Every industry has its own lingo, but there are some industries that really have a lot of jargon and commercial real estate (CRE) is definitely one of those industries. If you don’t have a background in CRE or CRE experience, it’s easy to feel overwhelmed. In talking to new or aspiring business owners, I hear this expressed over and over, so I thought it would be a good time to share 10 of the most common terms in commercial real estate that everyone should know.
1. Building Classifications
In most markets, building classifications refer to Class A, B, C and sometimes D properties. While the ratings can be very subjective, class A properties are usually newer buildings with excellent construction and in great locations with easy access, reliable tenants, and a multitude of sought after amenities (such as on site management or covered parking). As the class of the building decreases, typically one component of the property or another, such as age or quality of construction, becomes less desirable.
2. Cap Rate (slang for Capitalization Rate)
The cap rate represents the unleveraged initial yield on the investment expressed as the annual Net Operating Income divided by the asking sale price of a property.
3. Common Area Maintenance (CAM)
Simply put, this is the amount of additional rent that is charged to the tenant in addition to the base rent, in order to maintain the common areas of the property that are used by all of the tenants. Examples of this include outdoor lighting, cleaning of the parking lot, insurance, and more. It’s important to note that this often does not include any capital improvements that are made to the property.
In an effort to attract tenants, a landlord will sometimes grant concessions in negotiations. This could include a number of offers, such as lease buyouts, free rent, moving allowances, and above standard allowances for tenant improvements.
5. Net Absorption
This represents the net change in occupied space in a specified market for the current period of time measurement and the previous period. This can be either positive or negative, and must also include any decrease as well as any increases in the levels of inventory.
6. Net Operating Income (NOI)
As the name suggests, this is a calculation used to analyze real estate investment properties that generate income. The NOI equals the sum of all revenue from the property, minus all (reasonably necessary) operating expenses.
7. REIT (Real Estate Investment Trust)
A REIT is a security that sells similar to a stock on the exchange and invests in real estate directly, whether through properties or mortgages. REITs receive special tax considerations and will usually offer investors higher than average yields, with a highly liquid method of investing in commercial real estate.
8. Return on Investment (ROI)
Not specific to CRE, ROI is a performance measure used to measure the efficiency of an investment. To calculate ROI, the benefit or return of an investment is simply divided by the overall cost of the investment. The quotient can be expressed as a ratio or a percentage.
9. Tenant Improvements or Tenant Improvement Allowance (TI)
TI represents the custom alterations a building owner makes to the rental space as part of a specified lease agreement, in order to fit the space to the needs of the particular tenant. Examples of this can include changes to the floors, ceilings, walls and/or lighting.
10. Triple Net Lease (NNN)
A triple net lease is a lease agreement that stipulates the lessee (the tenant) as being completely responsible for any costs related to the space being leased, on top of the rent that is applied under the lease. This type of lease requires the tenant to pay for net real estate taxes on the property, net building insurance, and net common area maintenance. As a result, the tenant has to pay the net amount of all three of these costs, which is how the lease got its name.