25 Commercial Real Estate Terms You Should Know
The world of commercial real estate is complex and uses terminologies that may not be familiar to you. Learning these terms is like learning a new language. At first, it can be overwhelming but once you’ve familiarized yourself with these, it will help you better understand the process and make you aware of what lies beneath so you won’t feel under-informed.
Here are the 25 commercial real estate terms we believe you should know:
- Amortization - the action or process of repaying the loan principal with regular payments over a designated period of time consisting of both principal and interest.
- Assessed Value - the value of a property established by a governing authority to levy a tax or fee on the property owner.
- Balloon Payment – it is a type of loan that does not fully amortize over its term resulting to an oversized payment at the end of the loan term.
- Broker - a person who represents another person or a company during a buying or selling process.
- Capitalization Rate - also known as “Cap Rate”, is a term that is used to help determine the potential real estate deal. A percentage that relates the value of an income-producing property to its future income, expressed as net operating income divided by purchase price. It is based off of an algorithm by dividing the net operating income (NOI) by the sales price of the property.
- Common Area Maintenance – also known as “CAM”, is the amount of costs you are responsible to pay for maintaining the building. These fees include maintenance of shared areas: hallways, elevators, stairways, lobbies, public restrooms, parking lots, sidewalks, etc.
- Due Diligence - the process of examining a property, related documents, and procedures conducted by or for the potential lender or purchaser to reduce risk.
- Escrow - a legal arrangement in which a third party temporarily holds large sums money or property until a particular condition has been met. It is used as a way to protect both the buyer and seller during the commercial property purchasing process.
- Equity - The fair market value of an asset less any outstanding indebtedness or other encumbrances.
- Flex Space - is a form of commercial real estate that is flexible in terms of what it can be used for (e.g., space that could be utilized for industrial or office activities).
- Internal Rate of Return – also known as “IRR”, is the percentage of interest earned on each dollar that remains in an investment each year.
- Lessee - The person renting or leasing the property, also known as tenant.
- Lessor - the owner or the lessor of a property that is rented or leased to a tenant, also known as landlord.
- Letter of Intent – also known as “LOI”, a preliminary agreement that is negotiated between a tenant and landlord or buyer and seller.
- Listing - refers to the listing agreement that is made between a principal and an agent, regarding marketing of a property. Listings may include details about the property, the home (number of bedrooms, baths, featured rooms), other structures, the price, and photos.
- Net Operating Income – also known as “NOI”, the potential rental income plus other income, less vacancy, credit losses, and operating expenses.
- Real Estate Investment Trust – also known as “REIT”, is a company that owns, operates, or finances income-generating real estate. The trust is not subject to corporate income tax as long as it complies with the tax requirements for a REIT.
- Rentable Square Footage – is the amount of space that includes the usable square footage plus some part of the square footage that will be shared among tenants. This may include bathrooms in hallways, lobbies, restrooms, elevators, or cafeterias.
- Return on Investment – also known as “ROI”, is a measurement of how much money an investor receives after all expenses have been deducted. It is the difference between the net gains from investing in the property less the net cost from investing in the property divided by the purchase price of the property, expressed in percentage.
- Sale-leaseback - a leasing and financing strategy in which a property owner sells its property to an investor, then leases it back.
- Triple Net Lease – also known as “NNN”, is a lease agreement on a property whereby the tenant or lessee promises to pay all the expenses of the property including real estate taxes, building insurance, and maintenance.
- Usable Square Footage - is the amount of space that is being leased. Usable square footage determines wall-to-wall space under the lease terms. It is a space that is not meant to be shared with other tenants.
- Vacancy Rate - the percentage of the total supply of units or space of a specific commercial type that is vacant and available for occupancy at a particular point in time within a given market.
- Value-add Properties - are those that need corrective action to reach their full potential value. These investments typically target properties that have in-place cash flow, but seek to increase that cash flow over time by making improvements to or repositioning the property.
- Zoning - refers to laws that regulate how real property can be used in certain areas, designating the type of operations allowed on a site.
Even after outlining all the information above, investing in CRE can still seem daunting. That’s why the Leveraged CRE Investment Team at Commercial Properties, Inc. is here to help you achieve your investment goals. Contact us at (480) 330-8897 or send us an email at firstname.lastname@example.org.
Need help on how to get started investing in commercial real estate? We got you covered! We prepared a free e-book that will serve as your guide to achieve your long-term business goals or obtain that property you’ve always been dreaming of!
Phill Tomlinson is a commercial real estate broker with Commercial Properties, Inc. (CPI) in Scottsdale, Arizona, and owner of the Leveraged CRE Investment Team specializing in investment sales and tenant/landlord representation in the Phoenix and Scottsdale submarkets. Phill applies over 21 years of experience in the Real Estate industry helping investors and owners maximize their returns.
Bookmark www.leveragedcre.com to learn more about the Commercial Real Estate market and keep informed of relevant real estate strategies designed to maximize your income property investment results. Connect and follow Phill on Social Media at sm.leveragedcre.com/smplatform. #LeveragedCRE