Model home leaseback glossary

1031 exchange

A like-kind exchange under Internal Revenue Code Section 1031 that can defer capital gains tax when investment real property is exchanged for other investment real property. Replacement property must be held for investment or productive use in a trade or business; property held primarily for sale does not qualify. Confirm treatment with a qualified intermediary and tax advisor.

Absorption

The pace at which homes in a community sell, usually expressed as sales per month. Absorption determines how long a builder needs its model — and therefore how long the leaseback income runs.

Appraisal gap

The difference between contract price and appraised value. Common on model homes because the upgrade package can price the home above neighborhood comps, which reduces the loan amount a lender will make.

Cap rate (NOI cap rate)

Net operating income divided by purchase price. The underwritten yield after operating expenses. Not the same as the builder's published gross yield.

Cash-on-cash return

Annual pre-tax cash flow after debt service divided by total cash invested (down payment plus closing costs). Measures the return on the money you actually put in.

Contracted gross yield

Annual leaseback rent divided by purchase price, before any expense. This is usually the headline number builders publish.

De-modelization

Also called restoration or conversion. Returning a decorated model home to standard retail condition: removing sales-office fixtures, signage and non-standard conversions, restoring the garage, and repairing wear from foot traffic.

DSCR

Debt service coverage ratio: net operating income divided by annual debt service. Lenders commonly want 1.20× or better; a DSCR near 1.00× means the property barely covers its loan payment.

Effective gross income

Gross rent less vacancy and collection loss. The starting point for calculating NOI.

Escalation

A contractual rent increase during the lease, either a fixed percentage on a set date or indexed to CPI.

Estoppel certificate

A signed statement from the tenant at closing confirming rent, term, deposits and that no defaults exist. Standard protection for a buyer of a leased property.

Guarantor

The entity standing behind the tenant's obligations. A parent-company guaranty is materially stronger than a single-community subsidiary signing alone.

Gross lease

A lease in which the landlord pays operating expenses such as taxes, insurance and HOA out of the rent. The opposite of a NNN lease and a very different underwriting outcome.

IRR

Internal rate of return: the annualized return that accounts for both the timing and size of cash flows, including the exit. More complete than cash-on-cash for a deal with a defined hold period.

Lease-up

The period between the builder vacating and a paying market tenant taking occupancy. Almost always a real cost that the headline yield ignores.

Model home

A finished, furnished and heavily upgraded home a builder uses to sell a community. It may be a single-family home, townhome or condo, and it usually doubles as the on-site sales office.

NNN (triple net) lease

A lease in which the tenant pays taxes, insurance and maintenance in addition to rent. Model home leasebacks are frequently NNN or NNN-style, but the actual expense allocation must be read line by line.

NOI

Net operating income: effective gross income less operating expenses, before debt service, capital expenditures and income tax.

Post-lease market rent

What the home would rent for to an ordinary residential tenant after the builder leaves. Often below builder rent, because builder rent reflects commercial use of the home as a sales office.

Residual value

The estimated value of the home at the end of your hold period, net of selling costs, in a community that is fully or nearly built out.

Restoration obligation

The lease clause requiring the tenant to return the home to a defined condition at lease end, and specifying who pays for it.

Sale-leaseback

A transaction in which an owner sells an asset and simultaneously leases it back, converting equity into cash while keeping possession and use. For builders, it converts a model home into working capital.

Special district assessment

Community development or improvement district charges — CDD in Florida, MUD in Texas, Mello-Roos in California. Often material, and easy to miss when underwriting.

Turnkey

An income property that requires no renovation or lease-up before producing rent. A model leaseback is turnkey during the term; the post-lease period is not.

Definitions are general and educational. Nothing here is legal, tax or investment advice — how a term applies depends on the actual lease and your own circumstances. See the due diligence checklist.