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Oct 6, 2021 · In this glossary, you’ll find commercial real estate lease terms, commercial real estate loan terms, commercial real estate finance terms, and other important commercial real estate terms and definitions.
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- Anchor Tenant. A major draw for customers and a pivotal tenant in a shopping center or mall. The presence of a renowned anchor tenant can significantly enhance the value of a property and attract other lessees.
- Break-even Point. The moment when income equals expenses, meaning the property generates enough revenue to cover its operating costs. Understanding this helps investors assess risk and potential profitability.
- Capitalization Rate (Cap Rate) A crucial metric used to determine the potential return on an investment, calculated by dividing the net operating income by the current market value of the property.
- Double Net Lease. A lease agreement where the tenant is responsible for both property taxes and building insurance, leaving the landlord responsible for structural repairs.
- Gross Rental Income
- Vacancy Factor
- Total Operating Expenses
- Net Operating Income
- Annual Debt Service
- Cash Flow
- 11 Decision Making Commercial Real Estate Terms
- Cash on Cash Return
- Capitalization (CAP) Rate
- Debt Coverage Ratio
The gross rental incomeis the total income generated by a rental property before deducting expenses. To calculate the monthly gross rental income, multiply the monthly rent by the number of units and then multiply by 12. If each unit of our 5-unit apartment example rents for $1,200/month, the calculation is:
Commercial real estate rarely remains 100% rented 100% of the time. Vacancy factor accounts for this reality and therefore you must subtract a vacancy factor from the gross rental income. A vacancy factor provides safety into your calculations and the industry standard for multifamily apartments is a 5% vacancy factor. At a minimum, calculate a vac...
Operating expenses are the recurring costs that support the day-to-day operations of the property, including taxes, insurance, management, utilities, repairs, maintenance, supplies, bookkeeping, legal and contractors. Obtaining truthful, real-world operating expenses from a commercial property seller can be extremely difficult because in commercial...
The Net Operating Income (NOI) is one of the most important commercial real estate terms you’ll ever need to know. It is the value driver in commercial propertybecause as your NOI increases, the property value increases. Therefore, unlike residential real estate, with commercial, you can increase the value of the property by improving the property’...
It is financially astute to maintain a loan against commercial real estaterather than own it free and clear of any financing. Therefore, there will be debt payments, or what homeowners refer to as mortgage payments. The total yearly loan payments is called “Annual Debt Service” in the world of commercial real estate. The purchase price of our examp...
The first 6 commercial real estate terms above help us determine this incredibly important calculation, the property’s Cash Flow (CF). The Cash Flow is how much money the property puts in your pocket as the owner. This is your net profit. The purpose of owning commercial real estate is to make a profit and the Cash Flow is a critical component of t...
Once you have calculated the NOI and Cash Flow accurately and responsibly, your focus can turn to decision making commercial real estate terms. Bad investments come from investors making bad decisions. Bad decisions come from lack of knowledge and wisdom. By understanding the following 11 commercial terms, you’ll avoid making bad decision.
Cash on Cash return makes up part of your overall return on investment (ROI). This benchmark begins to help you compare a commercial real estate investment to other investment options that exist in the marketplace. For example, traditionally the “safest” investments include Certificate of Deposits from a Bank or Government Treasury Bonds. Since com...
Capitalization Rate, or what commercial investors shorten to Cap Rate, is defined as your return on investment if you paid all cash for the property and did not get a loan. There are actually two types of Cap Rate; the first is the Deal Cap Rate, which is defined as the NOI divided by the Purchase Price and the second is a metric commonly used by c...
The Debt Coverage Ratio (DCR) determines the property’s ability to pay (or cover) the property’s loan payments out its Net Operating Income (NOI). You want the NOI to cover the debt by at least 1.2 times because most lenders require the DCR to be at least 1.2. If the DCR is 1.0, your annual debt service and your NOI are the same and therefore you a...
Jul 21, 2024 · Commercial real estate refers to any property used for business activities. Residential real estate is used for private living quarters. There are many types of commercial real...
For the 2024 edition of Commercial Real Estate Terms and Definitions, the author reviewed secondary sources and sought input from members of the national research directors group as well as other CRE practitioners to identify terms that needed to be added or amended to match current use.
Sep 12, 2023 · Learn the top 25 commercial real estate terms you need to know to succeed in the industry. From ADS to Built-to-Suit, master the key definitions.
In commercial real estate (CRE), the terms “market” and “submarket” have many characteristics. 1. Hierarchy: In terms of geographic hierarchy, a region is made up of markets, and a market is made up of submarkets. 2. Boundaries: Markets and submarkets have generally accepted geographic boundaries that do not overlap.
