Commercial RE Terms

Commercial real estate investing can be a complex and lucrative venture, and it's important to have a good understanding of the terminology used in the industry. Here are some common commercial real estate terms you should know:

Cap Rate

Also known as capitalization rate, this is the rate of return on a property based on its net operating income (NOI) and its current market value. It is used to evaluate the profitability of an investment property.

Rentable square footage

The total square footage of a commercial property that can be rented out to tenants.

Usable square footage

The square footage of a commercial property that is available for a tenant's exclusive use, excluding common areas such as hallways or restrooms.

Lease term

The length of time a tenant will occupy a commercial property, typically measured in years.

Gross lease

A type of lease agreement where the tenant pays a fixed rent amount, and the landlord is responsible for paying all property expenses, including utilities, taxes, and maintenance.

Net lease

A type of lease agreement where the tenant pays a base rent amount plus additional expenses such as property taxes, insurance, and maintenance.

Triple net lease

A type of lease agreement where the tenant pays for all property expenses, including taxes, insurance, and maintenance, in addition to a base rent amount.

Tenant improvement allowance

A negotiated amount that the landlord agrees to contribute towards the cost of tenant improvements, such as renovations or build-outs.

Escalation clause

A provision in a lease agreement that allows for periodic increases in rent over the lease term, typically based on inflation or other market factors.

Common area maintenance (CAM)

The costs associated with maintaining and operating common areas of a commercial property, such as hallways, elevators, and parking lots. CAM charges are typically passed on to tenants as part of their lease agreement.

Letter of intent (LOI)

A preliminary agreement between a landlord and tenant outlining the basic terms of a lease, including rent amount, lease term, and other key provisions.

Tenant mix

The combination of tenants occupying a commercial property, typically designed to attract a specific target market.

Tenant improvements

Modifications made to a commercial property to meet the specific needs of a tenant, such as build-outs or renovations.

Anchor tenant

A large, well-known tenant that serves as a major draw for other tenants and customers in a commercial property.

This content is meant for informational purposes only and is not intended to be construed as financial, tax, legal, or insurance advice.