specified in a lease. Also known as base rent. (Real Estate Information Standards)

Cost The actual dollar amount paid for a property or the amount needed to build or improve it at a specified time in the future.

Cost approach A method of determining the market value of a property by evaluating the costs of creating a property exactly like the subject.

Cost approach improvement value The current cost to construct a reproduction of, or replacement for, the existing structure less an estimate for accrued depreciation from all causes. [Appraisal Institute]

Cost of capital See weighted average cost of capital.

Cost of occupancy Expenditures that are required to assume and maintain occupancy of a space. Such expenditures include rent and/or mortgage payments, and recurring costs, such as real estate taxes, repairs, operating expenses, and other outgoings directly resulting from the use of the property. (Encyclopedia of Real Estate Terms 2nd Edition, Damien Abbott)

Cost recovery An annual deduction based on the class life of an asset.

Cost recovery recapture According to the Taxpayer Relief Act of 1997, for properties sold after May 6, 1997, a noncorporate taxpayer will have to recapture, or pay taxes on, any straight-line cost recovery taken during the holding period, to the extent there is any gain.

Cross-over chart A visual representation of the relationship between the costs of leasing and owning at varying discount rates.

Cross-over (office use) demand Industrial space that is used as office space in order to lower the rental rate of a property. Also known as flex space.

Customer-spotting approach An approach to estimating the retail trade area (and sales/revenue potential) for a given establishment or center based on the location of existing customers via point-of-sale information (by obtaining customer address or zip code data) or customer surveys (by interviewing customers as they enter the store); data which can later be mapped to determine the extent of the trade area.

Data Refers to information collected and presented in a form that facilitates processing and analysis.

Data dispersion The amount or degree to which data points in a series are spread or dispersed about their mean (also referred to as variation about the mean).

Debt-coverage ratio (DCR) Ratio of net operating income to annual debt service. Expressed as net operating income divided by annual debt service.

Depreciation The loss of utility and value of a property.

Demand The volume or quantity of a product or service purchased, or willing to be purchased, in relation to price.

Demand factors Elements or forces that influence the demand for goods and services in a given market area.

Demographics Characteristics of human populations as defined by population size and density of regions, population growth rates, migration, vital statistics, and their effect on socio-economic conditions.

Depreciation The loss of utility and value of a property.

Desktop GIS GIS software programs that support a wide variety of functions, queries, and mapping capabilities for personal computer-based applications, geared toward visual presentation and descriptive analyses of geo-coded data.

Differential cash flow The difference that results when the cash flows from one alternative are subtracted from the cash flows from another alternative.

Direct survey method The use of personal interviews with key personnel in all major firms within a given community to determine the percentage of a firm’s revenues obtained from sales made outside the local economy for the purpose of estimating firm-specific basic employment and, by aggregation, the total basic employment in that community; a method that is known to be costly and time consuming.

Disaggregating demand The process of separating and identifying the various forces and factors which affect the demand for a given property type in a given market or the differentiation of demand by category (in reference to tenure, household income, and geographic submarket).

Disaggregating supply The process of separating and identifying the various forces and factors which affect the supply of a given property type in a given market or the differentiation of supply by category (including leased versus owned, unit type, price, and geographic submarket).

Discount rate The percentage rate at which money or cash flows are discounted. The discount rate reflects both the market risk-free rate of interest and a risk premium. Also see opportunity cost.

Discounted effective rent The cash flows over the term of the lease, discounted to the present value.

Discounting The process of reducing the value of money received in the future to reflect the opportunity cost of waiting to receive the money.

Displaced sales Sales that result from purchases made by customers who are not located in the subject service area (represents a revenue gain for retail establishments as sales are generated from consumers who reside outside the local trade area).

Diversification A method of reducing risk by investing in unrelated (uncorrelated) assets.

Drain information Information (substantiated and rumored) regarding inventory that is to be removed from the market by the forecast period.

Drive-time approach An approach to estimating the trade area (and sales/revenue potential) for a given retail establishment or center based on the central place theory concept of range and how far people are willing to travel to obtain retail goods as defined by drive time or mileage.

Due diligence The process of examining a property, related documents, and procedures conducted by or for the potential lender or purchaser to reduce risk. Applying a consistent standard of inspection and investigation one can determine if the actual conditions do or do not reflect the information as represented.

Dynamic system A complex and ever-changing or evolving set of diverse and interrelated entities and agents which are organized into a coherent and working totality which serves multiple and/or common purposes or objectives. Also see system and market dynamics.

Economic base Those economic activities or sectors in a local or regional economy that account for a certain share of the area's income that is generated from exports of goods and services.

