CRE101: Breaking down commercial real estate lingo - Part 1
We realize decoding the Commercial Real Estate (CRE) industry can be overwhelming and confusing – that’s why you should always hire an experienced commercial agent to assist you along the way. We’re also excited to offer a new blog series called CRE101, where we’ll be covering basic topics to help you understand the ins and outs of our world. Whether you are just starting out or are a seasoned investor, there will be something for everyone.
With a plethora of acronyms and convoluted phrases making up the CRE dictionary, we’ve compiled a list of need-to-know terms and broken down exactly what each means.
To make it easier to read, we’re breaking it down into a few posts starting the broadest and basic terms:
- Absolute Triple Net Lease. In this type of lease, the lessee assumes all fixed and variable expenses for the property including taxes, insurance, and all maintenance.
- Useable vs. Rentable Square Feet. Usable square footage refers to the space rented and used exclusively by the tenant. Rentable square footage is the area of the enclosed interior space of the
building other than holes in the floor, such as stairwells, elevators or mechanical duct space.
- Letter of Intent (LOI). This is an informal agreement between the tenant and landlord stating the intent to move forward with a lease. An LOI is generally used to lay out lease stipulations or special issues related to a property or tenant.
- Escalation Clause. A clause in a lease which allows the landlord to raise rental rates based on future cost increases related to taxes, operating costs or maintenance. Landlords can choose to incorporate an escalation clause in a fixed manner or make adjustments based on
increasedcost of living or
increased costs of the property.
- Net Operating Income (NOI). This number represents the amount of annual income generated from an income-producing investment property after considering all necessary expenses.
- Core Factor. This number represents the total percentage of rentable square footage devoted to the building’s common areas such as lobbies, restrooms, and corridors. It is calculated by dividing the rentable square footage by the usable square footage.
- Gross Lease. In a gross lease, the rent is all-inclusive. The landlord pays all or most expenses associated with the property, including taxes, insurance, and maintenance.
- Vacancy Rate. The percentage of space that is vacant is calculated by dividing the vacant space by total square footage.