Commercial Real Estate Terms You Need to Know

Commercial real estate is teeming with difficult and intimidating vocabulary. It can seem confusing trying to learn how to navigate your way through all the commercial real estate terms. If you are like many other property owners, learning the language can be difficult. You may understand certain commercial real estate terms, but you may still feel under-informed when venturing out to make commercial real estate decisions. Speaking with a trusted real estate attorney or wealth manager will help you make sure your decisions benefit your business but we have outlined some key commercial real estate terms that you need to know. We hope to clarify any misconceptions you may have about the commercial real estate market.

January 12, 2022

Commercial Real Estate Terms

Absorption. The amount of inventory or units of a specific commercial property type that become occupied during a specified time period (usually a year) in a given market, typically reported as the absorption rate.

Accumulated Cost Recovery. Total cost recovery deductions taken throughout the holding period of a property.

Acuity Spectrum. A range of care that encompasses the various categories within the senior living sector. The spectrum usually ranges, in order of increasing acuity, from independent living to assisted living to memory care to nursing care. 

Amortization. The repayment of loan principal through equal payments over a designated period of time consisting of both principal and interest.

Building Classification. Commercial buildings are separated into 3 different classes: Class A (usually the newest and highest quality buildings), Class B (typically a little older but still good quality and attractive), and Class C (buildings are older and need updating). 

Building Core. A main structural component, typically made of concrete, that goes the entire vertical length of a building, and houses elevators, stairwells and more.

Cancellation Clause. A provision in a contract (e.g., lease) that confers the ability of one in the lease to terminate the party's obligations. The grounds and ability to cancel are usually specified in the lease.

Capital Improvement. Any major physical development or redevelopment to a property that extends the life of the property.

Common Area Maintenance Fees. Also known as CAM Fees, these fees include all the costs of operating the commercial property, including all fees spent on maintaining shared or common areas, such as elevators, hallways, lobbies, restrooms, and more. Common area maintenance is a fee paid to the landlord in addition to rent to maintain your office space. Fees are based on total rentable square footage and represent a pro-rata fee of the total maintenance charges for the building. These fees can include anything from insurance, repairs, landscaping, cleaning services, utilities, snow removal security costs, and more.

Debt Yield. The ratio of the Net Operating Income to the amount of the mortgage loan, expressed in the form of a percentage. 

Due Diligence. A time frame provided to a buyer to fully examine a property, often by hiring experts to inspect the property, perform tests, etc., so that a buyer may decide on how to proceed.

Earnest Money Deposit. An initial deposit that is paid by the buyer as a show of good faith to the seller. 

Floor Plan. An architectural drawing depicting the layout of a specific floor or room. These drawings are done in 2D and from the vantage point of the top looking down. 

Joint Tenancy. An ownership of real property by two or more entities; if one owner dies, their ownership passes on to the surviving owner(s). 

Key Performance Indicator. A metric used to measure the performance of a commercial property. 

Loan Amortization. The repayment of the principal balance of a loan through periodic payments over time. 

Lock Out. A lock out is a common clause in a CRE loan, and is the period of time after disbursement that the borrower is not allowed to prepay the loan. 

Make Ready Costs. Typically seen on multifamily operating statements, these costs refer to minor repairs and maintenance work to a residential unit in order to make sure that the unit is in sufficient condition before being placed on the market. 

Net Operating Income. Also known as NOI, this is a simple calculation that equals your gross rental income minus your expenses. 

Occupancy Cost. The total cost incurred by a tenant to occupy space in a building, including tenant reimbursement expenses, base rent, parking charges and more. 

Option to Buy. Sometimes, tenants want to lease with the option to purchase the property. The contract should specify the terms under which a purchase can be made. 

Real Estate Investment Trust. Also known as an REIT, this is a real estate mutual fund, allowed by income tax laws to avoid the corporate income tax. 

Rentable Square Footage. Refers to the total usable square footage plus the shared spaces of the building. This includes the shared lobbies, hallways, restrooms and storage areas, which you pay for. To calculate RSF, you need to determine the “common area factor.” To do so, divide the total floor area by the usable square footage. On average, the common area factor ranges from10-20%.

Right of Expansion. Landlord is liable for providing an additional space for leasing before he presents it to the general public. Thus, you are liable to lease more space to such a tenant.

Right of First Refusal. Also referred to as a ROFR, this isa contractual clause that enables a third party to step in and purchase or lease a property based on what was negotiated between the owner and a potential lessee. 

Tenant Improvements. Most often seen in office, retail, and industrial real estate, these are physical changes to a lease space to fit the specific needs of the tenant. 

Usable Square Footage. Among the most important commercial real estate terms for you to know, usable square footage (USF) is the actual space you can occupy in a commercial rental property. Non-exclusive spaces and common areas such as lobbies, restrooms, stairways, hallways, and storage rooms are not included in USF. However, if you leased an entire floor, restrooms and hallways would be counted as usable square footage since it’s exclusive to your company. To calculate USF, subtract the shared square footage from the total floor area.

Walkability. The measure of how agreeable a property or an area is to walking. The “Walk Score” is a popular measure of this variable. 


How Evanco Can Help You with Your Legal Form Needs

Knowing these CRE terms will not only clarify any misconceptions that you may have about the commercial real estate market, but it will also benefit your business. No matter the type of property you own, you can count on the experts at Evanco RealtyAdvisors for the very best in full-service commercial administration. We provide everything you need to minimize your ownership workload and maximize the return on investment for each of your commercial properties. We provide peace of mind to owners; implement excellent property management services that enhance value for landlords.

Call us today at (619)814-1688 to see how our commercial property management strategies can help you!

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