Economic base analysis Inquiries that focus on the extent to which changes in basic employment (export-oriented activities and associated wage-income) affect the economic, employment, and population growth of a local or regional economy.

Economic base multiplier A measure that provides a rough estimate of how changes in basic employment will affect total employment in a given region (all other things being equal); defined as the ratio of total employment to basic employment.

Economic characteristics Attributes of the workforce, including production and employment activities.

Economic obsolescence The reduction in a property’s value due to external circumstances such as legislation or changes in nearby property use.

Economic sectors Branches or divisions of a local or regional economy in which particular activities take place. Effective An amount after a base amount has been adjusted for concessions, allowances, and costs.

Efficiency A measure of the capacity or effectiveness of space to produce the desired results with a minimum expenditure of time, money, energy, and materials.

Efficiency percentage The relationship of useable area to rentable area on a given property. Also see add-on factor, load factor, and rentable-to-useable ratio.

Employment ratios The percentage of total employees (at the firm or industry level) that are office space users.

Environmental conditions Features or state of the physical environment and the surroundings, factors, or forces which influence or modify that environment.

Environmental hazards Any physical or natural condition or event which possesses a risk to humans.

Environmental impacts The repercussions of an activity or specific land use on the physical/social environment as a consequence of emissions, waste disposal, water and power useage, etc.

Equilibrium point The price at which the quantity supplied equals the quantity demanded.

Equity lease A type of joint venture arrangement in which an owner enters into a contract with a user who agrees to occupy a space and pay rent as a tenant, but at the same time, receives a share of the ownership benefits such as periodic cash flows, interest and cost recovery deductions, and perhaps a share of the sales proceeds.

Equity yield rate The return on the portion of an investment financed by equity capital.

Exchange Under Section 1031 of the Internal Revenue Code, like-kind property used in a trade or business or held as an investment can be exchanged tax-deferred. Under a fully qualified Section 1031 exchange, real estate is traded for other like-kind property. All capital gains taxes are deferred until the newly acquired real estate is disposed of in a taxable transaction. The underlying philosophy behind the deferral of capital gains taxes is that taxation should not occur as long as the original investment remains intact in the form of (like-kind) real estate (like-kind refers to real property as such, rather than the quality or quantity of property).

Expansion A phase of the real estate or business cycle characterized by the dramatic short-term increase in the supply of available units in a given market (due to economic growth and increasing construction activity) as a response to increasing and/or pent-up demand and rising price levels.

Expected value (EV) The sum of the weighted averages of all possible outcomes of a probability distribution. Probability distribution is the collection of all possible outcomes for an event and their corresponding probabilities of occurrence. The probabilities of occurrence for each possible outcome are used as the weights. The sum of each possible value multiplied by its probability of occurrence equals the EV of the outcome. EVs can be calculated for any type of outcome the investor chooses to analyze: net operating incomes, after-tax cash flows, and rates of return (IRRs). An example of calculating the EV of the IRR for an investment follows: Scenario IRR% Probability Weighted Average Best-case 17.0 0.10 1.70 Most-likely case 14.6 0.80 11.68 Worst-case 13.2 0.10 1.32 Sum = 1.00 EV = 14.70

Expenditure patterns The tendencies or propensities of individuals/households to spend disposable income on a given good or service in comparison to other goods and services (typically defined as a percentage of disposable income) in relation to income level or range and/or other demographic or socio-economic characteristics.

Expense stop The level (or maximum amount) up to which the landlord will pay certain operating expenses. Amounts above the stop are the responsibility of the tenant.

External economies Savings or cost-cutting allowances realized by firms or industries within a given city that are primarily due to the advantages of sharing production inputs, information, and infrastructure and/or possibly linked to a city's comparative advantage to support a given activity.

External obsolescence A form or source of accrued depreciation considered in the cost approach to market value. The loss of value is because of external forces and change. For example, a new mall causes traffic and congestion, negatively affecting residential property values nearby, or a motel is no longer viable because a highway is rerouted, or another example would be depressed market conditions.

Factors of production The rudimentary components of any production process or system consisting of: land and land-based resources (including raw materials); capital, which includes real capital such as machinery, facilities, and infrastructure and financial capital to start or expand businesses; labor or human input (as defined in terms of labor hours or quality/productivity); and technology which includes production know-how and methods, as well as management and operations skills.

