Glossary of Real Estate Related Terms & Definitions
- Definitions in short form
- Glossary of Terms most commonly found when dealing in Real Estate
- What is Commercial Real Estate
- What is Residential Real Estate
Glossary & definitions
Disclaimer: Terms & definitions used here, are to give a general understanding only. For specific instances a different meaning could apply. Examples shown within, are by no means exhaustive. Do not interpret your own meaning into it, seek legal advice.
The Glossary is a useful reference, for anyone not absolutely certain as to the meaning of a term or terms.
Understanding what is being said, is most crucial before making a determination to act. The Glossary defines terms used throughout, which are not part of most persons every day language.
This Glossary is in alphabetical order, rather than in sequence of events.
What is Commercial Real Estate?
Land, Land with Improvements - Buildings, etc. with a Commercial or Industrial Zoning.
Businesses which are bought and sold - Retail, Whole sale, Manufacturing, Recreational, etc.
Securities or Rights over Real Property
Commercial Real Estate can have many faces. Its main purpose is to earn money for the owner. Simply, it is Real Estate in many forms, which permit and offer an owner, to earn money with the Real Estate.
(a) in its present state - ie; a Revenue Building(s) which provide weekly, monthly or annually an income from rentals.
(b) land which has a latent value, pending its use 'as-is', or development by way of subdivision or adding improvements in the form of buildings, which produce or are capable of producing an income(revenue).
(c) the purchase or sale of a business.
What is NOT considered Commercial? A Residential Single Family Housing Unit - improved or unimproved.
What is Residential Real Estate?
Residential Real Estate is defined for the purpose of this Glossary, as all non revenue producing properties and improvements, in which a single person or family may live. This may be a residential building lot, a single family home, a townhouse, a condominium apartment(Strata Unit) or a mobile home.
A | B | C | D | E | F | G | H | I | J | K | L | M | N | O | P | Q | R | S | T | U | V | W | X | Y | Z | |
Businesses
Not the operation of a business, no matter if Retail, Whole Sale, Manufacturing, but the buying and selling of any such business, falls within the parameters of Commercial Real Estate.
CAM cost
Common Area Maintenance Cost, are all cost incurred against the property shared in common with all other tenants (Lessees). The charges are usually calculated on the actual net area each tenant occupies. These charges are commonly invoiced by the landlord(Lessor) on a monthly basis, and in advance. They are paid concurrent with the due rent and can mostly be paid with one cheque.
Changes in Land-use
Over time, Residential Land in the form of an acreage, or in the form of several Residential building lots, with or without buildings on them, can often receive a higher density designation through changes in the zoning, in conformity with the OCP - Official Community Plan. This is likely to increase the value of your property. The changes may be from a Single Family Residential to a Multi Family Residential zone, or also to a Commercial or Industrial zone. A simple enquiry with the City's Planning department will tell you if there is a potential, known at present, to up-zone your property in the future.
Chattels
Chattels are all things placed onto land or into buildings, which are not required for the basic functionality of the building or other improvements, and are not attached.
Contract
An agreement between two or more parties, whereby each party gives and receives something of value from the other party.
The parties, the object of the agreement, the time and place and all other pertinent details must be contained in the agreement, to make it enforceable in the event a dispute arises.
Counter Offer
A counter offer is the method employed to make your wishes known to the party presenting an offer to you, to adjust details which in the form offered to you, are not acceptable. The price may be too low, the closing date to soon, etc.
A counter offer is legally a new offer. It does not have to be accepted by the person having made the offer. The same applies every time a counter is made. Any change contemplated, should therefore be made keeping that in mind.
An encumbrance on land, usually required by utility companies and municipalities. Sometimes also registered against a title for road and utility access to adjacent properties in a new subdivision.
Granting an easement has a value to the beneficial owner of the easement. It is in all instances a detriment to the affected property.
An easement permits entering upon the effected land for specific purposes. It usually requires the holder of the easement to bear the cost and responsibility to repair any disturbance to the land and what is on the land.
Encumbrances
Beneficial - Those that permit and make possible the use of land.
Detrimental - Those that limit the use of part or all of the property, for any reason. Could render intended development not possible or too expensive.
Other Encumbrances - mortgages, right of ways, easements, registered charges of any kind.
Environmental Encumbrance
- Land previously used, may well have been exposed to environmentally harmful substances such as pesticides, oil & gasoline.
- Most all waterways, marches, steep slopes, etc. may be designated environmentally sensitive, a designation which could render the entire lands useless for development. Required set-backs, mean loss of land.
