Key Terms Used in Commercial Real Estate Key Terms Used in Commercial Real Estate

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Key Terms Used in Commercial Real Estate

Regardless of industry, most professionals use special terminology to communicate with one another. Pilots, engineers, scientists, farmers, accountants and commercial real estate investors all have to understand the language associated with their profession — and it can get confusing.
If you're new to commercial real estate, these 13 key terms to help you in becoming a pro when it comes to the lingo.

1. Letter of Intent (LOI)

A letter of intent is an agreement(s) between two or more parties before an actual agreement, such as a lease, is finalized. It is similar to a term sheet or memorandum of understanding (MOU). While LOIs may not be binding, provisions of them can be, e.g., non-disclosure and exclusivity. The intent is to protect both parties in the transaction until the transaction is executed. This is "The Letter" you will be sending out when you are ready to go full force into the Commercial Real Estate Investment scene.

2. Build-to-suit
A building is designed and tailored for a specific tenant, often because the tenant is unable to find suitable space in the speculative market. Sometimes (but not always), a build-to-suit project includes specific design features not commonly found in the speculative market, thus compelling the tenant to have a special facility built. The build-to-suit project is usually contracted with a developer who owns and operates the completed facility occupied
by the tenant. Generally, a build-to-suit project becomes a single-tenant building upon completion.

3. Direct Vacancy Rate
The total amount of physically vacant space divided by the total amount of existing inventory, expressed as a percentage. Space that is under construc- tion (and, therefore, is vacant) is not included in vacancy calculations.

4. Effective Rent
Expressed in dollars per square foot either per year or per month depending on market standards, it is a measurement of the value of the lease when all the concessions plus escalations are included. Effective rent calculations may vary according to local market practices; for example, in some markets, broker commissions are included.

5. Triple Net Lease
A lease agreement whereby the tenant pays taxes, maintenance and property insurance as well as all operating costs associated with the tenant’s occupancy, including personal property taxes, janitorial services and all utility costs. The landlord is responsible for the roof and the structure and sometimes the parking lot. 

6. Usable Area
This relative term is best compared to rentable area. Usable area is the amount of space that can actually be used by tenants within the space
they lease. For example, columns inside a tenant space are counted in the measure of rentable area, but the space occupied by the column cannot be used by the tenant. A tenant’s usable area does not include common areas in the building.

7. Vacancy Rate
A measurement expressed as a percentage of the total amount of vacant space divided by the total amount of inventory. This measurement is typically applied to a building, a submarket or a market.

8. Capital Expenses or Cap Ex
Improvements (as opposed to repairs) to a fixed asset that will increase the value or useful life of that asset. A capital expenditure is typically amortized or depreciated over the useful life of the asset, as opposed to a repair, which is expensed in the year incurred.

9. Capitalization Rate or Cap Rate
Unlevered initial return from the acquisition of a real estate asset calculated by dividing net operating income (NOI) by the property sales price. For example, a property’s capitalization rate (cap rate) is 10 percent if it is purchased for $10 million and produces $1 million in NOI during one year. The cap rate
is typically calculated using the NOI generated in the first year of ownership so investors can normalize and compare potential returns among competing investment properties.  A little complicated, but it will come to you as you learn more about Real Estate Investing.

10. Internal Rate of Return (IRR)
For income properties, it is the interest or discount rate needed to discount the sum of future net cash flows, including amortization and payments of loans and depreciation of the real property, to an amount equal to the initial equity of the property.  For development projects, it is the interest or discount rate needed to convert (or discount or reduce) the sum of the development expenditures and incomes to equal zero.

11. Loan to Value Ratio (LTV)
The ratio between a mortgage loan and the value of the property pledged as security, usually expressed as a percentage.

12. Net Cash Flow
Net cash flow is the annual income produced by an investment property after deducting allowances for capital repairs, leasing commissions, tenant inducements (after the initial lease is up) and debt service from net operating income.  This will become one of your favorite terms because it's just that - your Net Cash Flow!  We all would like some cash flow from Commercial Real Estate investments!

13. Net Operating Income (NOI)
The income generated after deducting operating expenses but before deducting taxes and financing expenses.  This is a very important term because this is your bottom line!  Know this and learn it with your eyes closed!

There's Always More to Learn

Commercial real estate is more complicated than 13 terms, of course. But this beginner's guide will give you a foundation on which to build. Stay tuned for more Commercial lingo from A to Z.  This is only the beginning of a wealth of information which is needed to build on those fabulous investment opportunities out there.  The more you know!

