This Property Development Finance Glossary explains essential terms in easy-to-understand language to assist your learning journey.
Absorption Rate
Tells us how fast homes or spaces in a new building are expected to be rented or sold. It helps planners know how long it will take to fill the building. It is also used to show banks or investors that the project can earn money.
Variable Interest Rate
A loan interest rate that can change over time. It goes up or down depending on things like the Reserve Bank’s cash rate or the Bank Bill Swap Rate. That means your loan payments might also go up or down.
Amortisation
The process of slowly paying off a loan over time. Each payment includes part of the original loan and part interest. A schedule shows when each payment is due and how much you still owe.
Anchor Tenant
A big, well-known store in a shopping centre. It helps bring in more people, which also helps smaller shops nearby get customers. Big shopping centres might have more than one anchor tenant.
Bonds
Bonds are like IOUs. A company or government borrows money from people and promises to pay it back later with interest. Bonds are sold in large amounts like $50,000 or more and are paid back after a certain number of years.
Buy-Sell Provision
A rule in a business partnership. It says that if one person wants out, they can name a price for the whole business. The other person can then choose to either buy them out at that price or sell their own share for the same price.
Capital
Money or valuable things that someone invests to make more money. For example, buying property or starting a business to earn profits or increase value.
Capital Market
A system where people and companies raise money to invest. It includes banks, insurance companies, investment funds, and brokers. They help connect people who need money with those who want to invest.
Capital Stack
Shows all the different ways money is put into a project. At the bottom is low-risk money like bank loans. At the top is high-risk money like investor cash. The higher the risk, the higher the reward investors expect. Starting with low-risk Senior Debt at the bottom, followed by Mezzanine Debt, then Preferred Equity, and finally high-risk Common Equity at the top.
Capitalisation Rate (Cap Rate)
A way investors check how good a real estate project is. It compares how much money the property earns to how much it’s worth. A higher cap rate can mean better earnings or higher risk. It helps estimate how much the property might be worth now or in the future.
Carve-Out Agreement
A legal rule in a loan agreement. It says some of the borrower’s assets (things they own) are not included as backup for the loan. If the borrower can’t pay, the lender can’t take those assets.
Cash-On-Cash Return
Shows how much cash profit an investor makes each year compared to the cash they put in. It doesn’t count any increase in property value unless the property is sold. It helps investors know how well their cash is working.
Certificate of Occupancy
An official paper from the local government. It says a building has been checked and is safe and ready for people to live or work in.
Co-Investment
The money a developer has to put into a project to show they are serious. It helps make sure the developer and the investors both want the project to succeed. Usually, it’s between 5% and 15% of the total money needed.
Collateral
Something valuable you promise to give the lender if you can’t pay back a loan. It could be a building, land, or other property.
Commercial Mortgage-Backed Securities (CMBS)
Bonds made from many commercial real estate loans. A trust collects the loans and uses the money from them to pay the bondholders. Some of these bonds are safer and get paid first. Others are riskier and get paid last.
Common Area Maintenance (CAM) Charges
Extra costs that people renting space in a building pay. The money goes toward things like keeping the hallways clean, mowing the lawn, fixing lights in the parking lot, and paying for shared utilities.
Construction Loan
A short-term loan used to pay for building a new property, or improving an existing property. The bank gives out the money in stages, as the building is constructed.
Contingency Cost
Extra money set aside in case something unexpected happens during a project. At the start, this amount is bigger because there are more unknowns. As the project moves forward and becomes clearer, the extra amount goes down.
Debt Capital
Money borrowed to help pay for a project. It has to be paid back with interest.
Debt Service Coverage Ratio (DSCR)
A number that helps lenders decide how big of a loan a project can handle. It compares the building’s income to the cost of paying back the loan each year. If the ratio is 1.2 times, that means the project makes 20% more money than it needs to cover loan payments.
Debt Service
Regular payments you make on a loan. Each payment includes some interest and some of the original loan amount.
Depreciation
A building or property loses value over time. This can happen because it gets older or needs repairs. In accounting, it’s also used to show this loss on financial reports.
Development Levies
Fees that local governments charge builders when they start a new project. The money helps pay for things the new development will need, like bigger roads or more schools.
Due Diligence
Before buying land or a building, the buyer checks everything important. This includes ownership, the land’s shape and soil, rules, money issues, and the local market. Experts often help with this.
Due Diligence Period
The time the buyer has to do their research before buying. It can last from 30 days to 6 months or more.
Easement
Someone else has the right to use part of your land. For example, for water pipes, power lines, or a driveway.
Economic Viability
A project makes enough money to pay back investors and still give the developer a fair reward for their work and time.
