If you’re getting started in the commercial real estate world, you should first familiarize yourself with some basic terms.
Recognizing and understanding these terms in conversations and documents will make you more comfortable as you begin your career in commercial real estate.
- Building Classifications: Many markets refer to properties as A, B or C. Class A buildings are usually high-quality, flexibly built, amenity rich, newer buildings in desirable locations – and they command the highest rental rates. Class B and C properties are often defined by age, design layout/flexibility, construction quality, location, ADA compliance, or lack of amenities.
- Net Operating Income (NOI): This calculation analyzes revenue generated from a real estate investment. NOI is calculated by deducting all expenses incurred from operations from the gross income generated by the property. Some of these expenses may be operating costs, some may be owner expenses. Some are recoverable from tenants, and some are not. But they all should be reflected in the calculation of NOI.
- Right of First Refusal (ROFR): In a lease featuring this clause, the landlord must offer the tenant the opportunity to lease a specified space before leasing it to a third party. In this scenario, the landlord has reached terms with a third party to lease the space in question, and the tenant holding the right of first refusal must be served notice by the landlord of the terms on which they can lease the space. Typically, the tenant has a specified amount of time to respond, and can either choose to exercise the right of first refusal or decline to exercise. If the tenant chooses to exercise the ROFR, they are agreeing to lease the space on the terms that the landlord had reached with the third party. This can be a helpful tool for tenants who are concerned about having space to grow in their existing location.
- Real Estate Investment trust (REIT): This investment vehicle can either be privately or publicly held. Publicly held REITS sell shares like stock on the exchange floor, allowing you to invest directly in real estate through mortgages or properties. REITs get special tax considerations and should offer you high yields, while preserving the liquidity that is offered by the stock market.
- Cash on Cash Return: Records the percentage of cash a buyer gets from an investment property. This is done by dividing the annual cash flow by total cash invested. When using this measurement tool, be careful to measure only the true cash components of the investment to ensure that the return rate is accurate.
- Request for Proposal (RFP): When a tenant sits down with a real estate broker to determine what they are looking for in a space, the broker will submit those wants and needs in an RFP on your behalf. This document gives the landlords for the properties that meet the tenant’s criteria an idea of the general needs and the terms on which a tenant is willing to lease space so they can begin the negotiation process with the tenant’s representative.
- Return on Investment (ROI): Measure that evaluates the efficiency of a property or compares the property to a number of other investments. In basic terms, this is calculated by dividing the benefit of an investment by the investment’s cost, with the result expressed as a ratio or percentage.
- Load Factor: Sometimes referred to as the core factor or add on factor, the landlord uses this number to decide how much common area square footage is assessed to the tenant. The add on factor is typically a percentage by which the usable square footage of the tenant’s space is multiplied, to come up with the rentable square footage that the tenant will lease. Ask your prospective landlord how this total was calculated so you can decide if your rent is determined with an accurate rentable square footage.
- Triple-Net Lease (NNN): Lease option in which the tenant pays all property taxes, maintenance and repair costs, utilities, dues, assessments, insurance, and all other operating expenses. In a double-net lease, the tenant pays only some of these expenses, such as property taxes and insurance. In a single-net lease, the tenant pays just one of these expenses, typically the property taxes. These expenses are in addition to the base rent and are reconciled annually. When reconciled, the tenant will receive an invoice or a credit, depending on the result of the expense reconciliation.
- Concessions: A landlord may grant concessions in an attempt to attract tenants during negotiations. These can include free rent, moving allowances, or lease buyouts. Concessions are tough to negotiate when you’re in a hot real estate market.