Commercial Real Estate Glossary
Plain-English definitions of the terms you will meet when you buy, sell, lease, or exchange commercial property in Albuquerque and New Mexico. Each definition is written to stand on its own; follow the links for the full guides.
1031 Exchange
- 1031 exchange (like-kind exchange)
- A transaction under Internal Revenue Code Section 1031 that lets an investor sell real property held for investment or business use and buy other such real property while deferring capital gains tax and depreciation recapture.1031 Exchange in New Mexico Guide
- 180-day exchange period
- The period, ending 180 calendar days after the sale or on the due date of the taxpayer's federal return including extensions if earlier, within which the exchanger must acquire the replacement property.
- 200 percent rule
- An identification rule allowing an exchanger to identify any number of replacement properties as long as their combined fair market value does not exceed 200 percent of the value of the property sold.
- 45-day identification period
- The 45 calendar days after the sale of the relinquished property during which the exchanger must identify replacement property in writing to the qualified intermediary. Weekends and holidays count.1031 Deadline Calculator
- 95 percent rule
- An identification rule under which an exchanger who exceeds both the three-property and 200 percent limits must acquire at least 95 percent of the total value of all property identified.
- Boot
- Any value received in a 1031 exchange that is not like-kind real property, such as cash kept from the sale or debt relief not replaced on the new property. Boot is taxable to the extent of the gain.
- Depreciation recapture
- Tax owed on the portion of a sale gain attributable to depreciation deductions previously taken, generally taxed federally at up to 25 percent for real property. A 1031 exchange defers recapture along with capital gains.
- Improvement exchange
- A 1031 exchange in which exchange funds are used to construct or improve the replacement property while an accommodation titleholder holds title, with only improvements completed within 180 days counting toward the exchange.
- Like-kind property
- For 1031 purposes, any real property in the United States held for investment or business use is like-kind to any other such real property, regardless of type. Primary residences, dealer inventory, foreign real estate, and personal property do not qualify.
- Qualified intermediary (QI)
- An independent third party that holds sale proceeds and documents a 1031 exchange so the taxpayer never has constructive receipt of the funds. A QI cannot be the taxpayer's agent, attorney, accountant, or broker from the prior two years.
- Relinquished property
- The property an investor sells in a 1031 exchange. Its closing date starts the 45-day identification and 180-day exchange clocks.
- Replacement property
- The like-kind property an investor acquires in a 1031 exchange. It must be identified within 45 days and acquired within 180 days of the relinquished property's sale.
- Reverse exchange
- A 1031 exchange in which the replacement property is acquired before the relinquished property is sold, using an exchange accommodation titleholder to hold one property under the Revenue Procedure 2000-37 safe harbor for up to 180 days.
- Three-property rule
- An identification rule allowing an exchanger to identify up to three replacement properties of any value. The most commonly used of the three identification rules.
Investment
- BPO (broker price opinion)
- A written estimate of a property's value prepared by a licensed broker using comparable sales and market knowledge. Lenders use BPOs as a faster, lower-cost alternative to a full appraisal for distressed assets.
- Cap rate (capitalization rate)
- A property's annual net operating income divided by its purchase price, expressed as a percentage. A lower cap rate means a higher price for the same income and usually reflects lower perceived risk.Understanding Cap Rates in New Mexico
- Cash-on-cash return
- Annual pre-tax cash flow after debt service divided by the cash invested, expressed as a percentage. It measures the yield on an investor's actual equity rather than on the whole property.
- DST (Delaware Statutory Trust)
- A trust that owns institutional-quality real estate and sells fractional beneficial interests to investors. DST interests qualify as like-kind replacement property in a 1031 exchange under IRS Revenue Ruling 2004-86.
- Investment-grade tenant
- A tenant whose corporate credit is rated BBB- or higher by S&P (Baa3 or higher by Moody's). Leases guaranteed by investment-grade companies trade at the lowest cap rates in the net lease market.