Today, very stringed requirements are applied, adding significant costs and time delays to any such development. Soil tests in stages are usually necessary to establish the degree, if any, of contamination. Cost for testing and, if necessary cleanup, can be from very to extremely costly.
Fee for Service
A fee is charged for all consulting services. This permits everyone to choose any part of services they feel in need of, without being committed to contract for a package, ie: listing or full agency agreements. It gives a choice to each person to do as much or as little as they feel inclined to do themselves.
Improvements
Are basically all buildings or structures of any description, which are a benefit to the land and have a useful purpose. Improvements can also be other things fastened to the land, and have a beneficial purpose. Annual taxation is usually levied separately on land and improvements, showing a value for each separately.
While land usually goes up in value, improvements always go down, relative to age, condition, and obsolescence's factors.
Income from Real Estate Assets
Rental payments - These are payments made by a tenant to a landlord, usually on a month-to-month basis, with a one month notice to quit from either side, for commercial properties. Different notice rules apply to residential.
Contract Rent - This can also be a contract for simply a month-to-month tenancy, but is mostly employed to spell out the terms for a longer rental period, namely one or more years, and is generally referred to as a lease.
Leasing vs. Renting - advantages for the tenant and the landlord
- For the Tenant - A lease in excess of 3 years in duration, can be registered against the title of the land, and therefore constitutes an interest in land. Something looked at favorably, when it comes time to raise a loan from a financial institution. Another is an option for one or more extensions of the lease period. This gives additional security of tenure for any business.
- For the Landlord - Security of income for a specific period of time. In the case of a sale of subject property - evaluation by income method. This can be a bonus where the improvements are older, and worth less than the capitalized stream of income.
Lessor
The landlord, also referred to as the lessor, either is correct. Terms should not be mixed when referred to in a contract or any other legal document.
In a lease agreement the landlord/owner is mostly referred to as the Lessor.
Lessee
The tenant, also referred to as the Lessee, either is correct. Terms should not be mixed when referred to in a contract or any other legal document.
In a lease agreement, the party renting is often referred to as the Lessee.
Leasing
Renting for a long term under contract, usually with renewal options.
The lease payments are contract rents. All costs are usually in addition to the contract rent.
Lease
The legal document in which all the terms of the lease agreement between the Lessor and the Lessee are found in fine detail and in writing. It is signed and witnessed. A lease agreement for a duration of 3 years or more, may be registered by the Lessee against the owners land title in the appropriate land titles office, as in British Columbia, it constitutes a legal interest in the land. There are potential benefits to the Lessee in some instances.
Listing
A listing is a legal contract form, used by the Real Estate Industry to authorize the agency to act on behalf and with the consent of the owner of property. It identifies the owner, the property, all details of what the listing empowers the agency to do, commissions payable, and dates of beginning and end of the listing period.
Mortgage
A mortgage is a registered charge/encumbrance, against a title to Real Estate. A 1st mortgage has priority over all other charges/security, which may be placed subsequently on title.
Mortgagor
A mortgagor is a legal entity owning the title to Real Estate. It can be a natural person, or a corporation.
Mortgagee
A mortgagee is the person or corporation holding the security, usually for loaning money to the mortgagor.
Offer
Offer or contract of purchase and sale is the document by which a purchaser makes a bid to purchase the property from the vendor. The offer can be accepted as is, or in many instances is replied to with a counter offer.
Once agreement has been reached through negotiation or uncontested acceptance of an offer or counter offer, it becomes a legal contract.
* The same applies to contracts to lease, option or otherwise.
Offer to Lease
An offer to lease is a simple appearing document. However, when signed by all parties, it is legally binding on all those who signed and are parties to the agreement.
This is assuming, that the agreement has all the elements necessary to become a legally enforceable contract. It is a fallacy to believe, that my lawyer can make a few changes if I don't like something.
Option (Option to Purchase, Lease or otherwise)
- Is an encumbrance to the owner of the asset.
- Is a potential benefit to the beneficial owner of the option.
An option is an agreement. A contract sets out the terms of that agreement.
It usually conveys the right to the beneficial owner of the option, to exercise very specific rights within a certain time period. The cost for the option can be negotiated, but is usually between 5% and 10% of the subjects value, as an annual cost.
Renting
Rentals are normally for a short term, giving flexibility to the tenant. Usually on a month to month basis, and can be terminated by either side permitting for one full rental period as the notice period. The rent may include all other associated costs. The shortfall is the fact, that there is no long-term security of tenure, as there is with contract renting, which is referred to as a lease.
Right of Refusal ( ie: The right of first refusal to... )
- An encumbrance for the owner of the asset - giving a right of first refusal limits the ability to deal freely, as the beneficial holder of that right must be given an opportunity to exercise or refuse to exercise that right, before a third party can be dealt with.
