Real estate developers use a lot of jargon when discussing their work. If you’re an investor who wants to work with them, it’s important that you understand what they’re saying. In this blog post, we’ll define 50 of the most common terms developers use and explain what they mean. By doing so, you’ll be able to communicate better with developers and make more informed investment decisions!
1. Pro forma
A pro forma is an estimated financial statement that real estate developers use to forecast the future performance of a project. It takes into account factors such as expected revenues, operating expenses, and debt service.
2. Cap rate
The cap rate is the ratio of a property’s net operating income to its purchase price. It’s used to evaluate the potential return on investment of a property.
3. Debt-to-equity ratio
To get an idea of how much a company is relying on borrowed money to finance its operations, you can look at its debt-to-equity ratio. This figure is calculated by taking the total amount of a company’s liabilities and dividing it by shareholders’ equity.
4. Debt service coverage ratio
The debt service coverage ratio measures a company’s ability to make its debt payments. It’s calculated by dividing a company’s net operating income by its debt service.
5. Leverage
Leverage is the use of debt to finance the purchase of an asset. Leverage can increase the return on investment of an asset, but it also increases the risk.
6. Equity
Equity is the portion of a property’s ownership that the investor holds. Equity can be used to finance the purchase of a property or to provide a return on investment.
7. Equity stake
An equity stake is an ownership interest in a company or property. Equity stakes can be used to finance the purchase of a property or to provide a return on investment.
8. Partnership
A partnership is an agreement between two or more people to own and operate a business jointly.
9. Joint venture
A joint venture is an agreement between two or more companies to develop and operate a project jointly.
10. Letter of intent
A letter of intent is a non-binding agreement between two parties that outlines the terms of a proposed transaction.
11. Option
An option is a contract that gives the holder the right, but not the obligation, to buy or sell an asset at a specified price within a certain period of time.
12. Ground lease
A ground lease is a long-term lease of land on which a tenant can build improvements such as a building or parking garage.
13. Master lease
A master lease is a long-term lease of a property that includes the option to renew the lease at the end of the term.
14. Sale-leaseback
A sale-leaseback is a transaction in which a property is sold and then leased back to the seller.
15. Build-to-suit
Build-to-suit refers to the construction of a building to meet the specific needs of a tenant.
16. Design-build
Design-build is a method of construction in which one firm is responsible for both the design and construction of a project.
17. Tenant improvement allowance
A tenant improvement allowance is an amount of money that a landlord provides to a tenant to make improvements to their space.
18. Base year
The base year is the year in which a property’s taxes are assessed.
19. Ad valorem tax
An ad valorem tax is a tax that is based on the value of a property.
20. Real estate tax
A real estate tax is a tax that is levied on the ownership of the real estate.
21. Special assessment
A special assessment is a tax levied on a property to pay for improvements to the surrounding area, such as streets or sidewalks.
22. Mill rate
The mill rate is the amount of tax per dollar of assessed value. It’s calculated by dividing the total amount of taxes by the assessed value of all property in the jurisdiction.
23. Due diligence
Due diligence is the process of investigating a property to assess its suitability for investment.
24. Environmental assessment
An environmental assessment is a study of the potential impact of a project on the environment.
25. Phase I environmental assessment
A Phase I environmental assessment is an investigation of a property to determine the presence of any hazardous substances.
26. Phase II environmental assessment
A Phase II environmental assessment is an investigation of a property to determine the extent of contamination of any hazardous substances found in a Phase I assessment.
27. Brownfield
A brownfield is a parcel of land contaminated by industrial activity and unsuitable for development without cleanup.
28. Greenfield
A greenfield is a parcel of land that has not been developed and is suitable for development.
29. Subdivision
A subdivision is a division of a piece of land into smaller parcels.
30. Condominium
A condominium is a type of ownership in which each unit owner owns a unit in a building and shares ownership of the common areas with the other unit owners.
31. Cooperative
A cooperative is a type of ownership in which each member owns a share in the cooperative and has the right to occupy one unit in the property.
32. Planned unit development
A planned unit development (PUD) is a zoning designation that allows for a mix of uses, such as residential, commercial, and recreational, within a single development.
33. Paper Lots
Paper lots are unbuilt parcels of land that have been created through the subdivision process.
34. Allowable Lot Coverage
Vacant land has a development potential which is measured by the allowable lot coverage. The allowable lot coverage is the maximum percentage of the lot that can be covered by improvements.
35. Floor Area Ratio
The floor area ratio (FAR) is the ratio of the total floor area of a building to the size of the lot on which it is built.
36. Transferable Development Rights
Transferable development rights (TDRs) are the rights to develop a property that can be bought and sold separately from the land.
37. Inclusionary Zoning
Inclusionary zoning is a zoning ordinance that requires developers to set aside a certain percentage of units in a development for affordable housing.
38. Density Bonus
A density bonus is a zoning incentive that allows developers to build at a higher density than is normally allowed in exchange for providing affordable housing.
39. Height Limit
A height limit is a zoning regulation that limits the height of buildings in an area.
40. Setback
A setback is a zoning regulation that requires buildings to be set back a certain distance from the property line.
41. Easement
An easement is a right to use someone else’s land for a specific purpose.
42. Right of Way
A right of way is a type of easement that gives the holder the right to pass through someone else’s land.
43. Soft Costs
Soft costs are the non-construction costs associated with a development project, such as architectural and engineering fees.
44. Hard Costs
Hard costs are the construction costs associated with a development project.
45. Contingency
A contingency is an allowance for unexpected costs that may be incurred during a development project.
46. Managing Principal
The managing principal is the individual responsible for the overall management of a development company.
47. Depreciation & Amortization
Depreciation is an accounting method that allows for the gradual allocation of the cost of a property over its useful life. Amortization is an accounting method that allows for the gradual allocation of the cost of a loan over its term.
48. Debt Service
Debt service is the periodic payment of interest and principal on a loan.
49. Debt Coverage Ratio
The debt coverage ratio is the ratio of a property’s net operating income to its debt service.
50. Exit Strategy
An exit strategy is a plan for how an investor will sell their investment. A developer may also refer to this as an “exit” or a “disposition strategy.”
To Sum It Up
Real estate developers use various terms that may be unfamiliar to real estate investors. In this article, we’ve defined 50 of the most common terms developers use and explained what they mean. By understanding these terms, you’ll be better equipped to negotiate and partner with developers on successful real estate projects.
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