Glossary of terms
It is worth knowing the meaning of the following terms, as this knowledge will allow you to better understand the mechanisms of investing in commercial real estate.
Bill of exchange – is a kind of security, in which one of the parties undertakes unconditionally to pay off a given bill of exchange amount within the indicated period to the other party. The term “unconditional” means that the bill of exchange itself is not bound by any other legal actions – e.g. a contract.
Capitalisation rate – (Capitalisation Rate, Cap Rate, Nominal Cap Rate) is a synonym of profitability, a key measure in the real estate investment sector. This is the initial return (rate of return) expected by the real estate buyer, expressed as a percentage of the purchase price of the property covered in full with cash.
Catchment – an area of impact of a given point of sale. The analysis covers an area where the given point of sale is the most attractive and attracts the most customers. Designation of this area gives a better picture of commercial or service activities. The impact area of the point can be determined using the so-called time transport availability, i.e. giving distances measured by a unit of time. The better transport accessibility, the larger the area of impact. Using catchment, you can calculate the population residing at a distance of, e.g.: 5, 10, 15 or 30 minutes on foot or by car.
Comparative method – a valuation based on determining the value of the real estate by assuming that this value corresponds to the price that will be obtained for similar real estate being traded on the market. The price obtained is then adjusted for any differences in the features of the assessed and compared real estate; and also changes in prices due to the passage of time are included in it.
Conditional lease agreement – from a legal point of view, it is assumed that the lease agreement for a facility that has not yet been built is concluded under a suspending condition stipulating the creation of such a facility. This means that the lease relationship, notwithstanding the earlier conclusion of the contract, will be established only from the time the subject of the lease is created.
Easement (civil law) – the so-called limited property rights that encumber the property. They restrict ownership because they encumber someone else’s property in order to increase the usability of another property or to satisfy needs of a natural person other than the owner. We distinguish three types of easements: land, personal, and transmission easement.
Financial Leverage – is related to the method of financing the company’s investment activities and the structure of its capital. The leverage is the relationship between financing the company’s activity with debt and financing with equity. According to Aleksandra Duliniec “…taking by the company interest-bearing liabilities starts the mechanism of the so-called financial leverage. Its main purpose is to increase the rate of return on equity (ROE), compared to a situation in which the company is financed entirely with equity.”*
*(A. Duliniec, „Struktura i koszt kapitału w przedsiębiorstwie”, Wydawnictwo Naukowe PWN, 2001).
General contractor – independently or with the help of subcontractors cooperating with it undertakes the performance of all construction work necessary to complete the planned facilities included in the given investment. It is the general contractor who bears full liability towards the investor for the comprehensive fulfilment of the terms of the contract for construction works. Another obligation of the general contractor is also to conclude direct contracts with subcontractors of particular types of construction works, coordination of activities undertaken by subcontractors during construction and control of the execution of all works carried out by subcontractors that is complete, timely and sound in terms of the quality of work.
GLA – (Gross Leasable Area) – the amount of space in a commercial building that can actually be leased by the tenant.
High Street – the main street in a city gathering trade and services in a given town. Examples are Marszałkowska Street or Nowy Świat Street in Warsaw.
Income method – a method used in the property valuation process. According to this approach, the leased commercial property is worth a lot regardless of the location, e.g. on the main shopping street, simply because it generates a high income. If, for certain reasons, the rental rates on such a street decrease, the value of the premises should also fall. The key to the property income valuation is the capitalisation rate.
Investor – the Construction Law does not define this concept in detail. However, within the meaning of Article 17 of the Act, the investor is one of the participants in the construction process – next to the designer and the construction manager. The investor’s function should be understood as the initiation of the undertaking of actions necessary to carry out the construction investment, and the allocation of adequate funds for its implementation. The investor may appear as a natural person, legal entity or organisational unit.
Lease – a contract in which the lessor undertakes to lease to the lessee an item to use it and derive benefits from it for a definite or indefinite period. In return, the lessee undertakes to pay the lessor an agreed rent. This rent may be paid periodically: yearly, quarterly, monthly, as well as it can be capitalised, that is, for longer periods of time or the entire lease period. The rent may be payable in money or other benefits. It may also be marked in-kind in a fraction of benefits or the value of benefits in cash.
