Commercial Real Estate 101 

Looking to Invest? Terminology 101

Are you new to Commercial Real Estate, or have you never known what any of the following terms mean? Here we give you a quick breakdown of common terminology found in the world of CRE (commercial real estate):

Build Out: The construction or improvements of the interior space, including flooring, walls, finished plumbing, electrical work, etc.

Capitalization Rate (Cap Rate): The value given to the property when the Net Operating Income (NOI) is divided by the current market value or sales price. A cap rate can be used as a rough indicator of how quickly an investment will pay for itself. The higher the cap rate, the better.

Contiguous: Touching at some point or along a boundary; spaces next to one another.

Deed Restriction: An imposed restriction in a deed that limits the use of the property. For example, a restriction could prohibit the sale of alcoholic beverages.

Eminent Domain: The governments’ right to condemn and acquire property for public use. The government must provide the owner with fair compensation.

Escrow: A written agreement among parties, requiring that certain property/funds be placed with a third party. The object in escrow is released to a designated entity upon completion of some specific occurrence.

Grace Period: Additional time allowed to complete an action (e.g., make a payment) before a default or violation occurs.

Gross Lease (Full Service): A lease of property whereby the landlord (i.e. the lessor) pays for all property charges usually included in ownership. These charges can include utilities, taxes, janitorial and maintenance, among others.

Letter of Intent: An informal, usually non-binding, agreement among parties indicating their serious desire to move forward with negotiations.

Market Value: The expected price that a property should bring if exposed for lease or sale in the open market for a reasonable period of time.

Net Lease: Also called triple net lease. The lessee pays not only a fixed rental charge but also expenses on the rented property, including maintenance, taxes, snow removal, etc.

Percentage Lease: A lease of property in which the rent is based upon the percentage of the sales volume made on the specific premises. There is usually a clause for a minimum rent as well.

Subletting: The leasing of a space from one tenant to another tenant.

Tenant Improvements: Work done on the interior of a space, can be paid for by landlord, tenant, or some combination of both, depending on the term of the lease.

Valuation: Estimated price, value, or worth. Also, the act of identifying a property’s worth via an appraisal.

Zone: An area, delineated by a government authority, which is authorized for an limited to specific uses.

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