Commercial Real Estate Terminology
Breakeven Occupancy: the rate of occupancy at which
the property's revenue equals its expenses.
Buyers Market: an economy favoring commercial
property buyers typically characterized by more available property
than potential buyers.
Capitalization rate (aka cap rate) = Net Operating
Income Divided by Sales Price
Cash on Cash Return = (Net Operating Income - Debt
Service)/Acquisition Costs
Cash on Cash Return tells us what the overall return on our
investment is as a percentage.
Effective Gross Income = Gross Potential Income -
lost income due to vacancies
Estoppel Letter: a letter sent to tenants to verify
the rents the tenants are paying
A Buyers Market: an economy favoring commercial
property buyers typically characterized by more available property
than potential buyers.
Escrow Agent: Third party that holds a sum of money
pending the formal close of the commercial real estate property and
facilitates the closing.
Eminent Domain: When a government purchases a
parcel of land without the owner's consent.
Gross Lease: A lease where the tenant's rent covers
all operating expenses in one lump sum.
Land-Use: Zoning ordinances restricting the use of
a particular property.
Letter of Intent (LOI): a formal offer to purchase
a property
Moratoria: A limit or ban on further development of
a particular type of property.
Net Lease: Tenants pay to maintain their portion of
the building or property in addition to rent.
Net Operating Income (aka NOI) = Effective Gross
Income - Operating Expenses aka - what you actually take home
Obsolescence: The stage at which a commercial
property degrades to become unusable.
Operating Statements: These documents show the
profit and loss of a property across a specific period of time.
Pro Forma: Predicted revenue model based on the
anticipated results of the property - typically provided by the
seller as a way to entice a buyer
Property Class: A rating system running A=D where A
class represents a high quality property (new building/good area)
and D class represents a low quality property (very old building/bad
area of town
Purchase and Sale Agreement (aka P&S): A formal
letter detailing your intent to purchase the property under a
specific set of terms
Rent Roll: A document summarizing occupancy. This
typically includes lease rates, terms, and expirations for each
tenant.
Replacement Reserves: Money set aside to cover the
replacement of capital items (i.e. heaters/roofs/windows/sidewalks).
Sellers Market: An economy favoring commercial
property sellers typically characterized by less available property
than potential sellers.
Tenant at Will: A tenant currently occupying a
property without a lease - generally (laws vary by state) this means
the tenancy is renewed every month.
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