Effective Gross Income
How much money a property earns in rent and other payments, minus expected empty units (vacancy). It’s used to figure out how much a property might be worth.
Entitlement Process
The legal process to get approval from the city or town to build something. It can include reviews about the environment, zoning, and building rules. The community might also get involved and give their opinions.
Equity
The money put into a project by investors. They don’t lend it—they invest it to make a profit. They get their money back only if the project makes money.
Fixed Interest Rate
The interest rate on a loan stays the same the whole time. It doesn’t change even if the market does.
Floor/Area Ratio (FAR)
A number that compares the size of the building to the size of the land it’s on. A low FAR means there’s more open space, like parking. For example, if a one-story building takes up one-quarter of the land, the FAR is 0.25.
Forbearance
When a lender agrees to wait before taking action if someone falls behind on a loan. For example, even if the property’s value drops or the rules change, the lender might not take the building right away. Instead, they give the owner more time, especially if the property is still making enough money to pay the loan.
Foreclosure
If a person or company can’t keep up with loan payments, the lender can take the property and sell it to get their money back. This is called foreclosure. It can get complicated if more than one lender is involved. Sometimes, a smaller lender will pay the bigger one to take control of the property and protect their own money.
Forward Commitments
A promise from a lender to give a loan in the future. It helps protect the borrower from interest rates going up before the loan starts.
Gap Financing
Money used to fill the space between the amount a project needs and what it already has from loans and investors. It can be short-term or long-term. It helps cover costs that are not yet paid by either debt or equity.
General Partnership
In this type of business, all the partners share the work, profits, and risks. They are also responsible if the business owes money. The partnership doesn’t pay taxes itself; each partner pays taxes on their share of the profits.
Guaranteed Investment Contract (GIC)
A deal that promises an investor a set amount of profit for a certain time. It’s often used when a lender pays interest up front. That money is put into a GIC, which earns just enough to cover the interest payments over time.
Hard Costs
The physical costs of a project, like buying land and building the structure. They are different from soft costs like legal fees or design work.
Hedge Funds
Special investment funds that try to make high profits. They are risky and are only open to certain investors or big companies. Managers of hedge funds try to find deals others miss and get paid based on how much profit they make.
Hurdle Rate
The lowest return an investor or developer is willing to accept for a project. If the project can’t reach this level of profit, it’s not worth doing. There are different ways to measure return, and each person may use a different method.
Institutional Investor
Big organisations that invest large amounts of money. They put money into things like real estate, stocks, or other investments. Examples include banks, insurance companies, pension funds, and universities.
Integrated Project Delivery
When the developer, architect, and builder all work closely as a team. They share information, avoid delays, and try to keep costs down. Everyone shares the risks and rewards of the project.
Interest-Only Loan
A loan where you only pay the interest for a set amount of time, not the original amount you borrowed. After that time ends, you must pay back the full loan amount.
Internal Rate of Return (IRR)
A way to measure how good an investment is. It looks at how much money the investment will make over time. A high IRR means the project could be very profitable. It’s a detailed calculation that needs accurate info about costs and earnings.
Joint Venture
A business project shared by two or more people or companies. They work together and share profits, risks, and responsibilities. The rules are written in a joint venture agreement.
Letter of Intent (LOI)
A letter that says someone is interested in buying or renting property. It includes the price and when the deal should be finished. It is not a final contract, but it shows serious interest.
Leverage
Using borrowed money to help pay for an investment. If the investment makes money, using leverage can increase profits. But it can also increase losses if things go wrong.
Lien
A legal claim on a property. If the owner doesn’t pay a loan, the person or company with the lien can take the property to get their money back.
Limited Partnership
A kind of business where there are two types of partners. One is the general partner who runs the business and takes the risks. The other is the limited partner who only invests money and is not responsible for debts beyond what they put in.
Liquidity
How easy it is to get cash. It also means how quickly you can turn other things, like property or investments, into cash if needed.
Loan-to-Cost (LTC) Ratio
A number lenders use to decide how much money they can lend for a project. It compares the loan amount to how much the project will cost.
Loan-to-Value (LTV) Ratio
Another number lenders use to decide on a loan. It compares the loan amount to the value of the property, based on an official estimate.
Mezzanine Debt
A special kind of loan. It acts like a loan because it earns interest, but it’s also like an investment because it gets paid based on how well the project does. It usually doesn’t have a legal claim on the property.
Net Operating Income (NOI)
The money a property earns from rent after subtracting costs like taxes, repairs, and insurance—but before paying loans.
Net Rents Or Triple Net Rents (NNN)
Rent money after taking out the main costs of owning the building—like taxes, repairs, and insurance. It shows the real income the owner keeps.
Non-Recourse Loan
A loan where, if the borrower can’t pay, the lender can only take the property. They can’t go after the borrower’s other things.