Fair value of an asset (or liability) The amount at which the asset (or liability) could be bought (or incurred) or sold (or settled) in a current transaction between willing parties, that is, other than in a forced or liquidation sale. (Real Estate Information Standards)

Fashion/specialty center This type of retail center is composed mainly of upscale apparel shops, boutiques, and craft shops carrying selected fashion or unique merchandise of high quality and price. These centers need not be anchored, although sometimes restaurants or entertainment can provide the draw of anchors. The physical design of the center is very sophisticated, emphasizing a rich décor and high-quality landscaping. These centers usually are found in trade areas having high-income levels.

Feasibility analysis The process of evaluating a proposed project to determine if that project will satisfy the objectives set forth by the agents involved (including owners, investors, developers, and lessees).

Financial leverage The use of borrowed funds to acquire an investment.

Financial risk The possible change in an investment’s ability to return principal and income.

Fixed expenses Costs that do not change with a building’s occupancy rate. They include property taxes, insurance, and some forms of building maintenance.

Fixed lease A lease in which the lessee pays a fixed rental amount for the duration of the lease.

Flex space Space that is flexible in terms of what it can be used for (for example, space that could be utilized for industrial or office activities). Also see cross-over (office use) demand.

Forecast An estimate or prediction of a future condition or outcome.

Forecast period An upcoming time period of interest in which a forecast is to be made.

Formal (or geographic) data Information/data collected and presented by formal region. Also see formal region.

Formal region A region identified by political jurisdiction or on the basis of the presence or absence of one or more distinguishing features or characteristics.

Free rent See rent concessions.

Fully amortized mortgage loan A method of loan amortization in which equal periodic payments completely repay the loan.

Functional components Factors which determine how a location or site functions.

Functional data Information/data collected and presented by functional region. Also see functional region.

Functional feasibility Considerations made in the site selection process which assist in the evaluation of site potential as defined in terms of the practicality of a site, the best site for a given use, or the determination of a site's best use, through the examination of linkages, competition, demographics, and market conditions.

Functional obsolescence A form or source of accrued depreciation considered in the cost approach to market value. The reduced capacity of a property or improvements to perform their intended functions due to new technology, poor design, or changes in market standards.

Functional region A region delineated in terms of linkages or economic interactions that are typically organized as a trade area about a dominant location, center, or economic activity.

Future value (FV) The amount to which money grows over a designated period of time at a specified rate of interest.

FV See future value.

Gap analysis An evaluation of the difference in the demand and supply of space (measured in terms of square footage) for a particular type of commercial property in a given market area where gaps are expressed as the amount of square footage demanded less the amount of square footage available in a given time period. Note that if demand exceeds supply, the gap will be positive. A positive gap indicates that potential opportunities exist for successful commercial real estate transactions. However, transactions might be avoided when supply exceeds demand (or when a negative gap occurs), as there is an oversupply of available space in the market.

General market area gap analysis A gap analysis that is carried out for a city or several cities (simultaneously) to identity one or more general market areas where a positive gap exists for a particular type of commercial real estate. Also see gap analysis.

General market factors Factors influenced by the demographic, economic, and locational characteristics and the organizational aspects of a market.

Generic space Commercial space that can be used for a variety of purposes, such as multiple-use office space.

Geographic Information System(s) (GIS) System(s) (usually computer-based) used for capturing, handling, storing, retrieving, managing, manipulating, and displaying geographic information or geo-coded data.

Geographic submarket The total number of households or housing units within a given area as defined by tenure, income, and other socio-economic attributes that are known to exist or estimated to be within specific geographic units or divisions (for example, in various census tracts).

Globalization The condition of being or becoming globalized. A concept used to recognize crossjurisdictional interdependencies and the continuing integration of local, regional, and national economies which now form a larger economic and production system that is worldwide in scope and application; a trend that has greatly affected local economic change and real estate values.

Government incentives Concession given or measures taken by local or regional government to attract firms or investment dollars to a given locality for the purposes of promoting economic growth and encouraging development.

Gravity model A model that is used to account for a wide variety of flow patterns in human/economic systems, based on Newton's gravity equation which defines gravity or the flow potential (between two sites or locations) as directly proportional to the product of their masses (or size) and inversely proportional to the square of the distance between them: gravity = (mass × mass) ÷ distance2.

Gross area The entire floor area of a building or the total square footage of a floor.

Gross leasable area (GLA) The total floor area designed for tenant occupancy and exclusive use, including basements, mezzanines, and upper floors, and it is measured from the center line of joint partitions and from outside wall faces. GLA is that area on which tenants pay rent; it is the area that produces income.

Gross lease A lease in which all expenses associated with owning and operating the property are paid by the landlord. Also see net lease.

