Real estate glossary

A lease where the tenant bears all costs for repairs and insurance. The landlord receives 'clear' rent with no leakage.

The most sought-after lease type in UK commercial property. In the US, this is often called 'Absolute Net' or 'Triple Net' (NNN).

Tenant pays rent plus all three major property expenses: taxes, insurance, and maintenance.

Popular with passive investors because the tenant carries most running costs, though the owner still bears financing, vacancy and major capital repairs.

Tenant pays one flat fee. Landlord pays all operating expenses (taxes, maintenance, insurance).

Higher risk for landlord. If inflation spikes operating costs, the landlord's profit shrinks.

A specific date when the tenant (or landlord) can terminate the lease early, usually with 6 months' notice.

Crucial for valuation. A 10-year lease with a break at year 5 is effectively valued as a 5-year lease ('Term to Break').

A statutory right for a tenant to renew their lease at the end of the term (e.g., UK Landlord & Tenant Act 1954).

Landlords often ask tenants to 'contract out' of this to retain control of the building.

The legal term for a tenant's right to transfer (assign) or sublet their lease to someone else.

Landlords usually restrict this to ensure the new tenant is financially strong.

The obligation of the tenant to return the property in its original condition at the end of the lease.

Often results in a cash settlement paid by the tenant to the landlord to cover repair costs.

A clause ensuring rent can only stay the same or go up at review, never down.

Protects landlord cashflow but is becoming less common in tenant-friendly markets.

Total revenue minus all necessary operating expenses. Before debt, tax, or capex.

Formula: GrossRent - Vacancy - Opex

The 'EBITDA' of real estate. The primary number used to value a building.

The immediate cash return generated by the property based on current passing rent and purchase price.

Formula: (NOI / PurchasePrice) * 100

The headline price tag. 'This is selling at a 5% yield'.

US term for Net Initial Yield. Represents the un-levered return of the asset.

Formula: NOI / AssetValue

Lower Cap Rate = Higher Price. A 4% cap rate implies a 25x multiplier on income.

The anticipated yield once the rent has been increased to current market levels (ERV).

Formula: (EstimatedRentalValue / Price) * 100

Used when a property is 'under-rented' (tenants paying below market rates).

A weighted average of the Initial Yield and Reversionary Yield. It represents the true internal return.

The standard metric used by professional valuers in the UK/EU.

The open market rent the property would achieve if leased today.

If Passing Rent < ERV, the property is 'Reversionary' (good). If Passing Rent > ERV, it is 'Over-rented' (bad).

Weighted Average Unexpired Lease Term. The average time remaining on all leases, weighted by rent.

Formula: Sum(Remaining Term_i * Rent_i) / Sum(Rent_i)

The single most important metric for income security.

The time between one tenant leaving and the next one arriving.

Costly not just due to lost rent, but also due to landlord taking over empty rates/taxes.

A fee collected from tenants to pay for shared services (security, cleaning, lifts).

If the building is inefficient, high service charges make the total cost to tenants too high.

An incentive given to tenants (e.g., '6 months free') to sign a lease.

Lowers the 'Effective Rent' while keeping the 'Face Rent' high to support valuation.

Capital Expenditure (upgrading the asset, e.g., new roof) vs Operating Expenditure (maintaining it, e.g., cleaning).

Capex adds value to the balance sheet; Opex reduces profit on the P&L.

The size of the loan relative to the asset value.

Formula: LoanAmount / PropertyValue

Commercial loans are typically 50-65% LTV. Higher LTV = Higher Risk.

Debt Service Coverage Ratio. How easily income covers mortgage payments.

Formula: NOI / AnnualDebtService

Banks demand >1.25x. If it drops below 1.0x, you are losing cash every month.

The gradual repayment of a loan's principal over time.

Unlike Interest Only (IO), amortizing loans build equity but consume more cashflow monthly.

The primary loan (mortgage). First to be repaid, lowest risk, lowest interest rate.

If the property is sold, the Senior Lender gets paid before anyone else.

