June 24, 2015
Buying or leasing commercial real estate can be a complex process. As a business owner, you want to protect your company and make the best financial decisions, but your expertise most likely lies in a different market.
For experienced brokers and tenant representatives, commercial real estate jargon is used every day, but we understand that many terms may be foreign to those outside of the industry – especially first-time investors. While there is no universal strategy when it comes to a commercial real estate transaction for businesses, it is important for owners and investors to cultivate a general understanding of the industry’s jargon before signing any transactional documents. From property valuation to due diligence, understanding the particular set of terms can reflect your proficiency and help you manage a transaction efficiently.
Capitalization Rate (Cap Rate): The ratio between a property’s net operating income and the sum of its purchase price (or value) and capital additions.
Lessor: Landlord or property owner who leases property to a tenant
Lessee: Tenant who leases or rents a property
High-rise: A commercial building higher than twenty-five stories above ground level
Mid-rise: A commercial building between seven and twenty-five stories above ground level
Low-rise: A commercial building fewer than seven stories above ground level
Net Operating Income (NOI): The potential rental income plus other income, minus vacancy, credit losses and operating expenses.
TIs: Tenant Improvements
CAM: Common Area Maintenance
Base Year: Typically a tenant’s first year of occupancy
Vacancy Rate: The percentage of the total supply of units or space of a specific commercial type that is vacant and available for occupancy at a particular point in time within a given market
These industry terms are widely accepted, however, variations can arise in individual markets. For example, when categorizing building height, a “high-rise” property can vary based on the local real estate landscape. In Birmingham, Ala., a high-rise is typically 10 or more stories, a mid-rise is three to nine and a low rise is one to two.
Commercial real estate jargon is expansive, but becoming familiar with these terms should give you a great starting point to begin conversations. For a more in-depth glossary of commercial real estate terms, click here.