Absorption
The pace at which newly built or vacant units are leased or sold in a market over a period, usually expressed as units per month.
Glossary
Glossary
The words that decide what housing costs, defined plainly.
A
Amortization
The gradual repayment of a loan's principal through scheduled payments; the amortization period sets how quickly the balance falls and therefore how large each payment is.
Area median incomeAMI
The household income at the midpoint of a metropolitan area or county, used as the benchmark for setting income limits and rents in affordable housing programs.
B
Basis pointsbp
One hundredth of a percentage point; the unit used to describe small changes in interest rates, cap rates, and yields without ambiguity.
Brownfield
A previously developed site whose reuse is complicated by known or suspected contamination, adding cleanup cost, delay, and liability risk to any project built on it.
By-right development
Development that complies with existing zoning and can be approved through administrative review without discretionary hearings, variances, or negotiated conditions.
C
Capitalization rateCap rate
The ratio of a property's annual net operating income to its price or value; it converts a stream of income into a lump-sum value.
Carrying costs
The ongoing cost of holding a property or a project before it produces income: interest, property taxes, insurance, and the return owed on money already invested.
Cash-on-cash return
Annual cash flow after debt service divided by the equity invested; the simplest measure of the yearly yield an investor earns on the money they actually put in.
Construction loan
A short-term, usually floating-rate loan that funds a building's construction in stages as work is completed, then is repaid or refinanced when the building is finished and leased.
Contingency
A reserve built into a development budget to cover unexpected costs, usually set as a percentage of hard costs and sometimes of soft costs, and required by lenders.
D
Debt service
The total of principal and interest payments a borrower must make on a loan over a period, usually expressed per year; the largest fixed claim on a building's income.
Debt service coverage ratioDSCR
Net operating income divided by annual debt service; a lender's measure of how much cushion a building has before it can no longer make its loan payments.
Density
The number of homes permitted or built on a given area of land, usually expressed as units per acre; it determines how many units share the cost of a site.
Developer fee
A line in the development budget that pays the developer for assembling, managing, and guaranteeing the project, separate from any profit the developer earns as an equity investor.
E
Effective rent
The rent a tenant actually pays over a lease after concessions such as free months or waived fees are subtracted from the asking rent and spread across the term.
Entitlement
The set of government approvals a site needs before a specific project can be built on it, such as zoning changes, site plan approval, and environmental sign-off.
Equity
The portion of a project's cost funded by owners and investors rather than lenders; it is paid last, bears the most risk, and therefore requires the highest return.
Exit cap rate
The capitalization rate assumed for a future sale of a property; applied to projected income at that time, it sets the sale price in a pro forma.
F
Five-over-one
A mid-rise apartment type with several stories of wood framing over a concrete podium, used because it is among the cheapest ways to build at moderate density.
Floor area ratioFAR
A zoning limit expressed as total building floor area divided by lot area; a FAR of 2.0 allows a building with twice as much floor space as the land it sits on.
G
General contractorGC
The firm hired by the developer to build the project, which coordinates subcontractors, manages the schedule and site, and is responsible for delivering the building at the agreed price.
Gross rent multiplierGRM
A property's price divided by its annual gross rent; a quick, rough valuation shortcut that ignores vacancy and operating expenses.
Guaranty
A developer's or principal's personal or corporate promise to a lender to cover specified obligations, such as completing construction or repaying the loan, if the project itself cannot.
H
Hard costs
The cost of physically building a project: site work, materials, labor, and the contractor's fee; usually the largest single component of total development cost.
Historic tax credit
A federal, and in many states an additional state, income tax credit equal to a share of the cost of rehabilitating a certified historic building, sold to investors to raise equity.
I
Impact fee
A one-time charge a local government levies on new development to pay for public facilities the development is expected to require, such as roads, schools, parks, and utilities.
Inclusionary zoning
A local rule that requires or encourages new developments to include a share of units rented or sold below market rates, sometimes in exchange for added density or other benefits.
