CRE101: Breaking down commercial real estate lingo – Part 2
In case you missed our first installment of CRE 101 – check it out here. Each post in this ongoing series covers basic topics to help you understand the world of Commercial Real Estate (CRE). We’re starting with some basic terminology, so you won’t get hung up on the lingo as you learn along the way.
In Part 2, we’re still focused on broad and basic terms that relate to CRE overall. Be on the lookout in the coming weeks for posts that will dive into terms specific to office buildings, retail space and more.
- Cash and Cash Return (AKA ROI). Cash and cash return is also known as your return on investment and the reason you’re probably interested in CRE investments. This number represents how much money is coming out of the property and can help you determine how long it will take to recoup your investment. To figure out this number, take your annual cash flow and divide it by your down payment.
- Capitalization Rate. A cap rate is used to measure a building’s performance without considering the mortgage financing. This term is important to understand because its standard practice to use across the industry. To get your cap rate, divide your Net Operating Income (NOI) by the sales price of the property and this will tell you your ROI if you paid all cash for your property.
- Common Area Maintenance. No matter the type of space you’re leasing out, there will be areas and maintenance that impact and benefits all tenants. A monthly amount is often added to their base rent to accommodate these items. Capital improvements do not fall within this category and examples include parking lot maintenance, outdoor lighting, landscaping
- Concessions. Property owners want their buildings filled with renters and can choose to offer incentives to attract renters. Most often, concessions will take the form is free
rentbut other options include moving allowances or above standard improvements for the leased space.
- Net Absorption. This represents the change of the supply of commercial space in a given real estate market over a specific period of time. It is measured by deducting commercial space vacated by tenants and made available on the commercial space market from total space leased up.
- Divisible Minimum / Maximum. The smallest and largest sizes that
a spacecan be broken into in order to accommodate varying types of tenants. For example, a larger company that wants to operate on multiple floors or several retail boutiques that don’t require much square footage.
- Effective Rate. The actual amount of rent paid on average per year considering any free rent, changing rent amounts and tenant improvement costs into one figure.