- IRR (internal rate of return)
- The annualized rate of return that sets the present value of all projected cash flows, including the sale, equal to the initial investment. IRR captures both income and appreciation over the hold period.
- NOI (net operating income)
- A property's income from rent and other sources minus its operating expenses, before debt service, income taxes, depreciation, and capital expenditures. NOI is the basis for cap rate valuation.
- Receivership
- A court-supervised arrangement in which an independent receiver takes control of a distressed property to collect rent, preserve value, and prepare it for sale or workout during a foreclosure or dispute.
- REO (real estate owned)
- Property that a lender has taken back through foreclosure or a deed in lieu of foreclosure and now holds on its books. Banks dispose of REO to recover capital and reduce loss severity.Lender and Special Asset Services
- Sale-leaseback
- A transaction in which a business sells the property it occupies to an investor and simultaneously signs a long-term lease to stay, converting real estate equity into operating capital while keeping control of the location.Sale-leaseback case study
- Stabilized property
- A property that has reached normal, sustainable occupancy and income for its market, so its value can be measured directly by cap rate rather than by projected lease-up.
- TIC (tenancy in common)
- A form of co-ownership in which multiple investors each hold an undivided fractional interest in a property. TIC interests can qualify for 1031 exchanges when structured under IRS guidelines.
- Value-add property
- A property with below-market occupancy, rent, or condition that an investor buys to improve through leasing, renovation, or repositioning, accepting more risk in exchange for a higher return.
Leasing
- Absolute NNN lease
- A triple net lease in which the tenant is responsible for every cost of the property, including roof and structure, and typically cannot terminate for casualty or condemnation. Also called a bondable lease.
- Base rent
- The fixed rent stated in a lease before expense reimbursements, percentage rent, or other charges. In commercial leases it is usually quoted per square foot per year.
- CAM (common area maintenance)
- The costs of maintaining shared areas of a multi-tenant property, such as parking lots, landscaping, lighting, and sidewalks, which are passed through to tenants in proportion to the space they lease.
- Co-tenancy clause
- A retail lease provision that lets a tenant reduce rent or terminate if a named anchor tenant or a specified percentage of the center goes dark.
- Estoppel certificate
- A signed statement from a tenant confirming the terms of its lease, the rent, the security deposit, and that no defaults exist. Buyers and lenders require estoppels to verify the income they are relying on.
- Gross lease
- A lease in which the tenant pays a single rent amount and the landlord pays operating expenses. Common in office buildings. A modified gross lease shares expenses, often with the tenant paying increases above a base year.
- Ground lease
- A long-term lease of land only, in which the tenant builds and owns the improvements during the lease term and the improvements revert to the landowner when the lease ends.
- Landlord representation
- Brokerage services provided exclusively to a property owner to market vacant space, qualify tenants, and negotiate leases that maximize the asset's value.Landlord Representation
- NN lease (double net lease)
- A lease in which the tenant pays rent, property taxes, and insurance, while the landlord remains responsible for structural items such as roof, foundation, and sometimes parking lot or HVAC replacement.
- NNN lease (triple net lease)
- A commercial lease in which the tenant pays property taxes, building insurance, and maintenance in addition to base rent, so the landlord's rent is net of those three expenses. NNN properties are valued for predictable income and limited landlord responsibility.NNN Properties Guide
- Percentage rent
- Additional rent paid by a retail tenant equal to a percentage of its sales above a stated breakpoint. Common in shopping center leases with high-volume tenants.
- Rent escalation
- A scheduled increase in base rent during the lease term, expressed as a fixed percentage, a fixed dollar amount, or an index such as CPI. Escalations protect a landlord's income against inflation.
- Rentable vs. usable square feet
- Usable square feet is the space a tenant actually occupies; rentable square feet adds the tenant's share of common areas such as lobbies and corridors. Office rent is typically quoted on rentable area, and the ratio between the two is the load factor.
