If you have decided to divest your portfolio and embark upon the Commercial Real Estate world then you should have an understanding of some basic terminology:
- Assessed Value– The value of real property established by the tax assessor for the purpose of levying real estate taxes.
- Capitalization Rate (Cap Rate) – A percentage that relates the value of an income-producing property to its future income, expressed as net operating income divided by purchase price.
- Commercial Real Estate– Any multifamily residential, office, industrial, or retail property of which the purpose is to generate a profit as opposed to residential which is to serve as a living space.
- Common Area Maintenance– This is the amount of additional rent charged to the tenant, in addition to the base rent, to maintain the common areas of the property shared by the tenants and from which all tenants benefit. Examples include: snow removal, outdoor lighting, parking lot sweeping, insurance, property taxes, etc. Most often, this does not include any capital improvements that are made to the property.
- Earnest Money – Cash provided at the onset of the purchase agreement to show the buyer’s good faith in completing the transaction.
- Lease Types
- Triple Net- (NNN)A lease agreement that designates the lessee (the tenant) as being solely responsible for all of the costs relating to the asset being leased in addition to the rent fee applied under the lease. The structure of this type of lease requires the lessee to pay for net real estate taxes on the leased asset, net building insurance and net common area maintenance. The lessee has to pay the net amount of three types of costs, which how this term got its name.
- Gross Lease- A lease in which all expenses associated with owning and operating the property are paid by the landlord.
- Loan to Value (LTV) – The amount of money borrowed in relation to the total market value of a property. Expressed as the loan amount divided by the property value.
- Net Operating Income (NOI) – A calculation used to analyze real estate investments that generate income. Net operating income equals all revenue from the property minus all reasonably necessary operating expenses. Aside from rent, a property might also generate revenue from parking and service fees, like vending and laundry machines. Operating expenses are those required to run and maintain the building and its grounds, such as insurance, property management fees, utilities, property taxes, repairs and janitorial fees. NOI is a before-tax figure; it also excludes principal and interest payments on loans, capital expenditures, depreciation and amortization.
- Tenant Improvements – When you lease new space, you typically need to have it customized for your needs. Those customizations are referred to as tenant improvements and you can frequently get the landlord to pay some or all of their cost.
Next, read about why you should consider Lisa as your commercial realtor!