21 Common Terms in Commercial Real Estate

The world of commercial real estate is a complex place with a lot of terminology, jargon, and acronyms that are often unfamiliar to the average person.

Here are some common terms that we believe are important to be aware of if you are looking to invest in, purchase, lease, manage, finance, etc., commercial property.

  1. Absorption: The occupancy and use of available vacant property in a building or market area.
  2. Built-to-Suit: This is when a building is designed for and tailored to a specific tenant, often because the tenant cannot find a suitable space in the current market. It’s usually contracted by a developer who owns and operates the completed facility that is occupied by the tenant.
  3. Class A Building: An office building with rents in the top 30 – 40% of the marketplace. Often well-located in major employment hubs with good transit access and adjacent to high numbers of retail establishments and restaurants. Above-average quality of building services, upkeep, and management.
  4. Class B Building: An office building with rents based between those of Class A and Class C Buildings. Located in fair to good areas in major employment hubs with fair to good transit access and in close proximity to a moderate number of retail establishments and restaurants. Class B buildings have an average quality of building services, upkeep, and management.
  5. Class C Building: An office building with rents in the bottom 10 – 20% of the marketplace. Often older, neglected buildings in good locations or moderate-level buildings in poor locations. Typically, fewer amenities in close proximity. Below-average quality of building services, upkeep, and management. Higher than average vacancy rates for their market.
  6. Common Area Maintenance (CAM) Fees: These fees include all the costs of operating a commercial property and maintenance of shared areas like hallways, elevators, stairways, lobbies, public restrooms, parking lots, etc.
  7. Capitalization Rate (Cap Rate): This is calculated by dividing a property’s net operating income by the current market value (expressed as a percentage). It’s an estimate of an investor’s potential return on investment. For example: If the current market value of a property is $1,000,000 and it has a net operating income of $70,000, the cap rate is 7% (70,000/1,000,000=.07).
  8. Debt Coverage Ratio (DCR): The amount of cash flow available to pay the mortgage on a property, calculated by NOI divided by annual debt. A DCR of 1.2 or more is considered desirable.
  9. Flex Space: An industrial space that can be used in various ways, such as a showroom, warehouse, office, etc.
  10. Functional Obsolescence: A descriptive term used to characterize a building that cannot be improved to meet the current market demands without completely replacing the building’s existing systems and finishes.
  11. Ground Lease/Land Lease: A lease agreement in which a land owner agrees to lease a parcel of land for a fixed period to a third party. Depending on the agreement, the land owner can stipulate what the lessee can or cannot build on the property. These types of lease agreements are typically long, 20 years or more. Upon expiration of the lease, the land owner typically gains control and ownership of whatever is constructed on the land.
  12. Gross Lease/Full-Service Lease: A rental agreement where the landlord pays all (or the majority) of the operating expenses and taxes for the property.
  13. Gross Leasable Area (GLA): The total floor area designated for tenant use, including basements, mezzanines, and upper floors. GLA is the area on which a tenant pays rent.
  14. Gross Rental Income (GRI): Total annual income generated by a rental property before deducting any expenses. Calculated by multiplying the monthly rent by the number of units and then multiplying by 12.
  15. Modified Gross (MG) Lease: A rental agreement where the operating expenses are divided between the tenant and the landlord.
  16. Net Operating Income (NOI): The income generated after deducting operating expenses but before deducting taxes and financing expenses.
  17. Operating Expenses: Recurring costs that support the property’s day-to-day operations. Operating expenses include taxes, insurance, property management, utilities, repairs, supplies, bookkeeping, contractors, etc.
  18. Return on Investment (ROI): A measure of the value of a real estate investment. It is the difference between the net gains from investing in the property less the net cost of investing in the property, divided by the purchase price, and is usually reported as a percentage.
  19. Parking Ratio/Parking Index: Calculated by dividing the total rentable square footage by the total number of parking spaces. The parking ratio provides the rentable square feet per individual parking space and is typically expressed as a ratio like one parking space for 200 SF.
  20. Triple Net (NNN) Lease: A lease where the tenant pays taxes, maintenance, property insurance, as well as all operating costs associated with occupancy, like utilities, janitorial services, etc.
  21. Vacancy Rate: The total amount of vacant space divided by the total amount of inventory, usually expressed as a percentage and typically applied to a building or market.

If you are looking for a new office space to lease for your business, check out Prime Storage Commercial’s office listings. With various options, from small single rooms to large office suites and standalone buildings, Prime has spaces available to meet your business needs.

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