Helpful Commercial Real Estate Buzzwords to know!
-San Antonio Commercial Real Estate
Commercial Real Estate can be a somewhat intimidating business to break into whether you are a tenant, landlord, investor, broker, seller, developer, contractor, or vendor. Below are some helpful commercial real estate buzzwords intended to ease your ability to communicate on your next commercial real estate deal:
Commercial Real Estate Leasing Buzzwords:
#1 Triple Net Lease – Have you ever heard someone refer to “triple net” when discussing a commercial real estate lease? Triple Nets are the operating expenses that a tenant is responsible for paying in addition to base rent in a triple net lease. The three “nets” are property taxes (n1), property insurance (n2), and common area maintenance (n3). Typically the tenant pays their prorata share (proportionate share of tenant’s total leasable square footage in relation to the building’s gross leasable space) of these expenses in a triple net lease in addition to base rent. Triple Net Leases are common in retail leasing. We have seen a growing trend of triple net leases occurring in office and industrial as well.
#2 Add-on Factor – Have you ever wondered what the difference between “leasable” and “usable” square footage is? The “Add-on Factor” is the difference between the leasable and usable area of an office building commonly expressed as a percentage of the rentable area. An “Add-on Factor” is common in multi-tenant office buildings where there is a great deal of common area. Elevators, lobby area, community bathrooms, and hallways can all contribute to the “add-on” factor that a tenant pays for in addition to their “usable” square footage. Add-on factors are most common in office building leases.
#3 TI Allowance – “TI Allowance” or Tenant Improvement Allowance is an allowance that the landlord provides the tenant to build-out or modify the tenant’s lease space. TI allowances are negotiable much like rental terms.
#4 Second Generation Space – Second Generation Space is a term relating to office space that has had a prior tenant. The importance to the space having a prior tenant is that some (if not all) of the improvements can be reusable by the new tenant.
#5 Shell Space – Shell Space or 1st Generation Space is a term relating to office space that has not had a previous tenant. Unlike Second Generation Space, the tenant should expect to contribute a substantial amount of capital towards the improvements. Shell Space typically comes with a higher TI Allowance from the landlord than Second Generation Space.
#6 Grade Level vs. Dock High – These are common terms that you will hear when leasing industrial space. Grade Level refers to loading/unloading areas that are at street level. Dock High refers to industrial space that comes with a loading dock. It is rare to find industrial spaces with dock high loading areas that are under 3500 SF.
Commercial Real Estate Investing Buzzwords:
#1 GPI – GPI or Gross Potential Income provides the gross income estimated without considering losses, non-payment, or vacancies.
#2 GOI or EGI – GOI or Gross Operating Income (otherwise known as EGI or Effective Gross Income) is the result of subtracting vacancy and other credits from the GPI.
#3 Operating Expenses – Operating Expenses refer to the expenses associated with the property. This includes but is not limited to property taxes, property insurance, and common area maintenance. Operating Expenses DO NOT include debt service or interest payments.
#4 NOI – NOI or Net Operating Income is the result of subtracting the operating expenses for the property from the GOI or Gross Operating Income.
#5 Cap Rate – Have you every heard someone ask what the “cap rate” is? Or have you ever heard someone say that they are looking at a “7 cap deal”? Cap Rate is one of the most commonly used terms in commercial real estate because it is often used to determine value. A “cap rate” or capitalization rate can be determined by dividing the NOI by the purchase price of the property. Cap Rate = NOI/Purchase Price.
#6 CFBT – CFBT or Cash Flow Before Taxes can be determined by subtracting debt service and any capital expenses from the Net Operating Income.
#7 Cash on Cash Return – Cash on Cash Return can be determined by dividing the annual Cash Flow Before Taxes (CFBT) by the total cash invested. Cash on Cash Return = CFBT/Total Cash Invested. Cash on Cash Return does not account for property appreciation or for debt repayment.
Commercial Real Estate Development Buzzwords:
# 1 Parking Ratios – This is the number of parking spaces provided per 1,000 square feet of gross leasable area. If you had a 10,000 SF building with a 5:1000 parking ratio, you would have 50 parking spaces. Typically medical and retail space require higher parking ratios that other types of office buildings.
#2 ALTA Survey – ALTA stands for American Land Title Association. ALTA Surveys are more detailed than most commercial real estate surveys and can often be more expensive and timely to have completed. It is our recomendation to order an ALTA survey on development projects. An ALTA survey specifices the property boundary lines, location of the main building including improvements, location of secondary buildings, identifies easements (access, water, gas, telephone, aviation, railway, utilities, etc).
#3 Zoning – Zoning is the process of planning for property use types by a local government to allocate certain kinds of structures in certain areas. Zoning also includes restrictions in differing zoning areas (ex. building heights, the density, types of businesses, etc). Zoning rules are different in almost every Texas City. It is critical to fully research zoning rules in the area that you are considering for development prior to proceeding with any project. We typically recomend meeting with the local city zoning/development office in person so that you fully understand the rules of the property in question. We also recomend obtaining an approved “specific use” (single user or couple user development) letter for the city prior to acquiring the property if at all possible.
# 4 Impervious Surface – Any surface that does not absorb rain. This includes but is not limited to buildings, parking areas, driveways, roads, sidewalks, or any other concrete/asphalt type areas.
#5 Net Buildable Site Area – Site area calculated for the purpose of determining allowable impervious surface and land permitted to be developed.
#6 Impervious Surface Ratio – Total Impervious Surface Area divided by the Net Buildable Site Area.
#7 Water Retention vs. Water Detention – A retention pond is typically designed to hold water indefinitely. A detention pond is typicaly designed to detain water for a period of time to hinder from flash flooding occurring.
Contact a San Antonio Commercial Real Estate Expert today:
Luke LeGrand, ePRO 210-843-5853