The Different Types of Commercial Real Estate Metric Terms
3 min read
The commercial real estate industry is filled with a plethora of terminology, jargon, and acronyms. Stay ahead of the curb and learn exactly what each term means:
Absorption Rate – The rate at which available spaces are leased in a particular market during a specific period.
Amortization – The process of paying off a loan over time through regular payments, which covers both principal and interest.
Anchor Tenant – Well-known tenant in a retail property that attracts considerable foot traffic, making the location appealing for smaller tenants.
Appreciation – Increase in the value of a property over time, often due to factors like market demand, inflation, or improvements to the property.
Broker’s Opinion of Value (BOV) – An estimate of a property’s market value, usually provided by the real estate broker.
Build-to-Suit – A custom-built property to meet the tenant’s specific requirements.
Cap Rate (Capitalization Rate) – A metric used to evaluate the potential return on investment for a property.
Cash-on-Cash Return – Evaluates the cash income earned on the cash invested in a property.
Common Area Maintenance (CAM) – The cost of maintaining common areas in a commercial property (hallways, restrooms, parking lots).
Depreciation – The loss in value of a property over time, often for accounting and tax purposes.
Due Diligence – Comprehensive investigation carried out before acquiring a property.
Escalation Clause – Allows landlords to increase rent at specified intervals to account for increasing operating expenses or market conditions.
Exit Strategy – A pre-planned approach to selling or otherwise divesting a real estate investment.
Fair Market Value (FMV) – The estimated price that a property would sell for in a fair and open transaction between willing and informed parties.
Gross Lease – Tenant pays a flat rental amount, the landlord covers all property-related expenses (taxes, insurance, maintenance).
Highest and Best Use – Determines the most profitable and likely use of a property, which is legally permissible, financially feasible, and results in maximum value.
Letters of Intent (LOI) – Preliminary agreement between a buyer and a seller that outlines the terms and conditions of a potential transaction.
Leverage – Involves using borrowed funds for investment and earning a return greater than the interest payable.
Loan-to-Value Ratio (LTV) – The ratio of the loan amount to the appraised value of the property.
Net Lease – Tenant is responsible for some or all property-related costs in addition to the rent.
Net Operating Income (NOI) – Annual income generated by a property after deducing all operational costs (maintenance, insurance, property management fees).
Pro Forma – Financial statements are projections of future income, expenses, and net operating income.
Sale-Leaseback – A property owner sells the property but continues to lease it back, thereby freeing up capital while maintaining occupancy.
Subleasing – Allows an existing tenant to lease out their space or a portion of it to another party.
Tenant Improvement Allowance (TIA) – The amount a landlord is willing to contribute towards modifications or improvements to a leased space to suit the tenant’s needs.
Triple Net Lease (NNN) – A type of net lease where the tenant is responsible for all property expenses (maintenance, taxes, insurance).
Usable vs. Rentable Square Feet – Usable is the space a tenant occupies, while rentable includes a proportionate share of the building’s common area.
Vacancy Rate – The percentage of unoccupied rental units in a property or market at a specific time.
Yield – Income generated from a property as a percentage of its value or cost.
Zoning – Laws that regulate the use of land and structures in specific areas.
Reference
Commercial real estate terms and definitions: NAIOP: Commercial Real Estate Development Association. NAIOP. (n.d.). https://www.naiop.org/education-and-career/industry-terms-and-definitions/
cw-001. (2023, October 18). 30 essential commercial real estate terms. Coldwell Banker Alliance MTL. https://www.cbcalliance.ca/30-must-know-commercial-real-estate-terms/
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