Internal rate of returnIRR
The annualized return that makes the present value of all of an investment's cash flows equal to zero; the standard way equity investors compare deals of different sizes and timing.
L
Land basis
The total amount a developer has invested in a site, including purchase price, closing costs, carrying costs, and entitlement expenses, usually expressed per unit or per buildable square foot.
Loan-to-cost ratioLTC
The loan amount divided by the total cost to build a project; the standard sizing test for construction loans and the split that decides how much equity a developer must raise.
Loan-to-value ratioLTV
The loan amount divided by the appraised value of the property; lenders cap it to keep a cushion between what they lent and what the building is worth.
Low-Income Housing Tax CreditLIHTC
A federal program that awards income tax credits to developers of rent-restricted housing, which they sell to investors to raise equity and lower the rent the project must charge.
M
Mezzanine debt
A layer of financing that sits between the senior mortgage and the owners' equity, secured by the ownership interest rather than the property, carrying a higher rate than the mortgage.
Mortgage constant
Annual debt service divided by the loan amount; a single percentage that captures both the interest rate and the amortization period of a loan.
N
Net operating incomeNOI
A property's annual income after vacancy and operating expenses but before debt payments and income taxes; the number most other real estate math starts from.
O
Operating expensesOpex
The recurring costs of running a building, such as property taxes, insurance, management, repairs, utilities, and reserves, paid from rent before debt service.
Opportunity zone
A federally designated low-income census tract in which investors can defer and reduce capital gains taxes by investing realized gains in qualifying property or businesses for a set period.
P
Parking ratio
The number of parking spaces provided or required per housing unit; a zoning minimum that adds cost and consumes land regardless of whether residents need the spaces.
Payment in lieu of taxesPILOT
An agreement under which a property owner makes negotiated payments to a local government instead of paying full property taxes, usually to make a project feasible or to secure affordable units.
Permanent loan
The long-term mortgage placed on a completed, leased building; it repays the construction loan and is sized against the building's appraised value and its income.
Preferred return
A minimum annual return that outside equity investors receive on their capital before the developer or sponsor shares in a project's profits.
Prevailing wage
A requirement that workers be paid at least the wage and benefit rates a government sets for each trade in the area, usually triggered by public funding or an incentive.
Pro forma
A projected financial statement for a building: expected rents, vacancy, expenses, debt payments, and returns, laid out before the project is built or bought.
R
Replacement reserves
Money set aside each year from a building's income to pay for major components that wear out, such as roofs, boilers, elevators, and appliances.
S
Site plan approval
A local review of a project's detailed layout, including building placement, access, parking, landscaping, drainage, and utilities, required before permits can be issued.
Soft costs
Development costs that are not physical construction: design, engineering, permits and fees, legal, insurance, financing, marketing, and the developer's overhead.
T
Tax increment financingTIF
A public financing tool that uses the growth in property tax revenue from a redeveloped area to pay for infrastructure or subsidies within that area.
Total development costTDC
The full cost to deliver a completed, leased building: land, hard costs, soft costs, financing costs, and contingency; the denominator of yield on cost and the base for sizing debt and equity.
U
Underwriting
The process by which a lender or investor tests a project's assumptions about cost, income, expenses, and risk to decide whether, and on what terms, to fund it.
Unit mix
The breakdown of a building's apartments by size and bedroom count, which shapes construction cost per unit, the rent roll, and who the building can house.
V
Vacancy
The share of a building's potential rent that goes uncollected because units are empty or tenants do not pay; it is deducted from gross rent before expenses.
Value-add
An investment strategy of buying an existing building, improving it through renovation or better management, and raising its income and value; distinct from new construction.
Variance
A discretionary permission from a zoning board to deviate from a specific requirement of the zoning code, such as a setback, height, or parking rule, for a particular property.
Y
Yield on cost
A development project's stabilized net operating income divided by its total development cost; the return the building earns on what it cost to create it.