Leases, loan papers and tax notices each use a vocabulary of their own. Every term below gets one or two plain sentences, the way we would explain it across a kitchen table, with a link to where it shows up in our work.
Thirty terms, defined plainly
- Appraisal
- An opinion of value by a state licensed or certified appraiser following USPAP, which Clover State does not provide. Under 2018 Federal Reserve, FDIC and OCC rules, lenders need one for most commercial real estate transactions above $500,000.
- Assessment ratio
- The share of market value Wyoming taxes: 9.5% for commercial property and 11.5% for industrial, per Teton County’s guide to determining property tax. Assessed value is market value multiplied by that rate.
Where this shows up in our work - Assignment
- Transferring the whole lease to a new tenant, who takes over its obligations. Leases usually require the landlord’s consent, and many keep the original tenant liable unless it is released in writing.
Where this shows up in our work - Base year
- The year whose operating costs are built into a gross or modified gross rent. In later years the tenant pays its share of any costs above the base year amount.
Where this shows up in our work - CAM
- Common area maintenance: the costs of shared parts of a property, such as parking lot repair, snow removal and common lighting, billed to tenants by their share. The lease decides what counts as CAM.
Where this shows up in our work - Cap rate
- Short for capitalization rate: net operating income divided by value or price. $84,000 of net operating income at an 8.0% cap rate is $1,050,000.
Where this shows up in our work - CPI
- The Consumer Price Index, published by the federal Bureau of Labor Statistics, which some leases use to set rent increases. A CPI clause may add a floor and a cap on each year’s change.
Where this shows up in our work - DSCR
- Debt service coverage ratio: net operating income divided by annual loan payments. $84,000 of income against $60,000 of debt service is 1.40, and the loan terms set the minimum.
Where this shows up in our work - Effective rent
- What a lease really costs per square foot per year once free rent and allowances are spread across the term. Two leases with the same face rent can have different effective rents.
Where this shows up in our work - Escalation
- A scheduled rent increase, written as a fixed percentage, a fixed dollar step or a link to an index such as CPI. A 3% annual escalation turns $18.00 per square foot into $20.26 by year five.
Where this shows up in our work - Estoppel certificate
- A signed statement from a tenant confirming its lease terms, rent, deposit and any defaults as of a date. Buyers and lenders rely on it, so a gap between the estoppel and the lease is worth finding before closing.
Where this shows up in our work - Evaluation
- A valuation a lender may use instead of an appraisal for commercial real estate transactions below the $500,000 threshold the Federal Reserve, FDIC and OCC set in 2018. It does not have to follow USPAP or be completed by a state licensed or certified appraiser.
Where this shows up in our work - Expense stop
- A dollar amount of operating costs per square foot that the landlord covers, written into the lease. The tenant pays its share above that amount, so it works like a base year set as a number.
- Free rent
- Months, usually at the start of a lease, when base rent is waived, though CAM and taxes may still be owed. It lowers the effective rent without changing the rent written in the lease.
Where this shows up in our work - Gross-up
- Adjusting costs that rise with occupancy, such as janitorial and utilities, to what they would be at a set occupancy before sharing them among tenants. It keeps a base year or a tenant’s share from swinging as the building fills or empties.
Where this shows up in our work - Highest and best use
- The use of a property that is legally permitted, physically possible, financially feasible and most valuable. A valuation tests whether the current use still qualifies before pricing it.
Where this shows up in our work - LTV
- Loan to value: the loan balance divided by the property’s value. A $700,000 loan on a $1,050,000 property is an LTV of about 67%.
Where this shows up in our work - Mill levy
- The tax rate applied to assessed value, in mills: one mill is $1 of tax for every $1,000 of assessed value. Levies vary by taxing district, so read yours from your notice or last tax bill.
Where this shows up in our work - Modified gross
- A lease where base rent covers some operating costs and the tenant pays others directly, often utilities and janitorial. The split varies lease by lease, so the clause matters more than the label.
Where this shows up in our work - NNN
- Triple net: a lease where the tenant pays base rent plus its share of the three nets, property taxes, insurance and CAM. The tenant carries cost increases, and the landlord’s rent sits close to net operating income.
Where this shows up in our work - NOI
- Net operating income: a year of rent and other income, less vacancy and operating expenses, before loan payments, depreciation and income tax. It is the number a cap rate turns into a value.
Where this shows up in our work - Operating expense reconciliation
- The year-end statement comparing what tenants paid in estimated CAM, taxes and insurance with actual costs, then billing or crediting the difference. It is where lease language and the ledger meet, and where errors surface.
Where this shows up in our work - Option to renew
- A tenant’s right to extend the lease for a set term by written notice inside a fixed window before expiration. The rent may be fixed or tied to market, and a missed notice date usually ends the option.
Where this shows up in our work - Pro forma
- A projection of income and expenses, usually from a seller or broker, showing what a property could earn. Read it beside the T-12: the gap between the two is the part of the price resting on assumptions.
Where this shows up in our work - Rent roll
- A table of every tenant with suite, square feet, rent, lease dates and deposit as of a date. It is the seller’s summary of the leases, so a buyer checks it against the leases themselves.
Where this shows up in our work - Right of first refusal
- A tenant’s right to match an offer the landlord receives, for the building or neighboring space, before the landlord accepts it from someone else. It can slow a sale, so buyers want to know it is there.
Where this shows up in our work - SNDA
- Subordination, non-disturbance and attornment agreement. The tenant accepts that the loan comes first, the lender agrees to leave a tenant in good standing in place after a foreclosure, and the tenant agrees to recognize the new owner.
- Sublease
- The tenant renting some or all of its space to a subtenant while staying responsible to the landlord. The subtenant can have no more rights than the tenant’s own lease allows.
- T-12
- Trailing twelve months: income and expenses for the most recent twelve months, shown month by month. It is the record of what the building actually did, unlike a budget or a pro forma.
Where this shows up in our work - Tenant improvement allowance
- Money the landlord contributes, usually per square foot, toward building out the tenant’s space, often called the TI allowance. It lowers the tenant’s real cost only if the build-out would otherwise be the tenant’s to pay.
Where this shows up in our work
A clause still unclear?
A lease abstract puts every date, dollar and option in your lease on two pages, from $275 per lease.