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Commercial Real Estate Glossary



Expected value (EV)

The sum of the weighted averages of all possible outcomes of a probability distribution. Probability distribution is the collection of all possible outcomes for an event and their corresponding probabilities of occurrence. The probabilities of occurrence for each possible outcome are used as the weights. The sum of each possible value multiplied by its probability of occurrence equals the EV of the outcome. EVs can be calculated for any type of outcome the investor chooses to analyze: net operating incomes, after-tax cash flows, and rates of return (IRRs). An example of calculating the EV of the IRR for an investment follows:

Expected value (EV)

Scenario IRR% Probability Weighted Average

Best-case 17.0 0.10 1.70

Most-likely case 14.6 0.80 11.68

Worst-case 13.2 0.10 1.32

Sum = 1.00 EV = 14.70

Expenditure patterns

The tendencies or propensities of individuals/households to spend disposable income on a given good or service in comparison to other goods and services (typically defined as a percentage of disposable income) in relation to income level or range and/or other demographic or socio-economic characteristics.

Expense stop

The level (or maximum amount) up to which the landlord will pay certain operating expenses. Amounts above the stop are the responsibility of the tenant.

External economies

Savings or cost-cutting allowances realized by firms or industries within a given city that are primarily due to the advantages of sharing production inputs, information, and infrastructure and/or possibly linked to a city's comparative advantage to support a given activity.

External obsolescence

A form or source of accrued depreciation considered in the cost approach to market value. The loss of value is because of external forces and change. For example, a new mall causes traffic and congestion, negatively affecting residential property values nearby, or a motel is no longer viable because a highway is rerouted, or another example would be depressed market conditions

Factors of production

The rudimentary components of any production process or system consisting of: land and land-based resources (including raw materials); capital, which includes real capital such as machinery, facilities, and infrastructure and financial capital to start or expand businesses; labor or human input (as defined in terms of labor hours or quality/productivity); and technology which includes production know-how and methods, as well as management and operations skills.

Fair value of an asset (or liability)

The amount at which the asset (or liability) could be bought (or incurred) or sold (or settled) in a current transaction between willing parties, that is, other than in a forced or liquidation sale. (Real Estate Information Standards)

Fashion/specialty center

This type of retail center is composed mainly of upscale apparel shops, boutiques, and craft shops carrying selected fashion or unique merchandise of high quality and price. These centers need not be anchored, although sometimes restaurants or entertainment can provide the draw of anchors. The physical design of the center is very sophisticated, emphasizing a rich décor and high-quality landscaping. These centers usually are found in trade areas having high-income levels.

Feasibility analysis

The process of evaluating a proposed project to determine if that project will satisfy the objectives set forth by the agents involved (including owners, investors, developers, and lessees).

Financial leverage

The use of borrowed funds to acquire an investment.

Financial risk

The possible change in an investment’s ability to return principal and income.

Fixed expenses

Costs that do not change with a building’s occupancy rate. They include property taxes, insurance, and some forms of building maintenance.

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