Gross operating income The total income generated by the operations of a property before payment of operating expenses. It is calculated from potential rental income, plus other income affected by vacancy, less vacancy and credit losses, plus other income not affected by vacancy. The Annual Property Operating Data form or the Cash Flow Analysis Worksheet can be used to calculate a property’s gross operating income.

Gross rent multiplier (GRM) A method investors may use to determine market value. This method calculates the market value of a property by using the gross rents an investor anticipates the property will produce at end of year 1 multiplied by a given factor (known as the gross rent multiplier extracted from the marketplace).

Ground lease A lease of the land only. Usually the land is leased for a relatively long period of time to a tenant that constructs a building on the property. A land lease separates ownership of the land from ownership of buildings and improvements constructed on the land.

Growth patterns In reference to the patterns of urban or population growth in a geographic market, an important consideration in retail trade area analyses as growth patterns are known to affect sales/revenue potential within a market given the tendency of retail to follow population movement and income concentrations over time.

Heavy utility needs In reference to location-decision considerations made in relation to the energy or power requirements of a firm/user in the assessment of the feasibility of a location to support a given activity.

Hedging Protecting oneself against negative outcomes. High order good A good or service requiring a high threshold population before it is offered to a market. Such a good or service requires a large number of consumers to support its business and requires a larger trade area than a low order good. Also see lower order good.

High-tech Economic sectors and activities oriented toward the creation and production of hightechnology products and the use of advanced designs, techniques, or devices in fields like electronics, optics, lasers, aerospace, computers, semiconductors, and telecommunications.

Highest and best use The reasonably probable and legal use of vacant land or an improved property, which is physically possible, appropriately supported, financially feasible, and that results in the highest value. [Appraisal Institute]

Highest and best use (financial) analysis A determination of the highest and best use of one or more sites (either vacant or as though vacant) or properties as improved by examining the profitability of all possible use scenarios (including renovation, rehabilitation, demolition, and replacement).

Household A housing unit or residence at a given location that is occupied by one or more persons (that is, a social unit comprised of one or more individuals living together in the same dwelling or place).

Household population The total number of households in a given geographic market or submarket as defined by specific demographic and socio-economic characteristics.

Housing demand The total number of housing units demanded in a given market, defined as occupied household units divided by one minus the vacancy allowance for that market (where demand is affected by the rate at which new households are being added to the market, allowing for a normal level of vacancy).

Imbalances Unstable or nonsustainable conditions which arise out of a market disequilibrium or the lack of balance between the forces of supply and demand in any or all subcategories of commercial properties in one or more geographic submarkets over a given time period.

Imperfect market A market in which product differentiation exists, there is a lack of important product information, and certain buyers or sellers may influence the market. Commercial real estate is bought and sold in an imperfect market.

In-migration The process by which a given geographic area absorbs new individuals/households from locations outside that area (an influx of individuals/households to a given area). In-the-door approach An approach to estimating the trade area (and sales/revenue potential) for a given retail establishment or center based on observed flow patterns or traffic counts, where estimates are obtained for both the percentage of traffic that stops or patronizes that establishment/center and the percentage of people coming in-the-door who make a purchase.

Income capitalization approach A method to estimate the value of an income-producing property by converting net operating income into a value. The cap rate is divided into the net operating income to obtain the estimated value. Value = net operating income ÷ capitalization rate

Index lease A lease in which the rental amount adjusts accordingly to changes and/or movements in a price index, commonly the consumer price index. Industrial gap The difference between the demand for an industrial property and the supply of that property in a given market or area.

Industrial location decision-making A decision-making process that involves the examination and evaluation of alternative locations or sites for a particular industrial activity based on location/site feasibility characteristics; great importance is placed on the national or regional location decision (usually narrowing the location decision to a handful of cities or localities), with less importance given to the local site selection process.

Industrial property Commercial properties that are used for the purposes of production, manufacturing, or distribution.

Industrial service area The geographic area within a market that contains either an acceptable number of employees (and meets necessary labor requirements), or the necessary service and resources needed to support a given industrial activity or facility.

Initial investment The outlay of cash needed to acquire an investment.

Input-output modeling A mathematical approach to the description of a local or national economy, which takes explicit account of the flows and linkages within and between economic sectors. Recognizing that output (products and services) from one sector may require production inputs for other sectors, used to estimate sector- and region-specific multipliers for the purpose of analyzing the direct and indirect impacts of a given change in a particular sector or region.

Insurable value The value of the portions of the property that are physically destructible.

Intangible characteristics Attributes that are not directly measurable or quantifiable, and therefore must be expressed in a qualitative or abstract manner.