- An asset for the beneficial owner of the right of refusal - It usually offers an opportunity to purchase at a time and at a price, as offered to a vendor by a third party purchaser. It also leaves the option not to purchase at all. This may apply to the purchase or lease of Real Estate of any type, as well as to a business, or a partial interest in either.
Usually there are no specific terms attached to a right of refusal.
Right of Way
- An encumbrance on land
Usually required by utility companies, municipalities. Sometimes also registered against a title for road and utility access to adjacent properties in a new subdivision.
Granting a right of way has a value to the beneficial owner of the right. It is in many instances a detriment to the affected property, and should not be treated lightly.
A right of way permits use for those purposes identified in the registered plan and attached schedule. It generally permits the use and disturbance of private lands, without compensation to the owner of the land.
Re-zoning
Bare lands with an existing zoning, or lands over which the authorities having jurisdiction, have indicated, that it can be re-zoned, subject to certain restrictions and provisions. This can be in the form of one single acreage, or in the form of lots in a subdivision.
Subdivision
A larger parcel of land, usually several acres, which can be subdivided into a number of residential building lots, is also considered a commercial activity, as it is done as a business, the business being the development and subsequent marketing of the land for profit.
Value - effects on
Positive - Zoning, location, available public services, available utilities, usability factor of land, quality of improvements, latent development ability to a higher use, lack of similar Real Estate, cleanliness of surrounding land or developments, inclusion the in OCP.
Negative - Contamination of land, uneconomical size or shape of the land, right of ways, easements, under developed improvement when compared to the value of the land, incompatibility of adjacent improvements, unclean or ill maintained surroundings, poor visual surroundings, noise, poor or no view, lack of public services or utilities, and many others not listed here.
Zoning
Is a regulatory tool used by any authority having jurisdiction over the use of land within their region.
A specific zoning designation placed on sections or parcels of land, identifies in great detail, the types of uses, and the manner in which a property may be developed.
Information on existing or obtainable zonings, can easily be found at the Regional District Office, or at the Planning Department of any Municipality.
Most used terms, when addressing expected returns on an investment
ROR - Rate of Return - is a percentage(%) on the total investment based on the sale/purchase price.
This measures the total annual return in percentage(%) irregardless of where the moneys are originating, your own or borrowed(before taxes).
ROE - Return on Equity - on the investors actual cash invested - not borrowed
ROI - Return on Investment - measures the return on your investment on the whole project. This is where experienced investors use leverage to their advantage. Borrowing money at a lower rate than the rate you are receiving from your investment, increases the rate of return on your on capital. Say if the rate of return is 9% overall, your return on equity may well be 12%.
IRR - Internal Rate of Return - over a fixed number of years (5 to 10 or more) with all capital plus gains, re-invested annually and compounded, the average annual return over the total investment horizon is referred to as the IRR.
This is the truest measure of calculating the cumulative return from all investments and re-investments over the investment horizon . When used on revenue properties, the eventual gain upon the sale of the Real Estate, is part of the equation. This measure usually takes into account the tax consequences to the investor, and therefore shows the real return after taxes. In this calculation, it is assumed, that the investment will be sold after the pre-determined investment horizon has been reached.
COC - Cash on Cash - This is a term used when expressing, that at least for calculation purposes, none of the funds are borrowed.
CAP Rate - Capitalization Rate, is the rate by which net earnings from an income stream, of a particular business activity, are multiplied to arrive at a value for that business. The actual amount must be net of all costs, and after all adjustments for unusual derivations from the norm. The CAP Rate is then applied and a fair value may thereby be established. Having a spreadsheet analysis to that effect, will assist greatly, when contemplating the sale or purchase of the income stream. The CAP Rate is sometimes confused with the expected ROE - ROI - ROR.
Investment Horizon
Investment horizon is the period expressed in time, measuring the time of actual ownership after which time the investment will become again available to the investor.
Investment
Expectations from an investment can be numerous:
- Place money into a safe commodity for long term capital appreciation - usually land
- Place money into revenue producing land and/or building for immediate returns plus long term capital appreciation.
- Purchase land with development potential for residential or commercial future use
- Purchasing a business, or share or shares in an active business/enterprise
- Purchasing a business with an established cash flow, or a good potential for some, with a positive bottom line.
- Purchase the shares of a bankrupt business with huge losses, for tax reasons.
The above are only some examples.
Note:
All of the within information is provided to give a better basic understanding of terms commonly found when dealing in Commercial Real Estate. These terms should not be applied by individuals when trying to interpret actual documents.
Legal advise: should only be thought from legal experts.
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