Real Estate Investment Glossary
Absorption Rate
The amount of inventory or units of a specific
commercial property type that become occupied during
a specified time period in a given market.1 Also referred
to as "Market Absorption."
Amortization
The repayment of loan principal through equal payments
consisting of both principal and interest over a
designated period of time.2
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
can then be depreciated over the period of their useful life,
as distinguished from operating expenses, such as new
paint or plumbing repairs, which can be expensed in the
year they occur.3
Capitalization Rate
The capitalization rate (or cap rate) for a property
is determined by dividing the property's net operating
income (NOI) by its purchase price. Generally, high cap
rates indicate higher returns and greater perceived risk.
Cap Rate = NOI/Purchase Price4
CDO (Collateralized Debt Obligations)
An investment-grade security backed by a pool of various
other securities. CDOs can be made up of any type of debt,
in the form of bonds or loans, and usally do not deal with
mortgages. CDOs are divided into slices, each made up of
debt which has a unique amount of risk associated with it.
CDOs are often sold to investors who want the income
generated by the debt without purchasing the debt itself.5
CMBS (Collateralized Mortgage-Backed Securities)
A mortgage-backed security that is collateralized by a
pool of commercial properties.6
Core Investment Style
Investing in high-quality, stabilized properties,
substantially occupied (generally 85-100 percent leased);
generally providing stable current income with the
opportunity for growth/appreciation in value to create
total return.7
Cost of Capital
The cost to a company, such as a REIT, of raising capital in
the form of equity (common or preferred stock) or debt.
The cost of equity capital generally includes both the
dividend rate as well as the expected equity growth either
by higher dividends or growth in stock prices. The cost of
debt capital is merely the interest expense on debt incurred.8
Credit Spread
The spread between 10-year Treasury notes and longterm
commercial lending rates that banks set after
considering all appropriate risk factors. For example,
if 10-year T-notes are currently 3.00 percent and
commercial lending rates for core investments in
commercial office properties are 6.00 percent, then
the current spread is 300 basis points.
(6.00-3.00 = 300 basis points)9
EBITDA
Earnings before interest, taxes, depreciation,
and amortization.10
Funds from Operations (FFO)
The most commonly accepted and reported measure of
REIT operating performance. FFO is equal to a REIT's net
income, excluding gains or losses from sale of property, and
adding back real estate depreciation and amortization.11
Leverage
The amount of debt in relation to either equity capital
or total capital.12
Modified FFO (MFFO)
This is a term that indicates a financial measure that modifies
FFO in some way which may differ between reporting
companies. MFFO generally excludes from FFO impairment
charges, adjustments to fair value for derivatives not
qualifying for hedge accounting and acquisitions-related
costs, to further evaluate operating performance.13
Net Absorption
The square feet leased in a specific geographic area over a
fixed period of time, after deducting space vacated in the
same area during the same period.14
Net Asset Value (NAV)
The net "market value" of all of a company's assets including,
but not limited to, its properties, after subtracting all of its
liabilities and obligations.15
Net Operating Income (NOI)
Income after operating expenses have been deducted, but
before deducting income taxes and financing expenses.
NOI = Gross Income – Operating Expenses16
Opportunity Investment Style
Investing in properties in markets with lower barriers to
entry; generally involves a conversion, redevelopment, or
significant lease-up for maximization of existing property
value. Seeks low to no current income and superior
back-end returns.17
Real Estate Investment Trust Act of 1960
The federal law that authorized REITs allows small investors to
pool their investments in large scale real estate in order to get
the same benefits as might be obtained by direct ownership,
while diversifying risk.18
REIT
A REIT is a company qualifying as a "real estate investment
trust" under federal income tax law that avoids double
taxation and is dedicated to owning and operating incomeproducing
commercial real estate, such as apartment
complexes, shopping centers, office buildings, and
warehouses. Some REITs also engage in financing real estate.19
Replacement Cost
The estimated current cost to construct a building with
utility equivalent to the building being appraised, using
modern materials and current standards, design, and layout.20
Securitization
Securitization is the process of financing a pool of similar
but unrelated financial assets (usually loans or other debt
instruments) by issuing to investors security interests
representing claims against the cash flow and other
economic benefits generated by the pool of assets.21
Tax Reform Act of 1986
Federal law that substantially altered the real estate
investment landscape by permitting REITs not only to own,
but also to operate and manage, most types of incomeproducing
commercial properties. It also stopped real estate
"tax shelters" that had attracted capital from investors based
on the amount of losses that could be created.22
Value-Added Investment Style
Investing in properties that exhibit management or
operational problems, such as below-market occupancy rates,
physical improvement requirements, or capital constraints
with the goal of re-tenanting, recapitalizing or repositioning
the property in order to increase revenue and create value.23
The material provided is for educational and informational purposes only.
Sources: This information was gathered from sources believed to be reliable, but whose accuracy is not guaranteed.
1Glossary of Commercial Real Estate Terms, National Association of Realtors. (www.realtor.org); 2Ibid; 3Ibid; 4Glossary of REIT Terms, NAREIT (www.reit.com/AllAboutREITs);
5InvestorWords.com; 6Investment Dictionary; Answers.com; 7"The Relationship Between Risk and Return," (BehringerHarvard.com/Education Center); 8Glossary of REIT Terms,
NAREIT (www.reit.com/AllAboutREITs); 9Investment Dictionary; Answers.com; 10Glossary of REIT Terms, NAREIT (www.reit.com/AllAboutREITs); 11Ibid; 12Ibid; 13 Term
defined in Form 8-K, Behringer Harvard Opportunity REIT I, Inc., 03/31/10; 14Commercial Real Estate Leasing Definitions, The Center for Commercial Real EstateTM, 2009;
15Glossary of REIT Terms, NAREIT (www.reit.com/AllAboutREITs); 16Investopedia.com; 17"The Relationship Between Risk and Return," (BehringerHarvard.com/Education
Center); 18Glossary of REIT Terms, NAREIT (www.reit.com/AllAboutREITs); 19Ibid; 20Glossary of Commercial Real Estate Terms, National Association of Realtors. (www.realtor.org);
21Glossary of REIT Terms, NAREIT (www.reit.com/AllAboutREITs); 22Ibid; 23"The Relationship Between Risk and Return," (BehringerHarvard.com/Education Center)