25 Need-to-Know Commercial Real Estate Terms
If you’re not familiar with commercial real estate industry jargon, it can feel like a foreign language. If you’re confused by things like Differential Cash Flow or Load Factor, don’t worry – you’re not alone.
But don’t lose heart. Understanding some of the basic terms can give you a foundation to speak that language – and, hopefully, leave you better equipped to make commercial real estate decisions.
To that end, we’ve put together an introduction to 25 common commercial real estate terms.
While each of these terms could likely be discussed in detail in its own right, for our purposes here, we’ll work to give you a familiarity and basic understanding of each.
Let’s get started!
Annual Percentage Rate
The Annual Percentage Rate, or APR, is the interest rate for an entire year – instead of a monthly fee or rate – as applied on a loan.
Effective APR (or EAR) takes into account the fee and compound interest.
An annuity is a fixed payment over a designated period of time.
Break Even Point
The break-even point is the condition at which property income covers recurring expenses. Often, this will be dependent upon building occupancy.
The most commonly-used building classification approach in commercial real estate is applied to office buildings:
Class A: Highest quality buildings in the market, with favorable locations, structural integrity, and infrastructure.
Class B: A step below Class A, yet still with quality components. May have potential to upgrade to Class A with aesthetic renovations
Class C: The lowest class of building. These properties are older, poorly located, and in need of substantial renovations.
The capitalization rate, or cap rate, is the ratio of Net Operating Income (NOI) to a property’s asset value. For example, if a property is valued at $1,000,000 and has a net operating income of $100,000, then the cap rate would be $100,000 over $1,000,000 (or 10%).
Cash Flow After Tax
Cash flow after tax, or CFAT, is determined by adding non-cash accounts, such as amortization, depreciation, restructuring costs and impairments, back to net income.
Cash Flow Before Tax
Cash flow before tax, or CFBT, is the amount of money generated by an investment after collection of all revenues and payment of all bills, yet without any deductions for depreciation or other noncash items, and before calculation of income tax consequences.
Common Area Maintenance
A common area is a space shared by all of a building’s tenants. In commercial buildings, these spaces often include areas such as entryways, dining areas, or conference rooms that are available for shared use.
Maintenance is the amount of additional rent charged to the tenant to these areas and may include services like custodial care or snow removal.
Concessions are granted benefits by a landlord in order to attract tenants. Examples include free rent, lease buyouts, moving allowances, or tenant improvement allowances
Contract rent is the total rental obligation as specified in a commercial real estate lease.
Depreciation is the loss of utility and value of a property over time.
Differential Cash Flow
Differential cash flow is the difference in the cash flow from one alternative and the cash flow from another alternative. This is a barometer used to determine the viability of new projects.
A leased fee is a landlord’s right of use to property and the right to lease to others. Essentially, it means that the landlord still owns the property.
Multiple-Use Office Space
Multiple-use office space is simply commercial space that can be used for a variety of purposes.
Net Operating Income
Net operating income, or NOI, is a calculation used to analyze real estate investments that generate income.
NOI equals all revenue from the property minus all operating expenses. Revenue may include things like parking and service fees, vending machines, and rent. Operating may include maintenance, insurance, property management fees, utilities, property taxes, etc.
Present value (PV) is the current worth of a future sum of money or stream of cash flows based on a specified rate of return. The general principle is that money today is more valuable than the same sum of money in the future, based on return on investment.
Principal refers to an original sum invested or lent.
Real Estate Investment Trust
A real estate investment trust, or REIT, is a company that owns, and in most cases operates, income-producing real estate as a means of generating profits for investors.
Rentable Square Footage
Rentable square footage is a space’s usable square footage in addition to a portion of the building’s common areas (such as entry ways, conference rooms, etc.)
Also known as the load factor, the rentable-to-usable ratio is the rentable square feet over usable square feet, where rentable square feet include common areas and usable square feet include the specific area a tenant will occupy to do business.
Return on Investment
Return on investment, or ROI, refers to the gain or loss generated on an investment relative to the amount of money invested. This is calculated by taking net profit over cost of investment.
To sublease means for a renting tenant to lease a property of their rented space to a subtenant.
Triple Net Lease
A triple net lease is a lease agreement in which the tenant is responsible for paying the building’s property taxes, building insurance, and maintenance or repair costs during the term of the lease. Often, rent is reduced in this context.
Usable Square Footage
Usable square footage is the space occupied by a tenant from wall to wall, excluding common areas such as lobbies, restrooms, stairwells, etc.
Zoning refers to the designation of certain areas as being legally categorized for certain land uses and is usual enacted by a local planning authority.
Next Steps to Make Great Commercial Real Estate Decisions
Hopefully, these definitions are helpful for you as you consider commercial real estate information in your decision-making process. If you’re still a bit intimidated, though, don’t hesitate to ask for help.
At Rockpoint Commercial, we have a breadth of expertise in commercial real estate consulting and management, right here in Frederick, MD. Whether you’re looking to buy, sell, or lease, there’s a lot of jargon out there clouding the waters. But we can help you to sort through it and find the commercial real estate steps that are best for you.
Don’t let jargon cloud your decisions. If you’re ready to leave commercial real estate mystery behind, get in touch with us today.