Interest-only loan A method of loan amortization in which interest is paid periodically over the term of the loan and the entire original loan amount is paid at maturity.

Internal growth The rate at which a base population or the number of new households is changing due to natural increase (births less deaths) and time (the aging and maturation of that population), as children are born, grow up, and form families and households of their own.

Internal rate of return (IRR) The percentage rate earned on each dollar that remains in an investment each year. The IRR of an investment is the discount rate at which the sum of the present value of future cash flows equals the initial capital investment.

Internal rate of return method A comparison method that calculates the internal rate of return of the differential cash flow between any two investment alternatives, then compares that rate with the user’s opportunity cost. Also see internal rate of return.

Inventory The supply or stock of a given commodity or a listing thereof.

Investing Limiting current consumption in favor of future consumption.

Investment value The value to a specific investor, based on that investor’s requirements, tax rate, or financing.

IRR See internal rate of return.

IRR of the differential The internal rate of return on the difference between the cash flows for any two investment alternatives. Also see internal rate of return method and differential cash flow.

Key federal laws With respect to the handling of hazardous materials, they are important laws or statutes enacted to enforce the responsible handling of materials to minimize the danger to human beings and/or the environment.

Labor pool A body or core group of workers (employed and employable) that make up the local labor force.

Landlord The lessor or owner of the leased property.

Landlord-paid tenant improvements (LPTI) The total cost (outlay) of necessary tenant improvements paid by the landlord netted against any contribution made by the tenant.

Land sale-leaseback The same concept as a sale-leaseback, but only the land is sold and leased back using a ground lease.

Leakage (retail) Purchases made in other service areas by consumers located within the subject area (representing a loss of revenue for retailers located within the trade area in which those consumers reside).

Lease A contract that creates the relationship of landlord and tenant. A contractually binding agreement that grants a right to exclusive possession or use of property, usually in return for a periodic payment called rent. (Encyclopedia of Real Estate Terms 2nd Edition, Damien Abbott)

Lease buyout The process by which a landlord, tenant, or third party pays to extinguish the tenant’s remaining lease obligation and rights under its existing lease agreement.

Lease terminology Terms commonly used in reference to a lease.

Leased fee In exchange for permitting a tenant to use the property, the owner/lessor has the right to receive rental income and the right to repossess the property upon termination of the lease.

Leased fee interest The value (to the owner) of the rental payments plus the value of the property at the end of the lease term (reversionary interest).

Leasehold estate In exchange for rent, the tenant has the right to occupy and use the property for the duration of the lease.

Leasehold interest The value (to the tenant) of the lease. The value of the leasehold interest is determined by present value of the difference between market rent and the contract rent.

Leasing A means of obtaining the physical and partial economic use of a property for a specified period without obtaining an ownership interest.

Lessee The person renting or leasing the property. Also known as a tenant.

Lessor The person who rents or leases a property to another. Also known as a landlord.

Leverage The use of borrowed funds to finance a portion of the cost of an investment.

Lifestyle characteristics (psychographics) Intangible characteristics of a local economy that define and shape the quality of life element and the social and cultural identity of the local population.

Linkages The cost to transport goods, services, or people to and from a site measured in time, distance, and inconvenience.

Liquidation value The likely price that a property would bring in a forced sale (foreclosure or tax sale). Used when a sale must occur with limited exposure time to the market or with restrictive conditions of sale.

Liquidity The ability to convert an investment into cash quickly without loss of principal.

Load factor The ratio of rentable area to useable area. The load factor is a gauge by which a user can evaluate different sites with comparable rents. It is also known as the add-on factor.

Loan balance The amount of money remaining to be paid on an amortizing loan at a given time.

Loan or mortgage value That portion of the value of real property recognized by the lender when used to secure a loan.

Loan point A charge prepaid by the borrower upon the origination of a loan. One point equals one percent of the loan amount.

Loan-to-value ratio (L/V) The amount of money borrowed in relation to the total market value of a property. Expressed as the loan amount divided by the property value.

Location analysis The process of evaluating whether a general location meets the requirements of being both possible and practical as defined on the basis of technical and functional components.

Location quotient An index, defined in ratio form that compares the proportion of a local activity to the proportion of that activity found at some larger geographic scale, such as the nation.

Location quotient method A method for estimating a community's economic base multiplier using basic employment estimates obtained from estimated location quotients (under various simplifying assumptions).

Lower order good A good or service requiring a low threshold population to be offered. A good or service is considered to have a low threshold if it does not require a large number of consumers to support its business and thus requires a small trade area. Also see high order good.