Lessor – the entity handing the real estate over for payable use.
Letter of intent – a written, preliminary declaration of intentions regarding the actions of a party, submitted by the party to a possible future business relationship. In contrast to the offer, the letter of intent does not bind the requesting party or the requested party. It can be issued by one or more people, both legal and natural persons. The document specifies the scope of future actions or contracts and an outline of plans for a given project. It is usually signed when an agreement has been reached after the preliminary negotiations had been concluded to take further action. It is therefore the first regulation of future cooperation, which obliges signatories to participate in a given project.
Master Lease – an unoccupied space in the building that is to be sold or the upcoming, expected expiration of lease contracts have a very significant impact on the economics of investment in commercial real estate. The parties to the purchase and sale transaction regulate these matters in contracts called “Master Lease” and “Rental Guarantee”. The seller can guarantee a predetermined amount of payment until the non-commercialised area is leased, thus securing the buyer’s income from the lease.
Mortgage – is a limited property right, which consists in encumbering the real estate to secure the given receivables. The creditor may seek satisfaction from the encumbered real estate, regardless of the fact that it became the property and with priority over personal creditors of its owner. Real estate as well as a fraction of the real estate may be encumbered with a mortgage.
MPZP – the Local Development Plan is an act of local law, adopted in the form of a resolution of the commune council and specifying the purpose, conditions of land development, as well as the distribution of public purpose investments. It consists of a text part (the resolution) and a graphic part (annex to the resolution). Arrangements of the local plan, together with other regulations, shape the manner of exercising ownership of real estate.
Passive income – means an income achieved without constant involvement of the investor’s own work. Persons who achieve passive income are called rentiers, and, in plain language, when income fully covers living costs, without the need to work. Passive income is obtained when an activity done once brings profits for a certain period of time.
Perpetual usufruct – a civil law specific to Polish legislation regarding land property. It consists in granting the right to use a land property owned by the State Treasury, a voivodeship, poviat or commune or a union of these units to a natural or legal person for a period specified as 99 years (exceptionally shorter, but not less than 40 years). This mainly applies to land located within the administrative borders of cities.
Pledge on shares – pledge is one of the types of limited property rights. The subject of the pledge may be movables or transferable property rights. The purpose of establishing a pledge is to protect the creditor’s receivables, and its meaning comes down to granting the creditor the opportunity to settle its claim with the object (the right), which is the subject of the pledge, regardless of who owns the property and with priority over personal creditors of the object’s owner.
PNB – the building permit pursuant to Article 3 point 12 of the Construction Law (Journal of Laws 2018, item 1202) is an administrative decision authorising the commencement and execution of the construction or the performance of construction works other than the construction of a building.
Preliminary agreement – in accordance with the provisions, with this type of document, the parties undertake to conclude a promised agreement (e.g. sale agreement, specific task contract). The preliminary agreement introduces an obligation, and it is therefore a path to conclude various promised agreements intended by the parties (definitive agreements, also called “firm” agreements).
PZT – the Land Development Plan.
REIT – (Real Estate Investment Trust) are special purpose companies or investment funds established to invest on the rental commercial real estate market.
Rent roll – a summary of revenues and costs generated by a given property on the basis of agreements concluded with tenants.
Rentier – is a person who can cover his or her life costs in full with passive income, i.e. funds generated by invested capital.
Residual value – the value of the item at the time of its resale.
Share – shares are taken up by shareholders for contributions paid by them to the company (cash or non-cash – contributions in kind). The sum of all shares must be equal to the share capital. Holding shares is synonymous with participation in a limited liability company as its shareholder, having all rights and obligations related to that participation. The number or value of shares held directly translates into the right of the shareholder to profit, the right to vote or the pre-emptive right to purchase shares.
Tenant – an entity using the real estate under a lease agreement.
Total area – the area constituting the sum of the surfaces of individual storeys measured along the outside outline of the walls.
Usable area – this is an area intended to meet the needs directly related to the use/function of the building. Another term used is GLA.