- SNDA (subordination, non-disturbance, and attornment)
- An agreement among tenant, landlord, and lender in which the tenant subordinates its lease to the mortgage, the lender agrees not to disturb the tenant's occupancy if it forecloses, and the tenant agrees to recognize the lender as landlord.
- Tenant improvement allowance (TI)
- Money a landlord contributes toward the cost of building out a tenant's space, usually quoted per square foot. Larger allowances are typically traded for longer lease terms or higher rent.
- Tenant representation
- Brokerage services provided exclusively to a business seeking space, including market surveys, site selection, and lease negotiation. The landlord usually pays the tenant representative's fee.Tenant Representation
Finance
- CMBS (commercial mortgage-backed securities)
- Loans on commercial property that are pooled and sold to investors as bonds. CMBS lenders offer non-recourse, fixed-rate financing on stabilized assets but have rigid servicing and prepayment terms.
- DSCR (debt service coverage ratio)
- Net operating income divided by annual debt service. Lenders usually require a DSCR of 1.20 to 1.35 or higher, meaning the property earns 20 to 35 percent more than its loan payments.
- Gross receipts tax (GRT)
- New Mexico's tax on the gross receipts of businesses, applied to most goods and services including brokerage commissions. Rent from leases of real property is generally deductible and therefore not subject to GRT.
- LTV (loan-to-value)
- The loan amount divided by the property's appraised value or purchase price. Commercial lenders commonly cap LTV at 55 to 75 percent depending on asset type and tenant credit.
- Mill rate (mill levy)
- The property tax rate expressed in dollars per $1,000 of taxable value. In New Mexico, taxable value is one-third of assessed value, and mill rates vary by county and taxing district.
- Non-recourse loan
- A commercial loan secured only by the property, so the lender cannot pursue the borrower's other assets after default, except for carve-outs such as fraud or environmental liability. Common in CMBS and life company lending on credit NNN properties.
Transactions
- ALTA survey
- A detailed boundary survey prepared to the standards of the American Land Title Association and the National Society of Professional Surveyors, showing improvements, easements, encroachments, and other title matters. Required for most commercial financing.
- Due diligence period
- The contractual window after a purchase agreement is signed during which the buyer inspects the property, reviews leases and title, and can typically terminate for any reason. In Albuquerque it commonly runs 30 to 60 days.
- Letter of intent (LOI)
- A short, mostly non-binding document that outlines the key business terms of a proposed lease or sale before the parties draft the full agreement. LOIs speed negotiation by settling price, term, and major conditions first.
- Phase I environmental site assessment
- A study of a property's history and current condition to identify recognized environmental conditions, performed to the ASTM standard. Lenders require it, and it establishes the buyer's innocent-landowner defense. A Phase II involves sampling.
Development & Zoning
- Build-to-suit
- A development arrangement in which a landlord or developer constructs a building to a specific tenant's requirements under a pre-signed lease. Build-to-suit properties often become single-tenant NNN investments.
- Entitlements
- The government approvals needed to develop a property as intended, including zoning, site plan approval, subdivision, variances, and permits. Entitlement risk and timing are central to land value.
- IDO (Integrated Development Ordinance)
- The City of Albuquerque's zoning and land use code, in effect since 2018, which organizes zoning into residential, mixed-use (MX), and non-residential (NR) districts and sets the approval process for development.Albuquerque Market Guide: Zoning
- Pad site (outparcel)
- A small parcel at the edge of a shopping center or along a major road, typically developed as a single-tenant building such as a restaurant, bank, or pharmacy. Pad sites are a primary source of NNN properties.
- Site selection
- The analytical process of choosing a location for a business based on demographics, traffic, competition, access, zoning, cost, and incentives.Site Selection Services
Related resources
Written by
Tim House
President and Qualifying Broker, Team Southwest Commercial Real Estate
Tim has more than 25 years of commercial real estate experience in Albuquerque and the Southwest, with an emphasis on NNN investment properties, 1031 tax-deferred exchanges, development land, and special assets. He is a Past President of the Commercial Association of Realtors New Mexico and a former licensed general contractor.
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