Commercial real estate can be complex, often filled with terms that may seem unfamiliar. Learning this terminology is like picking up a new language. Initially, it might feel overwhelming. However, once you understand these terms, navigating the process becomes much easier. You’ll feel more informed and confident about what’s happening behind the scenes.
Here are 25 key commercial real estate terms you should know:
Amortization
Amortization refers to the process of repaying a loan’s principal through regular payments. These payments include both principal and interest, ensuring the loan is paid off over time.
Assessed Value
A governing authority assesses the value of a property. This value is then used to calculate property taxes or fees, which the owner is responsible for.
Balloon Payment
A balloon payment is part of a loan that doesn’t fully amortize over its term. As a result, the borrower must make a larger, final payment at the end of the loan term.
Broker
A broker actively represents either the buyer or seller during a real estate transaction. They serve as a vital link between the two parties.
Capitalization Rate (Cap Rate)
The Cap Rate helps assess the value of income-generating properties. To calculate it, divide the net operating income (NOI) by the property’s purchase price. This percentage gives insight into the property’s potential return.
Common Area Maintenance (CAM)
CAM fees refer to the costs tenants must pay for maintaining shared spaces. These areas often include hallways, elevators, lobbies, and parking lots. Tenants share the responsibility for these upkeep expenses.
Due Diligence
Due diligence involves thoroughly examining a property and its associated documents. Both buyers and lenders conduct this process to reduce their financial risk before making a decision.
Escrow
Escrow refers to an arrangement where a neutral third party holds money or property until certain conditions are met. This setup helps protect both the buyer and seller during the transaction.
Equity
Equity represents the difference between the current market value of a property and any outstanding debt. Essentially, it is the portion of the property that the owner truly owns.
Flex Space
Flex space refers to commercial real estate that can serve multiple purposes. For example, the space might be used for office work or industrial activities, depending on the tenant’s needs.
Internal Rate of Return (IRR)
The IRR indicates the percentage of interest earned on each dollar that remains invested in the property over time. Investors use this figure to evaluate the profitability of their investment.
Lessee
A lessee, also known as the tenant, rents or leases the property from the owner. They agree to specific terms in exchange for occupying the space.
Lessor
The lessor, or landlord, owns the property and leases it to a tenant. In return, they receive rental income from the lessee.
Letter of Intent (LOI)
An LOI is a preliminary agreement between a tenant and a landlord, or a buyer and seller. It outlines key terms before moving forward with formal negotiations, providing a starting point for further discussions.
Listing
A listing is an agreement between a property owner and an agent that outlines the marketing strategy for a property. Listings often include essential details like the property’s price, features, and photos.
Net Operating Income (NOI)
NOI is calculated by adding up potential rental income and other income, then subtracting vacancies and operating expenses. This figure helps investors determine the property’s profitability.
Real Estate Investment Trust (REIT)
A REIT is a company that owns, operates, or finances income-generating real estate. REITs are exempt from corporate income taxes as long as they follow specific tax regulations.
Rentable Square Footage
Rentable square footage includes the usable square footage plus a portion of shared spaces. Areas like restrooms, elevators, and lobbies are typically considered when calculating rentable square footage.
Return on Investment (ROI)
ROI measures how much profit an investor receives after accounting for expenses. It is calculated by dividing the net gains from the investment by the purchase price and is expressed as a percentage.
Sale-Leaseback
In a sale-leaseback arrangement, a property owner sells the property to an investor and then leases it back. This strategy allows the original owner to free up capital while still using the space.
Triple Net Lease (NNN)
An NNN lease requires the tenant to cover all property expenses, including real estate taxes, insurance, and maintenance costs, in addition to their rent.
Usable Square Footage
Usable square footage refers to the actual space a tenant occupies under their lease agreement. It excludes shared areas and is exclusive to the tenant’s space.
Vacancy Rate
Vacancy rate measures the percentage of unoccupied units or spaces in a specific market. It gives a snapshot of how many properties are available for rent or lease at a given time.
Value-Add Properties
Value-add properties are those that need improvements to reach their full potential. Investors buy these properties with the goal of increasing their value through renovations or other enhancements.
Zoning
Zoning laws regulate how property can be used in specific areas. They designate the types of activities allowed on a site, such as residential, commercial, or industrial use.
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