Commercial Real Estate Jargon: Easy as ABC
| June 4, 2014
Navigating the commercial real estate world is challenging for even the most seasoned professionals, especially in today’s fast-changing economy. As the scope and shape of commercial real estate continues to morph, so does the vocabulary used to describe it. There are a myriad of terms in CRE jargon, but we’ve chosen just one (for now) for every letter of the alphabet as a refresher on the language of our business.
Many of these terms came from this article from David V. Tran, “Commercial Real Estate Jargon Investors Should Know,” and this commercial real estate terminology glossary from OfficeSpace.com. Visit those sites for more terms and definitions. Visit those sites for more terms and definitions, and look for our recurring “Easy as ABC” posts on The Dirt.
A IS FOR APPLE…
Anchored tenants are the establishments that serve as the main traffic draw to an area. Major shopping hubs like Wal-Mart and Target are examples. A savvy tenant will look for space in a building boasting anchored tenants who attract the same or similar target consumer.
B IS FOR BASE BUILDING.
The base building is a structure’s skeleton before the tenant or landlord installs improvements.
C IS FOR CAM
Or common area maintenance. CAM fees are paid by tenants to landlords to cover property taxes, insurance and maintenance, typically in proportion to the percentage of the overall building space which each tenant occupies (see “Load Factor”).
D IS FOR DUE DILIGENCE PERIOD.
Buyers have a grace period of about 30-90 days after signing a contract to investigate the property. If conditions prove to be unsatisfactory during the DDP, the Buyer may have a number of options, including cancelling the deal and receiving a refund of their earnest money.
E IS FOR ESTOPPEL CERTIFICATE.
Signed by the tenant and landlord, the Estoppel Certificate confirms the terms and facts of the lease, in addition to any oral or other agreements between tenant and landlord made after the original lease was signed. After signing, neither party can make claims disagreeing with its terms.
F IS FOR FULL SERVICE LEASE.
When the tenant’s rent (not including CAM) covers everything from utilities to maintenance, they are engaged in a full service lease.
G IS FOR GROSS LEASE.
In a gross lease, the tenant pays rent to the landlord, who covers tax, insurance and maintenance.
H IS FOR HOTELLING.
Some office spaces contain space for hotelling, which is when a telecommuter or visiting employee from another location uses an office or desk temporarily.
I IS FOR IMPERFECT MARKET.
No market is truly perfect, but this is especially true in commercial real estate where the matching of buyers and sellers is not immediate, supply and demand are constantly changing, and valuations are not always predictable.
J IS FOR JUNK BOND.
Also known as a “high-yield bond,” a junk bond is rated below the BB level for having high default risk. Junk bonds usually offer higher interest rates than safer, government-issued bonds.
K IS FOR KICKER.
In real estate, a kicker is an added expense that must be paid prior to real estate loan approval. Buyers should take caution with kickers, as they can be a shady practice and in some cases are illegal.
L IS FOR LOAD FACTOR.
A tenant’s rentable area divided by the useable area, minus 1, creates the load factor. Usually expressed as a percentage, the load factor is used to determine a tenant’s proportionate share of common areas in relation to other tenants (see “CAM”).
M IS FOR MASTER LEASE.
When properties are subleased, the original tenant (or sometimes called, the “prime tenant”) holds the master lease. For example, Ted leased a building with five units to Judy, who then subleased them to five separate business owners. Ted and Judy hold the master lease.
N IS FOR NNN LEASE.
In a triple net, or NNN lease, the tenant is required to pay the net real estate taxes, net building insurance and net common area maintenance. Because the tenant is taking on responsibilities normally delegated to the landlord, the cost of rent is usually lower.
O IS FOR OPEN LISTING.
Properties leased directly by the owner are open listings.
P IS FOR PASS THROUGHS.
Paid above base rent, pass throughs sum up insurance, property tax and CAM fees that the tenant owes the landlord.
Q IS FOR QUALIFY.
Qualify is the first stage in the 4-part process of transaction management. To help with this stage, the word can be broken down into an acronym meaning Quantify, Usage, Authority, Latitude, Intention, Financial and Yield.
R IS FOR RIGHT OF FIRST OFFER.
A right given to the tenant by the owner saying that if the owner looks to sell the property, the tenant will have the first chance to make an offer to buy or lease out a portion.
S IS FOR SPACE POCKET.
Usually leased by an existing tenant, a space pocket is set aside for future use with expected expansion, and typically rent terms are different than space in actual use.
T IS FOR TURNKEY.
A property made ready for a tenant to begin business without doing much or any preparation work is called a turnkey. The owner makes all preparations prior to the tenant taking occupancy.
U IS FOR USEABLE AREA.
The area (usually in square footage) of a property occupied solely by the tenant within their leased space.
V IS FOR VALUE ENGINEERING.
Changes made to a project or process to add value or diminish costs.
W IS FOR WORK LETTER.
The work letter contains specifications for tenant improvements, information on the timeframe to complete projects and pricing for the involved parties to agree upon.
X IS FOR X-FACTOR
The term “X-factor” refers to any variable not easily quantifiable or identifiable that has a significant impact on the outcome of a situation. X-factors are always at play in commercial real estate. (See Imperfect Market for evidence)
Y IS FOR YIELD.
Also known as the rate of return, yield refers to the amount of interest gained on money invested.
Z IS FOR ZONING.
Zoning is the act of legally defining the boundaries and usage for land and property, performed by the authorities in a given jurisdiction.