Every field in the industry has its own lingo and we often enter some fields that have got a lot of jargon. The commercial real estate industry is one such industry that has a lot of jargon and it could be very challenging if you’re not acquainted with the terms.
The commercial real estate lingo is not very dynamic and the terms which are used today are the same ones that were used decades ago. So, it’s something you can learn real fast!
If you’re an amateur in the industry of real estate and are finding hard to comprehend things told by your loan consultants or legal advisors, this blog is going to come very handily for you.
Here are some commercial real estate terms that every investor must know. It might take you a good 6 to 8 months to learn these terms if you want to learn it as and when you come across the term.
But isn’t it better to know about these terms beforehand so you can actually comprehend what your advisors or consultants are trying to tell you?
If not for anything, you’ll at least not feel like a lost kid in the jungle listening to many words whose meaning you don’t know. Read on and you’ll get acquainted with the real estate terms, you, as an investor should know! Let’s begin!
Commercial real estate terms every investor should know
1) Common Area Maintenance
Usually referred to as CAM, the common area maintenance is the charges charged to the tenants which are added to their base rent.
Common area maintenance charges are charged to the tenants in relation to the areas that are shared by a group of tenants whose benefits everyone drive individually and collectively.
The best examples could be the maintenance charges of swimming pool area, the parking lot sweeping fees, the corridor cleaning fees, the maintenance charges given to the Gardner and so on.
These areas are not usually subject to the capitalization rates of the property and those are to be borne equally by all the tenants sharing the same property.
2) The building classifications
The building classifications are often referred to the different classes of buildings which are mostly referred to as class A, B, C and D.
These ratings are based upon the amenities provided by different property types and are used by the commercial real estate investors to know the worth of the building and to judge the market trends.
The class A properties are usually newer buildings which has superior construction and are provided with all modern amenities such as Wi-Fi, gated community, lawns or Gardens, gyms, play area, meeting discussions room and so on.
These are typically rated higher than other classes of buildings and these buildings have the capability of attracting high paying tenants.
When the class of building decreases to B, C, and D, the amenities will decrease in quantity as well as quality.
While deciding the class of the property, what matters the most is the location in which the property is situated than the specifications of the property in itself.
For example, a property that can be rated class A in one particular location can be rated class B in another as the location of the latter property does not suit the class A standards.
Location of the property depends upon a lot of factors like the proximity of the location to different places like schools, colleges, hospitals, theatres, public parks, airports, railway stations and so on.
Thus, it can be noted that the class of the property does not depend on the specifications of a property. It rather depends on the location in which the property is situated.
3) Cap rate
Generally referred to as the capitalization rate, the cap rate is the part of a leveraged initial yield on investing in a commercial property which is usually expressed as the percentage of net operating income (NOI) when divided by the price of the property.
The capitalization rate is one of the major factors that investors look into before they finalize purchasing a particular commercial real estate property.
There is no hard and fast rule that says higher the capitalization rate, higher the profits a property would derive as it’s totally a subjective concept and it depends on a lot of other factors.
Thus, investors cannot decide the worth of the property just by looking at the face of capitalization rate a property has.
4) Net absorption
Net absorption is the net change in a particular occupied commercial real estate space within a given market between the last measurement period and the current measurement period.
It includes both the decreases as well as increases in the inventory levels and the net absorption rate can be either positive or negative.
It is always recommended for the real estate investors to reveal the net absorption rates clearly before any sale or purchase of property is done.
5) The concessions
The concessions in the industry of commercial real estate refer to the discounts provided by the landlords to their tenants in order to attract more tenants to their property.
The concessions are given to residential as well as commercial office spaces and it is one of the biggest areas where tenants negotiate.
The concessions are given in the form of lease buyouts, tenant improvement allowances or moving out allowances.
Sometimes, there can be different terms and conditions on which the concessions are negotiated between the owner and the tenants depending upon their mutual understanding.
To safeguard the interest of the buyers, it is always recommended that they take help of commercial real estate loan Consultants.
6) Stated income loans
Commercial stated income loans are often referred to as the boon to the industry of commercial real estate.
These loans are provided based on the income which is stated in the bank statements of a loan borrower and not on any other loan eligibility criteria.
Stated income loans are best suited for people who do not have a consistent income flow or do not have the same source of income every month or every year.
These loans are most beneficial for freelancers and self-employed professionals as they do not have a consistent source of income.
7) Real Estate Investment Trust
Often referred to as REITs, the real estate investment trust are the agencies that deal with a stock market by trading the commercial as well as residential properties by functioning as a trust.
It is best suited for people who do not want to individually involve themselves in dealing with the transactions of a commercial real estate but can invest some money with the trust.
These real estate investment trusts often receive special tax considerations and also promise their investors high yield as they only invest in highly profitable properties.
They also offer highly liquid-able investments to their investors and is best suited for people who do not want to take risks individually.
8) Hard money loans
Commercial hard money loans are the loans that are provided by private money lenders.
In other words, these are the loans that are provided by non-institutional lenders and are thus more suitable for people who cannot qualify the lengthy loan eligibility requirements set by banks and other lending institutions.
The loan approval process with traditional banks can take a long time and have high rates of interest which can be avoided in case of hard money loans.
Private money lenders do not have the hard loan eligibility requirements but they rather focus on the Asset Value and the borrower’s equity.
A minimum borrower’s equity of 20% should be able to land you a hard money loan with most of the private money lenders.
9) Net Operating Income
Shortly called as NOI, the net operating income is the calculation that is used to analyze the income that can be generated by a commercial real estate property.
Net operating income is the total revenue generated from a commercial real estate property after deducting all the reasonable necessary operating expenses.
This calculation is used to compare the profits that can be generated by buying different commercial real estate properties and to arrive at the final decision.
The different operating expenses may include vending and laundry machine expenses, parking and service fees, cleaning and maintenance charges, security charges, utilities, repair management charges, janitorial fees, property taxes and so on.
Net operating income is before tax figure and it does not include loan repayment expenses, interest expenses, depreciation and amortization expenses and other types of capital expenditures.
The accurate calculation of Net operating income is very crucial in determining the total probable profit that can be generated by purchase or sale of a commercial real estate property.
Those were some of the real estate terms every investor must know before getting into the real estate business.
There are hundreds of other commercial real estate terms but you don’t need to know all of them as there are legal advisors and commercial real estate consultants who can help you with that.
The aforesaid list is the collection of basic terms that you must be familiar with in order to understand what you’re getting into.