Whether you’re a seasoned commercial real estate investor or are leasing a space for the first time, commercial real estate conversations around buying, selling, or leasing often come with a long list of terms, abbreviations, and acronyms that are critical to know.
While your commercial real estate agent will guide you through the transaction process to help you secure the space that best meets your needs, it can be helpful to have a basic understanding of common CRE terms to ensure you are fully aware of what is being discussed.
Keep reading for a breakdown of some frequently used commercial real estate terms to help you navigate your next deal with confidence.
Commercial Real Estate (CRE)
Commercial real estate (CRE) is a property used for business such as an office building, retail space, industrial site, multifamily building, or warehouse, that has the potential to generate revenue.
Incidental Expense (or Additional Rent)
Incidental expenses (also known as additional rent) are costs that a landlord or tenant pays in addition to the base rent. These can include insurance, property taxes, maintenance, utilities, or common area maintenance fees.
Common Area Maintenance (CAM) Fee
A common area maintenance (also known as CAM) fee is an incidental expense of maintaining shared common areas in a property that is split between the tenants. These can include maintenance and repairs for shared spaces such as lobbies, parking lots, or elevators. CAM fees are commonly combined into operating costs or additional rent.
Loan-to-Value Ratio (LTV)
Loan-to-value ratio (LTV) is a metric that lenders consider when approving a loan by comparing the size of the loan to the appraised value or purchase price of the property, whichever is lower.
Loan-to-value ratios directly impact mortgage loan terms, including interest rates, amortization periods, and the amount of equity a borrower is required to contribute.
The calculation for a loan-to-value ratio is: (Loan Amount ÷ Appraised Property Value) × 100
Capital Improvements
Capital improvements are additions, upgrades, or changes made to a property that enhances, increases the value of, extends the life of, or creates additional uses for a property. Whereas repairs restore a property to its previous condition, capital improvements enhance and improve the condition of the property. These can include replacing old windows with energy-efficient ones, building an additional room, or installing a new security system.
Absorption Rate
Absorption rate is the rate at which available space is leased or sold in a market over a specific period of time, typically measured quarterly or annually. It reflects the overall demand for commercial real estate in a given market.
A positive absorption rate indicates that more space was leased than became available, while a negative absorption rate means more space was vacated than leased.
Absorption is typically reported as a total square footage amount rather than a percentage.
Net Absorption
Net absorption is the total amount of space leased minus the amount of space vacated during that same period.
Contingent Offer (or Conditional Offer)
A contingent offer, also known as a conditional offer, is an offer to purchase that is conditional on certain conditions being met. These contingencies can be dependent on financing, due diligence, environmental assessments, or third-party approvals.
Comparables (Comps)
Comparables (or comps) are properties that have recently been sold or leased that are similar in size, location, condition, and features to the property in question. Comps can be used in a variety of circumstances such as appraisals or market analyses.
Net Operating Income (NOI)
Net operating income (NOI) is the annual income a property generates after subtracting all operating expenses, such as maintenance, property management, property taxes, insurance, and utilities.
NOI is often used to evaluate a property’s profitability and is a key metric in determining property value and return on investment.
NOI calculations do not include debt service, mortgage payments, capital expenditures, or income taxes.
Capitalization Rate (Cap Rate)
The capitalization rate (or cap rate) is a metric used to evaluate the expected return on investment for a property. The formula for calculating the cap rate is: (NOI ÷ Property Value) × 100
The cap rate doesn’t account for mortgage and interest payments on loans, it assumes an all-cash purchase of the property.
Tenant Improvement Allowance
The tenant improvement allowance is an amount of money the landlord offers to contribute towards renovations for a tenant to make. This amount is typically based on a dollar per square foot amount.
Helping You Achieve Your Commercial Real Estate Goals
Navigating a commercial real estate transaction is easier when you understand the common phrases and abbreviations being used. At Cushman & Wakefield | Stevenson, our team of commercial real estate agents is committed to helping you achieve your real estate goals while keeping you informed at every stage of the process so you can be confident in your decision.
Equipped with in-depth knowledge of the CRE industry and Winnipeg’s unique market, our agents offer expertise in sales and leasing across all asset classes. Contact us today to get started.
