Glossary of Commercial Real Estate Terms

Administrative Fee: Typically, a fee paid as part of the CAM expense. Usually 10% – 15% of the CAM expenses, not including real estate taxes, assessments or insurance.

Attornment: In the event a mortgage holder forecloses on the landlord, the tenant will recognize the change of ownership and the new landlord.

Build-to-suit: Method of leasing property in which the landlord makes improvements to a space based on the tenant’s specifications. The cost of construction is generally factored into the lease terms. Most build-to-suit provisions apply to long term (10-year)leases.

CAM charges: Common Area Maintenance charges including parking lot maintenance, landscaping, common area lighting, etc. Based on actual expenses and apportioned among all the tenants. CAM charges are quoted as $/SF and based on rentable square footage. Typically paid monthly based on estimated costs for the year. At the end of the year, actual CAM charges are calculated and a credit or debit is passed on to the tenants.

Capitalization Rate: Net operating income (NOI) divided by the purchase price.

Cash on Cash Return: Cash Flow Before Taxes (CFBT)/initial investment. Best indication of the quality of the investment.

Credit-tenant property: A single-tenant commercial property occupied by a tenant who has a credit rating by Moody’s or Standard & Poor of BBB or better.

Debt Coverage Ratio: NOI/loan payment. This is what your banker will want to know before lending you money for the investment.

Discount Rate: Rate of which future cash flows are discounted (devalued) per year.

Double Net Lease (NN): In addition to a fixed monthly rent, tenant pays property taxes and insurance.

Escalation clause: Clause in a lease that allows the landlord to increase rent in the future. Rent increases dictated under an escalation clause may be charged in various ways, including:
• A fixed increase over a definite period
• A cost-of living increase tied to a government index, such as the Consumer Price Index (CPI)
• An increase directly related to increases in operating the property

Estoppel: Clause in the leases that states that if the landlord sells or mortgages the property, the tenant agrees to sign an Estoppel certificate that acknowledges the tenant’s current lease. The Estoppel usually includes the rental amount, remaining time on the lease including options to renew, outstanding rental payments due, lease amendments and any other important items in the lease. Typically, when an owner plans on selling the property, the buyer’s lender will require the tenants to sign an Estoppel Certificate.

Exclusive Use Clause: Provides protection in the shopping center for their right to sell a specific product(s); the landlord may not lease space to any tenant that sells those items.

Gross Lease: Tenant pays a fixed monthly rent.

HVAC: An acronym for “heating, ventilation and air conditioning” system.

IRR (Internal Rate of Return): Calculated by setting NPV = 0 and finding out what the discount rate would be. Use a calculator to do this calculation.

Lien: Legal claim filed against a property for payment of a debt or obligation. If a property owner fails to pay a creditor, for example, the creditor can place a lien on the property. A lien can halt the sale of a property.

Liability Insurance: Tenant will be required to carry an insurance policy in an amount of generally two to four million dollars and name the landlord as additional insured.

Load Factor: If the tenant has rights to hallways, elevators, restrooms outside their space, lobby, etc., the landlord will determine how many square feet of this area exist and prorate it to the other tenants. The tenant will pay rent on their prorata share of this number when the landlord calculates minimum rent.

Management Fee: Part of the CAM expense. Calculated as a percentage of the gross rents for the space (5% – 10%).

NPV (Net Present Value): Method for calculating the present value of future cash flows. Useful for comparing different investments and their returns. Most calculators provide NPV calculations.

Optimum Holding Period: Number of years to hold a property in order to maximize ROE. After this period it’s best to sell or exchange the property.

Percentage Rent: In addition to Minimum Rent, tenant will also pay a percentage of their sales volume as additional rent. Typically, when a tenant reaches a specific sales volume, the tenant will pay the landlord an amount over and above a specific figure. Example: if a Tenant’s minimum rent is $100,000/year and they have a 6% overage clause, the calculation is: $100,000/6% = gross of $1,666,666. The tenant would be required to pay the landlord 6% of the amount that exceeds $1,666,666.If the tenant did $2,000,000 in sales, $2,000,000 – $1,666,666 = $333,333 x 6% = $19,999 additional rent paid to the landlord.

Projected Gross Operating Income: Property’s annual income if all spaces were rented and all of the rent actually collected, minus an allowance for vacancy and credit loss.

Prorata (pro rate): The percentage of space occupied by a tenant as compared to the total space available for lease in the development. Example: if the total space in the center is 5,000 square feet and the tenant leases 1,000 square feet, prorata share is 1,000/5,000 = 25%. The tenant is then responsible for 25% of the total expenses of the development.

Recapture: The right of the landlord to cancel a lease with a tenant in the event a tenant desires to sublease or assign its lease. The recapture allows the landlord to lease the space directly to a new tenant and hot have the existing tenant assign or sublease to a new tenant.

Rentable square feet: Total square feet used to calculate the rent rate; may include an apportionment of lobby, hallways and other areas in the building available to and used by all the building tenants. Expressed as a multiplying or load factor of Useable SF. Example: Rentable SF = Useable SF x 1.15 (multiplying or load factor)

Return on Equity (ROE): CFBT/equity. Equal to Cash on Cash the first year, then decreases because your equity grows faster than NOI (due to depreciation and mortgage retirement).

Right of First Offer: Before offering a space or property for sale on the open market, the landlord or owner is obligated to offer the property first to a specific party.

Right of First Refusal: Allows a tenant the first opportunity to lease space if the landlord has a qualified party ready, willing and able to lease the space. The tenant can accept the other party’s offer amount which he will pay to the landlord or decline to lease the space.

Sale-leaseback: Transaction in which an owner sells a property to an investor who then leases the property back to the original owner under prearranged terms. Sale-leaseback deals offer the original owner freed-up capital and tax breaks and the investor a guaranteed return and appreciation.

Sublease: Lease given by a tenant for some or all of a rented property. For example, if a tenant rents 20,000 square feet but ends up needing only 10,000 square feet, they may want to sublet the extra space for some or all of the remaining term of the lease, providing they continue to occupy and pay rent for the property.

Subordination: Tenant agrees that the lease is subordinate to the mortgage. If the property is sold, the new owner cannot cancel the lease and the lease is in full force and effect. The lender’s position is not affected by the change in the tenant’s lease. In the event that the property is foreclosed, the lender may either keep the lease in effect or terminate it.

Triple Net Lease (NNN): In addition to a fixed monthly rent, tenant pays property taxes, insurance and common area maintenance.

Useable square feet: Total square feet within the walls of the space being leased. Actual space available for Tenant’s exclusive use.

Utility Costs: In larger spaces, utilities are separately metered and paid by the Tenant. In small spaces, utilities may not be separately metered and are apportioned among all users.

Vanilla Shell: Landlord provides the space with walls ready for paint, concrete slab floors, drop ceilings, lighting, air conditioning and heating, electrical panels, bathroom and electrical outlets per code in the walls. Does not include floor covering, wall covering, or any additional interior walls.

Yield Capitalization: More complex form of income capitalization which looks further into the future and attempts to estimate return over a projected holding period (typically 10 years).