Understanding Commercial Real Estate Terms
If you’ve never purchased property before, you may be somewhat overwhelmed by the jargon used by the real estate world. It’s quite common for a real estate agent to chat away about things like leases, capitalization rates and operating expenses – without you having a clue what they’re talking about.
What to Know About Commercial Real Estate
The things to know about commercial real estate depend largely on the type of property you’re involved with. Commercial real estate is property that has been designed or oriented towards business endeavors and commercial practices. There are numerous stipulations and legal regulations within the commercial real estate market and industry that must be understood properly before embarking on a deal.
Some sectors of real estate have specific areas of function, such as residential, commercial, and industrial. Each sector undertakes legal methodologies that require specific legislation that must be followed within.
Here’s a brief overview of commercial real estate terms you should be familiar with:
Common Commercial Real Estate Terms
- Building Classifications:These usually refer to Class “A”, “B”, “C” and sometimes “D” properties. Class “A” properties are usually newer buildings with high-quality construction in prime locations.
- Cap Rate: This means ‘capitalization rate’ and refers to the unlevered initial yield on the investment stated as the annual Net Operating Income divided by the property price or asking sales price.
- Commercial Real Estate Intermediary
A commercial real estate intermediary is someone who works as a third party the property market. When selling or buying property, an intermediary can help with getting the highest price per square foot, while at the same time maintaining your investment goal. The intermediary should also have some knowledge of the submarket in which a property is located. They can also help you to understand the buying process and explain some of commercial real estate terminology being used along the way.
- Usable Square Footage.: Also known as USF, this is the actual space you’ll be occupying in a commercial rental property. It doesn’t include non-exclusive spaces such as restrooms, lobbies or stairwells.
- Rentable Square Footage: Also known as RSF, this is all the usable square footage you’ll be occupying, along with the shared spaces within the property. This will include shared restrooms, lobbies, hallways and storage areas. You pay for these. To calculate the RSF of the property you’re purchasing, first determine the amount of common area then divide the total floor area by the USF (usable square footage). In most cases, common area makes up around 10-20% of the total property area.
Understanding Commercial Real Estate Leases
Commercial real estate leases are best explained by the realtor involved with the property. These types of leases can be quite complicated, especially as they’re very different from residential real estate leases. Renting a commercial space usually means you’ll be paying for more than just the physical space you’ll be occupying. If you don’t know the difference between a Double Net Lease and a Triple Net Lease (aka an NNN lease), you’re risking losing money in the long term
Before leaping into a signed agreement, make sure you understand what questions you should ask, and the landlord will be calculating things like rent, load fees, and any other expenses. The more you understand, the better you’ll be able to wrangle a good deal!
Commercial Real Estate Lease Terms
When negotiating your commercial real estate lease terms, it’s vital that you fully understand the terminology being used! Although a lawyer can be handy for explaining this to you, it still helps to do some research beforehand.
Here are some of the most common commercial real estate lease terms you’ll encounter:
1. Incidental expenses: These are ‘extra’ costs besides your base rent. Incidental expenses can include insurance, property tax, utilities, maintenance and various costs and repairs.
2. Common area maintenance: Maintenance of common areas (kitchens, dining areas) are usually shared by tenants. Costs could include fees for a janitor, snow removal, gardening, lawn mowing and so on.
3. Gross rent lease: This is a form of commercial real estate lease which involves paying a single sum to the landlord to cover base rent and all incidental expenses.
4. Double net lease (NN): In a double net lease, the tenant pays the base rent plus two incidental expenses, such as insurance and property taxes. The rest of the expenses are covered by the landlord.
5. Triple net lease (NNN): In a triple net lease, the tenant pays the base rent plus numerous other expenses,such as property taxes, operating costs, maintenance costs, and building insurance and utilities. The landlord pays only for structural repairs as and where needed.
When looking for commercial property for sale or rent, it’s important to understand commercial real estate terms to ensure everything unfolds smoothly. If you need help with any commercial real estate related needs, give Thomas Mensendiek and team a call today!