Operating Cash Flow (OCF)
The money left after a property pays for expenses and loan payments. It can be given to investors as profit.
Operating Expense Ratio
Shows how much of the income goes to pay for running the building. It compares expenses to the building’s total income.
Operating Expenses
The regular costs of running a property. They include cleaning, management, utilities, taxes, insurance, and saving for repairs.
Opportunity Funds
Special investments for rich people or big companies. They focus on high-risk projects that could bring high rewards.
Pari Passu
A Latin phrase that means “equal steps.” It means each investor gets paid based on how much they put in.
Percentage Rent
Extra rent paid by a store based on how much it sells. It’s added to the regular rent if sales go above a certain level.
Permanent Loan
The main, long-term loan used to pay for a property after it’s built or bought. It usually replaces a short-term construction loan.
Predevelopment Costs
Costs that come before building starts. They include paying for architects, consultants, permits, land deposits, developer’s time, and early planning work.
Preferred Return
The minimum profit investors get each year before the developer makes any money. The developer may get a share of this return based on how much they invested too.
Prime Rate
The base interest rate that banks use when lending money. It’s usually the rate banks give to their best, most trusted customers.
Private Equity Fund
A pool of money from rich people or large companies. It is used to invest in projects that are risky but could earn a lot of money quickly.
Pro Forma
A financial plan that shows what a real estate project might earn and spend. It includes income, costs, loans, and big financial events.
Promotional Return
Money that goes to investors from the project’s extra profits, after they’ve been paid back and received their promised return.
Property Developer
A person or company that runs a building project. They handle buying the land, getting approvals, building, and finishing the project. They also work with designers, builders, lawyers, and marketers.
Purchase and Sale Agreement
A written contract for selling a property. It lists the sale terms, what the buyer must do to complete the deal, and what the seller must do to get paid.
Rate of Return
Shows how much profit an investor makes in a year compared to how much they put in. It can be measured in different ways, such as total return, return on costs, or return on sales.
Real Estate Investment Trust (REIT)
A company that collects money from many investors to buy or finance real estate. It works like a mutual fund, giving people a way to invest in property. REITs often don’t pay income taxes but must give most of their earnings to investors.
Real Estate Operating Company
A company that owns and manages real estate. Its shares can be bought and sold on the stock market.
Recourse
If a borrower doesn’t pay a loan, recourse gives the lender the right to take other assets from the borrower—not just the property tied to the loan.
Refinancing
Replacing an old loan with a new one that has better terms, like a lower interest rate or a longer time to repay.
Residual Land Value
How much a developer can afford to spend on land after subtracting all the other project costs from the total investment amount they’re aiming for.
Return on Equity
A percentage that shows how much profit investors make based on the money they put into the project.
Site Plan
A detailed map that shows what will be built on a piece of land. It includes buildings, roads, parking lots, pipes for water and sewage, electric and gas lines, plants, and areas others can use like walkways or easements.
Soft Costs
Costs in a building project that aren’t for construction or land. They include things like design, engineering, permits, legal help, and planning.
Speculative Development (Spec Development)
A building project started without any renters or buyers lined up. The developer hopes to find customers after it’s built.
Stabilised Income
The steady money a project earns after all units are rented or sold. It usually happens a few years after the building is finished.
Subordinated Debt
A type of loan that is paid back after other loans if the project doesn’t make enough money. It’s riskier but can pay more.
SNDA Agreement (Subordination, Non-Disturbance, And Attornment)
A deal that lets the lender take over a property if the owner doesn’t pay the loan. But it also protects renters, so they can stay if they keep paying rent.
Syndication
Collecting money from many investors for one project. For example, lots of people each buy a piece of a partnership to help pay for a building.
Tenant Improvement Allowances (TIs)
Money a landlord gives a business to fix up or build out the space they are renting. How much money is offered depends on how important the tenant is and the local market.
Terminal Capital Rate
A number used to guess how much a property will be worth when it is sold in the future. It helps plan for resale value.
Title Report
A document that shows everything legally tied to a property. It lists loans, liens (debts), easements, and any rules that limit what can be done with the property.
Tranche
Splitting up investments or loans into different levels of risk. The safest levels get paid first, while the riskier ones get paid later but may earn more.
Triple Net Rents (NNN)
This kind of rent means the renter pays not only the rent but also the costs of taxes, building upkeep, and insurance.
Trust
A legal setup where a person, or company, called a Trustee, takes care of property or money for someone else, called a Beneficiary. The Trustee must follow the rules written in a Trust document and obey the law.
Vacancy Rate Allowance
A guess that some income will be lost because some spaces might stay empty or tenants might not pay rent. It helps plan for less-than-perfect earnings.
