The world of commercial real estate can be challenging to new customers, especially if they are not famililar with the terminology. Here are a few key terms one might hear and need to know during their search to lease or buy commercial property:
1031 Exchange: An IRS 1031 exchange is a transaction that allows a commercial property seller to defer paying taxes on the sale of the property if they use the funds to buy another, similar property within a specific period of time.
Amortization: the process of spreading a loan into payments that consist of both principal and interest over a set timeline, called an amortization schedule
CAM - Common Area Maintenance: A CAM charge is an additional rent, charged on top of base rent, and is mainly composed of maintenance fees for work performed on the common area of a property.
Cap Rate - Capitalization Rate: The capitalization rate is used in the world of commercial real estate to indicate the rate of return that is expected to be generated on a real estate investment property. Often called as the "cap rate," this measure is computed based on the net income which the property is expected to generate. It is used to estimate the investor's potential return on their investment (ROI) in the real estate market.
Capital Gain: Capital gain is a rise in the value of a capital asset (investment or real estate) that gives it a higher worth than the purchase price. The gain is not realized until the asset is sold. A capital gain may be short-term (one year or less) or long-term (more than one year) and must be claimed on income taxes.
Cash Flow: Net about of cash moving in and out of a business, usually measured over a set time period. For example: if a property generates $10,000 in net operating income (NOI) but has $5,000 in debt service payments and $1,000 in capital expenditures, then the property’s net cash flow is $4,000 ($10,000 - $5,000 - $1,000 = $4,000). It’s important to note that cash flow is not the same as Net Income or Net Operating Income.
Cash on Cash Return: Ration of Annual before tax cash flow from an investment to the total amount of cash invested, represented as a percentage.
Certificate of Occupancy (CO): A document issued by a local government agency, certifying that a building meets certain requirements and codes that indicate its fitness to house tenants. These requirements differ across building types, as well as cities and states, and are usually required to be met by new developments.
Commercial Real Estate: Real estate meant to generate income or profit for the owner of the property. Generally includes all categories of non-residential real estate.
Common Area: The areas of a building that are available for the nonexclusive use of all its tenants, such as lobbies, corridors, and parking lots.
Depreciation: In context, depreciation refers to the allocation of an asset’s cost over the timeframe of its useful life, or duration for which it will be useful.
Due Diligence: An investigation or audit of a potential investment to confirm all material facts regarding a transaction.
Fixed Costs: Costs that do not change with a building’s occupancy rate. They include property taxes, insurance, and some forms of building maintenanc.
Floor Plate: the amount of leasable square footage on an individual floor of a building. In multistory buildings, especially taller office properties in major urban areas, the floor plate on lower floors is likely to be larger than the the floor plate on higher floors. In some cases, a building's floor plate is also known as its footprint.
FSG - Full Service Gross: In a full service gross lease, the landlord is responsible for paying the taxes, maintenance, insurance, and utilities for the premises.
Ground Lease: A lease of the land only, on which the tenant usually owns a building or is required to build as specified in the lease.
Landlord: A person or business that leases land, buildings, or residential space to a tenant.
LOI - Letter of Intent: A document outlining one or more agreements between two or more parties before the agreements are finalized by a contract. Typically non-binding.
NNN - Triple Net Lease: A lease agreement that states the tenant is solely responsible for all of the costs relating to the property being leased in addition to the rent.
Net Operating Income: A calculation used to analyze real estate investments that generate income. Net operating income equals all revenue generated from the property less all reasonably necessary operating expenses.
Pass Throughs: Operating expenses for the premises that are passed on to the tenant by the landlord.
Rate of Return: The profit or loss on an investment over a specified period of time expressed as proportion of the investment amount.
Real Property: Land, and generally whatever is erected or affixed to the land, such as buildings, fences, and including light fixtures, plumbing.
Step-Up Lease: A lease in which the rental amount paid by the lessee increases by a preset rate or set dollar amount at predetermined intervals. A step lease is a means for the lessor to hedge against inflation and future maintenance or operational expenses. E.g. a 10% rental increase in year 5 of a 10 year lease.
Square Feet: The unit used to measure the floor area of a space. For example, if a space was 40 feet wide and 80 feet deep it would be 3200 square feet (40 X 80 = 3200).
Sublease: A lease in which the original tenant (lessee) sublets all or part of the leasehold interest to another tenant (known as a subtenant) while still retaining a leasehold interest in the property. Also known as a sandwich lease due to the sandwiching of the original lessee between the lessor and the subtenant. The original lessee is still liable to pay the rent if the sublessee should default.
Tenant: A person or entity who rents real estate from another though a lease. A tenant also may be referred to as a lessee.
Trust, Real Estate: Real property owned through a trust rather than by an individual. In this context, the exact legal for of ownership might take various forms.
TIA - Tenant Improvement Allowance: A person or entity who rents real estate from another though a lease. A tenant also may be referred to as a lessee.
Zoning: The designation of specific areas by a local planning authority within a given jurisdiction for the purpose of legally defining land use or land use categories. This designation will determine whether a property is commercial, residential, or industrial, and can be very specific as to the property's use.
Looking to buy or lease commercial property in the Greater El Paso Area? Our team at Ponzio Properties would love the opportunity to find your right fit, call or message us today!