Due Diligence Checklist
Glossary of Commercial Terms
Get to know your acronyms and jargon with this list of definitions.
Amenities
The features and benefits of a property that create value. Tangible amenities could include onsite parking; intangible amenities might be proximity to local transport or retail outlets.
Amortisation
The drop in the value of an intangible asset over a specified period of time. An intangible asset might be a patent or copyright, and the period is usually defined as the its useful life. (The term ‘depreciation’ is used to describe the reduction in value of a tangible asset over time.)
Appraisal
An informal estimate of the price of a property, usually provided by a real estate agent. An appraisal is not the same as a formal valuation.
APR (annual percentage rate)
The annual rate charged for borrowing (or made as a result of investing) expressed as a single percentage value. This represents the actual yearly cost of funds (or income from investing) over the term of a loan.
Arrears
Overdue payments on a debt or liability. An account that requires regular recurring payments – like a mortgage, rental agreement, utility bill or any type of loan – is in arrears when one or more payments have been missed.
Asset management
Activities or services designed to maintain and increase the market value of any asset so the owner can benefit from returns. In real estate, asset management focuses on maximising property value and ongoing returns from the property, usually in the form of rental income.
BCA (Building Code of Australia)
Written regulations created and maintained by the Australian Building Codes Board (ABCB), setting the minimum standards of health, safety, amenity and sustainability for the construction industry. The BCA details technical requirements for the design and construction of buildings in Australia.
Body corporate
A group formed by the owners of a piece of land that has been subdivided into flats, apartments or units. Also known as an owners’ corporation, the group is responsible for maintaining and managing common areas of a building such as stairwells, entrance areas and car parks.
Capital
In general, this refers to financial resources available for use. Capital can be used to generate wealth when it is invested or used to produce goods and services. It can also be combined with labour to produce a return, while capital in the form of property can be rented out to generate income.
Caveat emptor
A Latin term meaning ‘let the buyer beware’. In real estate transactions, this phrase reminds buyers to complete their due diligence when purchasing a property.
CGT (capital gains tax) – Government regulations place limits on how capital can be used for investment, and generally tax wealth that an individual or entity generates when they invest capital. For example, when a property asset is sold in Australia, any increase in value – the difference between what it cost and what you get for reselling it – is subject to CGT. Personal property assets, such as a family home, are exempt from CGT.
CMA (Certified Management Accountant)
A qualified professional who has skills and expertise in financial accounting and strategic management. They can help individuals and companies make strategic business decisions based on financial information.
Conveyancing
The process of transferring property between a buyer and a seller. In real estate, conveyancing involves drawing up and carrying out a written contract that sets out the agreed purchase price and the date of transfer, as well as the obligations and responsibilities of both parties.
Contingency
A potentially negative economic event that may – or may not – happen in the future. Managing risk for any investment, including real estate, includes considering potential contingencies.
Covenant
A condition in a real property deed or title that limits or prevents someone from using a property for certain purposes.
CPI (Consumer Price Index)
The average change over time in how much households pay for a fixed basket of goods and services. In Australia, the Australian Bureau of Statistics publishes CPI figures. The CPI can indicate changes in economic inflation and variations in the cost of living.
Depreciation
The reduction in value of a tangible asset over time. With respect to real estate, depreciation can also mean a drop in the value of property assets due to poor market conditions.
Due diligence
Investigating a potential investment or purchase to confirm all material facts. When someone is preparing to purchase a property, there are many different aspects of due diligence involved. The buyer needs to examine, among other things, the contract of sale, and the planning controls in place that will affect how the land and/or buildings are used.
Easement
The right of one party to use the property of another party, usually for an agreed fee. Easements can affect the value of a property, so it’s wise to consult with a conveyancer to determine the effects of an easement on a potential property purchase.
Egress/Ingress
The legal right to exit and enter a property. In the context of real estate law, egress and ingress are usually relate to use of an easement; for example, an egress or ingress easement will govern the use of a shared driveway or private road for access to and from a property.
Encumbrance
A claim against a property by a party who is not the owner. Mortgages, easements and liens are examples of some encumbrances that can apply to real estate assets.
Escrow
An arrangement for a third party to hold funds on behalf of the other two parties in a transaction. In the sale of a property, the funds to purchase may be held in escrow until all conditions of the transaction – such as a building inspection – are satisfied.
Fiduciary
A person legally authorised to hold assets in trust for another person, and to manage the funds for that person’s benefit.
Force majeure
A clause included in a contract that removes liability for the impacts of unforeseen events (such as natural disasters) that could stop either party from meeting their obligations.
Land tax
An annual tax on the value of a piece of land. In Australia, land tax is administered by the state and territory governments.
Lien
The legal right of a creditor to sell a debtor’s property if the debtor breaches the terms of the loan contract. When purchasing any property, conducting due diligence includes being aware of any liens that could remain in place after ownership of the property is transferred.