Follow us on Facebook and Instagram!
&
Subscribe to our YouTube Channel!
Revival Property Group
"Real Estate Solutions At Your Convenience"

Regardless of industry, most professionals use special terminology to communicate with one another. Pilots, engineers, scientists, farmers, accountants and commercial real estate investors all have to understand the language associated with their profession — and it can get confusing.
If you're new to commercial real estate, these 13 key terms to help you in becoming a pro when it comes to the lingo.

1. Letter of Intent (LOI)

A letter of intent is an agreement(s) between two or more parties before an actual agreement, such as a lease, is finalized. It is similar to a term sheet or memorandum of understanding (MOU). While LOIs may not be binding, provisions of them can be, e.g., non-disclosure and exclusivity. The intent is to protect both parties in the transaction until the transaction is executed. This is "The Letter" you will be sending out when you are ready to go full force into the Commercial Real Estate Investment scene.

2. Build-to-suit
A building is designed and tailored for a specific tenant, often because the tenant is unable to find suitable space in the speculative market. Sometimes (but not always), a build-to-suit project includes specific design features not commonly found in the speculative market, thus compelling the tenant to have a special facility built. The build-to-suit project is usually contracted with a developer who owns and operates the completed facility occupied
by the tenant. Generally, a build-to-suit project becomes a single-tenant building upon completion.

3. Direct Vacancy Rate
The total amount of physically vacant space divided by the total amount of existing inventory, expressed as a percentage. Space that is under construc- tion (and, therefore, is vacant) is not included in vacancy calculations.

4. Effective Rent
Expressed in dollars per square foot either per year or per month depending on market standards, it is a measurement of the value of the lease when all the concessions plus escalations are included. Effective rent calculations may vary according to local market practices; for example, in some markets, broker commissions are included.

5. Triple Net Lease
A lease agreement whereby the tenant pays taxes, maintenance and property insurance as well as all operating costs associated with the tenant’s occupancy, including personal property taxes, janitorial services and all utility costs. The landlord is responsible for the roof and the structure and sometimes the parking lot. 

6. Usable Area
This relative term is best compared to rentable area. Usable area is the amount of space that can actually be used by tenants within the space
they lease. For example, columns inside a tenant space are counted in the measure of rentable area, but the space occupied by the column cannot be used by the tenant. A tenant’s usable area does not include common areas in the building.

7. Vacancy Rate
A measurement expressed as a percentage of the total amount of vacant space divided by the total amount of inventory. This measurement is typically applied to a building, a submarket or a market.

8. Capital Expenses or Cap Ex
Improvements (as opposed to repairs) to a fixed asset that will increase the value or useful life of that asset. A capital expenditure is typically amortized or depreciated over the useful life of the asset, as opposed to a repair, which is expensed in the year incurred.

9. Capitalization Rate or Cap Rate
Unlevered initial return from the acquisition of a real estate asset calculated by dividing net operating income (NOI) by the property sales price. For example, a property’s capitalization rate (cap rate) is 10 percent if it is purchased for $10 million and produces $1 million in NOI during one year. The cap rate
is typically calculated using the NOI generated in the first year of ownership so investors can normalize and compare potential returns among competing investment properties.  A little complicated, but it will come to you as you learn more about Real Estate Investing.

10. Internal Rate of Return (IRR)
For income properties, it is the interest or discount rate needed to discount the sum of future net cash flows, including amortization and payments of loans and depreciation of the real property, to an amount equal to the initial equity of the property.  For development projects, it is the interest or discount rate needed to convert (or discount or reduce) the sum of the development expenditures and incomes to equal zero.

11. Loan to Value Ratio (LTV)
The ratio between a mortgage loan and the value of the property pledged as security, usually expressed as a percentage.

12. Net Cash Flow
Net cash flow is the annual income produced by an investment property after deducting allowances for capital repairs, leasing commissions, tenant inducements (after the initial lease is up) and debt service from net operating income.  This will become one of your favorite terms because it's just that - your Net Cash Flow!  We all would like some cash flow from Commercial Real Estate investments!

13. Net Operating Income (NOI)
The income generated after deducting operating expenses but before deducting taxes and financing expenses.  This is a very important term because this is your bottom line!  Know this and learn it with your eyes closed!

There's Always More to Learn

Commercial real estate is more complicated than 13 terms, of course. But this beginner's guide will give you a foundation on which to build. Stay tuned for more Commercial lingo from A to Z.  This is only the beginning of a wealth of information which is needed to build on those fabulous investment opportunities out there.  The more you know!

Follow us on Facebook and Instagram!
&
Subscribe to our YouTube Channel!
Revival Property Group
"Real Estate Solutions At Your Convenience"

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