Commercial Real Estate: Terms to Understand

Cap Rate (Capitalization Rate): The ratio of a property’s net operating income (NOI) to its current market value. It is used to evaluate the potential return on investment.

Net Operating Income (NOI): The income generated by a commercial property after deducting operating expenses but before considering debt service and taxes.

Lease Agreement: A legally binding contract that outlines the terms and conditions of a lease, including rent, duration, and responsibilities of the landlord and tenant.

Triple Net Lease (NNN): A lease agreement in which the tenant is responsible for paying not only rent but also property taxes, insurance, and maintenance costs.

Commercial Property Types:

• Retail Space: Commercial space used for selling products or services to the public.
• Office Space: Commercial space used for professional and administrative purposes.
• Industrial Space: Commercial space used for manufacturing, warehousing, or distribution.
• Mixed-Use Property: A property that combines multiple uses, such as retail, office, and residential.
  
  

Zoning: Local government regulations that specify how a property can be used, including its permitted uses and building restrictions.

Vacancy Rate: The percentage of unoccupied rental space in a commercial property, which can impact potential rental income.

Market Analysis: The evaluation of local market conditions, including supply and demand, to determine the attractiveness of an investment.

Due Diligence: The process of investigating a property’s financial, legal, and physical aspects before completing a transaction.

Build-Out: The customization or renovation of commercial space to meet the specific needs of a tenant.

Easement: The legal right to use another person’s property for a specific purpose, such as access to a neighboring property.

Escrow: A third-party account where funds are held until all conditions of a real estate transaction are met.

Listing Agreement: A contract between a property owner and a real estate agent, specifying the terms and conditions of the property’s sale or lease.

Tenant Improvement Allowance (TIA): A financial contribution from the landlord to the tenant for customizing or improving a leased space.

Gross Lease: A lease in which the landlord covers all property expenses, including taxes, insurance, and maintenance.

Base Rent: The fixed rent amount paid by a tenant, typically with periodic increases based on a predetermined schedule.

Commercial Appraisal: A professional assessment of a property’s value, used for financing, sales, and property tax purposes.

CAM (Common Area Maintenance): Charges levied by landlords on tenants to cover the maintenance and operation of common areas in a commercial property.

Title Insurance: Insurance that protects buyers and lenders from financial loss due to defects in a property’s title.

1031 Exchange: A tax-deferred exchange that allows investors to sell one investment property and purchase another without incurring capital gains tax.