Line of credit
An arrangement whereby a financial institution sets a maximum loan amount the customer can draw on at any time. Interest is not usually charged on any part of the line of credit that isn’t being used, which gives it an advantage over a regular loan.
Mortgage insurance
An insurance policy that the lender or borrower can purchase to protect themselves against mortgage default. In Australia, Lenders Mortgage Insurance (LMI) is usually required for mortgages greater than 80 per cent of the property value. In most cases, the borrower pays the insurance premium for LMI.
NABERS (National Australian Built Environment Rating System)
A national rating system that measures the environmental performance of buildings in Australia. NABERS analyses 12 months of performance data relating to a building or tenancy’s energy or water bills – or conducts a waste audit – and provides a star rating. This rating is scaled relative to the performance of other similar buildings in the same location.
Negative gearing
Borrowing money to buy an asset and receiving income (other than funds used to cover the loan interest and maintenance costs) from the investment. In Australia, the shortfall between income earned and interest due can be deducted from an individual’s tax liability. Negative gearing becomes profitable when the property is sold, assuming that property values are rising and a capital gain can be made. Investors considering negative gearing must have the finances to fund their ongoing interest and maintenance costs until the property is sold.
Net present value
A measure widely used to determine if the future expected cash flow from a rental property has a present value higher than the funds required to invest in the rental property. This is a way of calculating whether a particular real estate asset will provide a specific target rate of return, so investors can compare different properties on the market.
Official Cash Rate of interest (OCR)
The OCR is the rate of interest the central bank charges on overnight loans to commercial banks and it influences the price of borrowing money in Australia.
Ombudsman
An official or body that investigates complaints against businesses, financial institutions and governments. In Australia, there is an ombudsman available for such investigations in each state and territory.
Public liability
A specific legal liability that can result from injury to a third party, or damage to their property, while that third party is on the owner’s premises. When buying a commercial property, the purchaser must obtain public liability insurance as an essential part of meeting their legal responsibilities as an owner.
Quantity surveyor
A professional adviser to the construction industry. Quantity surveyors are responsible for estimating and monitoring costs, from the feasibility stage of a project until construction is completed. They work closely with architects, financial institutions, engineers, contractors, suppliers, project owners, accountants, insurance companies, solicitors and government authorities.
RBA (Reserve Bank of Australia)
Australia’s central bank. The Reserve Bank Board governs all monetary and banking policies of the RBA, which aim to support the growth and stability of the Australian economy. The board meets on the first Tuesday of each month (except January), to discuss and announce matters of policy, including any changes to the OCR.
REIT (Real Estate Investment Trust)
An investment vehicle for real estate, whereby investors can buy a stake in property assets (including buildings and mortgages) without tying up their capital in the long term. REITs can be traded, like stocks, on major exchanges. They give investors exposure to large-scale real estate assets, including warehouses, hospitals, shopping malls and apartment buildings.
Stamp duty
A tax on legal documents that relate to the transfer of assets or property. Property sales and acquisitions throughout Australia are subject to stamp duty, although rates vary in each state and territory.
Strata title
A form of ownership created for multi-level apartment blocks, and horizontal subdivisions with shared areas such as car parks and swimming pools. Strata title properties consist of individual lots and common property. Lots can be apartments, garages or storerooms, and each is assigned a lot owner on the title document. Common property is defined as everything else on the parcel of land that is not within a lot – such as stairwells, driveways, gardens and so on.
Tenants in common
The co-owners of an undivided interest in the same property. Each has an equal right to the possession and use of the property. Each owner can bequeath their interest to beneficiaries through their will, whereas in a joint tenancy, if one party dies their share passes automatically to the remaining owner or owners.
Term deposit
A deposit held at a financial institution for a fixed term that may range anywhere from a month to a few years. The conditions of a term deposit are that the money can only be withdrawn after the term has ended or by the borrower giving an agreed number of days’ notice. Typically, a longer term will offer a higher interest rate, and if the cash is withdrawn early, a penalty may be charged.
Torrens Title property
A property where the owner holds the title to the building and the land it is on. A Torrens Title document will list all details and interests affecting a property and its land, including easements, caveats, mortgages, covenants and past changes in ownership.
Valuation
A formal process of establishing the value of a property from an objective and independent point of view. In most Australian states and territories, a formal valuation can only be provided by a qualified valuer who has the necessary qualifications and training.
Yield
A measurement of the future income an investment property is expected to bring in. Yield is calculated annually as a percentage of the cost (or market value) of the asset.
Gross yield is the income expected to be received before expenses; net yield takes into account running costs of the property, including maintenance costs, management fees and so on.
Yield is particularly important to commercial real estate investors, because it is usually the main source of income they expect to receive from their investments.
Capital growth rates for commercial buildings are often not as high as for residential properties, so the yield on this type of purchase is often a more important factor when deciding whether to buy.