Junior debt that sits between Senior Debt and Equity. Higher risk, higher rate.

Used to bridge the gap when a bank only lends 60% but the developer needs 80%.

The estimated final value of a project once construction is 100% complete and sold/leased.

The 'top line' number in any development appraisal.

How much a developer can afford to pay for land.

Formula: GDV - ConstructionCosts - Fees - TargetProfit = LandValue

Land is worth what you can build on it, minus the cost to build it.

A clause where the land seller gets extra money if the developer achieves a higher value than expected.

Protects the seller from selling cheap land that becomes very valuable.

The point when the building is 'finished' and ready for occupation, triggering lease starts and warranty periods.

Often contentious. Does 'finished' mean 100% perfect or just 'usable'?

A property that will become obsolete due to new environmental regulations (e.g. failing minimum EPC standards).

The biggest risk in real estate today. 'Brown Discount' vs 'Green Premium'.

Global certification systems for rating the sustainability of buildings.

Institutional investors (Pension Funds) are often banned from buying buildings without these ratings.

The extra rent or value achieved by highly sustainable buildings.

Top tenants will now pay more to be in 'Green' buildings to meet their own corporate targets.

Energy Performance Certificate rating from A (most efficient) to G (least efficient).

In many markets, properties below minimum EPC standards cannot be legally let.

A building that produces no net carbon emissions through efficient design and renewable energy.

Increasingly required by institutional tenants to meet their own ESG commitments.

The lowest risk real estate strategy: prime locations, long leases, blue-chip tenants.

Target returns: 6-9% IRR. Think: Trophy office in Manhattan with a 15-year Google lease.

Slightly higher risk than Core, with minor value-add opportunities.

Target returns: 9-12% IRR. Maybe some lease expiries or light capex needed.

Properties requiring significant improvement (renovations, re-leasing, repositioning).

Target returns: 12-18% IRR. Higher risk, but substantial upside if executed well.

The highest risk strategy: ground-up development, distressed assets, or major repositioning.

Target returns: 18%+ IRR. Can include land speculation or emerging markets.

A company sells its real estate and immediately leases it back from the buyer.

Unlocks capital for the seller; provides secure income for the buyer.

A development built specifically to a tenant's requirements, with a pre-signed lease.

Lower risk development as income is secured before construction begins.

The tenant leases only the land and owns (or builds) the structure on top.

Common for retail and infrastructure. Land reverts to owner at lease end with improvements.

The annualized return of an investment, accounting for the timing of all cash flows.

The standard metric for comparing investments with different hold periods.

Annual pre-tax cash flow divided by total cash invested.

Formula: Annual Cash Flow / Total Equity Invested

Measures the actual cash yield on your equity, ignoring appreciation.

Total cash returned divided by total cash invested.

Formula: Total Distributions / Total Equity Invested

A 2.0x multiple means you doubled your money. Ignores time unlike IRR.

The cap rate at acquisition, based on Year 1 NOI.

Formula: Year 1 NOI / Purchase Price

Used to compare the initial yield of different acquisition opportunities.

The assumed cap rate when selling the property at the end of the hold period.

Usually assumed higher than going-in cap (building is older). Key assumption in any model.

The projected NOI once a property reaches full occupancy and market rents.

Used for valuation when a property is currently vacant or under renovation.

The total floor space available for tenant use in a retail property.

Includes all tenant spaces but excludes common areas like hallways.

The actual rentable space a tenant occupies, excluding shared areas.

Rent is typically quoted per NLA square foot/meter.

The ratio of usable space to total building area.

Formula: NLA / GIA (Gross Internal Area)

Modern offices target 80%+. Poor efficiency means tenants pay for unusable space.

The percentage of rentable space currently leased.

Formula: Leased Space / Total Rentable Space

90%+ is healthy. Below 80% signals distress or transitional asset.

The rate at which available space is leased in a market over a period.

Positive absorption = demand exceeds supply. Negative = oversupply.

The annual rent divided by the total square footage.

Formula: Annual Rent / Square Feet

The standard unit for comparing rents across different sized spaces.