Ever wondered what an agent was saying while touring you through a property? Or what the terms and phrases in the marketing packets really meant? Well we've compiled a short list of the most common commercial real estate terms to help you navigate your way to a deal. If you don't see a specific term you have questions about on the list, please comment below.
Amortization:
The repayment of loan principal through equal payments of both principal and interest over a designated period of time.
CAM - Common Area Maintenance:
The CAM charge is an additional rent, charged on top of base rent, and is mainly composed of maintenance fees for work performed on the
common area of a property
Cap Rate - Capitalization Rate:
A cap rate is the ratio of Net Operating Income (NOI) to the property asset value. If a property were listed at $500,000.00 with an NOI of $75,000.00, the cap rate would be 15% (75,000.00/500,000.00 = .15).
Capital Gain:
Taxable income derived from the sale of a capital asset. It is equal to the sales price less the cost of sale, adjusted basis, suspended losses, excess cost recovery, and recapture of straight-line cost recovery.
Cash Flow:
The net cash received in any period, taking into account net operating income, debt service, capital expenses, loan proceeds, sale revenues, and any other sources and uses of cash.
Cash on Cash Return:
A return measure that is calculated as cash flow before taxes divided by the initial equity investment.
Commercial Real Estate:
Any multifamily residential, office, industrial, or retail property that can be bought or sold in a real estate market.
Common Area:
Areas of the site available to all tenants for use on a non-exclusive basis e.g. hallways, parking lots, roofs, etc.
Depreciation:
The loss of utility and value of a property over time. Depreciation may be used as a tax write-off for a designated number of years.
Demographics:
Characteristics of human populations as defined by population size and density of regions, population growth rates, migration, vital statistics, and their effect on socio-economic conditions.
Due Diligence:
The process of examining a property, related documents, and procedures conducted by or for the potential lender or purchaser to reduce risk. Applying a consistent standard of inspection and investigation one can determine if the actual conditions do or do not reflect the information as represented.
Fixed Costs:
Costs that do not change with a building’s occupancy rate. They include property taxes, insurance, and some forms of building maintenance.
Flex Space:
Space that is flexible in terms of it's use, e.g. a building with 4,000 square feet of office space and 2,000 square feet of warehouse.
FSG - Full Service Gross:
In a full service gross lease, the landlord is responsible for paying the taxes, maintenance, insurance, and utilities for the premises.
Ground Lease:
A lease of the land only, typically for extended periods of time so that a developer or tenant may construct a building.
Landlord:
A person or business that leases land, buildings, or residential space to a tenant.
LOI - Letter of Intent:
A document outlining one or more agreements between two or more parties before the agreements are finalized by a contract and is typically non-binding.
NNN - Triple Net Expenses:
A lease structure in which the tenant or lessee is responsible for paying a portion of or all of the common expenses related to real estate ownership - property taxes, insurance, and maintenance of the premises.
Net Operating Income:
The potential rental income plus other income, less vacancy, credit losses, and operating expenses.
Pass Throughs:
Operating expenses for the premises that are passed on to the tenant by the landlord.
ROI - return on investment:
The percentage return on each dollar invested. Also known as yield.
Rent Concession:
A period of free rent given to the tenant by the lessor, typically 2-3 months in the Nashville market.
Step-Up Lease:
A lease in which the rental amount paid by the lessee increases by a preset rate or set dollar amount at predetermined intervals. A step lease is a means for the lessor to hedge against inflation and future maintenance or operational expenses. E.g. a 10% rental increase in year 5 of a 10 year lease.
Square Feet:
The unit used to measure the floor area of a space. E.g. if a space was 20 feet wide and 60 feet deep it would be 1,200sf (20'x60').
Sublease:
A lease in which the original tenant (lessee) sublets all or part of the leasehold interest to another tenant (known as a subtenant) while still retaining a leasehold interest in the property. Also known as a sandwich lease due to the sandwiching of the original lessee between the lessor and the subtenant. The original lessee is still liable to pay the rent if the sublessee should default.
Tenant:
A tenant is a person or business that occupies land or property from a landlord.
Tenant Improvements:
The improvements made to a leased premises prior to or during a tenant’s occupancy, which may be paid for by either the landlord, the tenant, or both. These may include adding or removing walls, fixtures, doors, etc.
TIA - Tenant Improvement Allowance:
The amount a landlord is willing to give to the tenant, typically on a per square foot basis, to make improvements to the premises.
Zoning:
The designation of specific areas by a local planning authority within a given jurisdiction for the purpose of legally defining land use or land use categories. This designation will determine whether a property is commercial, residential, or industrial, and can be very specific as to the property's use.