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Glossary of Terms used in Commercial Real Estate

 

Is this your first step into investment real estate? For many Canadians, investment in a multi-family or multi-tenant unit is attractive as an investment. If you’re considering that, welcome to an entirely new vocabulary, and terms such as NOI, or Cap rate. A commercial REALTOR® can explain them to you in detail, and explain the impact each one can have on your decision whether a specific property is right for you and your investment portfolio.

 

Abandonment

A person or entity that leaves a demised premises before the end of a lease term.

Absorption rate

The net statistical changes in occupied space over a period of time. Positive absorption reflects an increase in occupied space while negative absorption reflects a decrease.

 Accrued expense

Expenses incurred which are not yet payable, or have not yet been paid.

Acquisition cost

The total cost to the purchaser of a property; includes soft costs and sales costs.

Additional Rents

These are rents charged to a tenant for the maintenance, taxation, and insurance of any common areas.

After tax yield rate

The annual rate of return on equity after payment of income taxes.

After tax yield

This is the annual profit remaining after payment of income taxes, or the annual return on equity after payment of income taxes.

Amenities

These are features that make a property more attractive, useful, desirable, and/or rentable and are usually included in the sale price or rent calculations.

Amortization

The process of paying off a debt, together with interest, usually with equal payments at regular intervals over a period of time.

Anchor tenant

A prominent tenant occupying a large proportion of a commercial property and attracts customers and other tenants to the property.

Appraisal Estimate

This is the process that leads to an estimate of the value of a property, and can also refer to the report that states the estimate and conclusion of value

Arrears

Money that is due or past due, but has not been paid.

Assessment

This is a levy against a property in addition to general taxes, and it is usually applied by a civic authority for improvements such as streets, sewers, etc.

Assignment

The method or manner by which a right, a specialty, or contract is transferred from one person to another.

Basic rent

This is the rent agreed to through negotiation and does not include adjustments and additions.

Blanket mortgage

This is a single mortgage covering more than one property, such as a mortgage covering all the lots of a builder in one subdivision.

Break-even point

This is the point where the effective gross income equals the cost of all operating expenses and debt service payments.

Build to suit

The construction of a building or property that suits the particular needs of the occupant.

Capital improvements

These are additions to the property or improvements that enhance or extend the useful life of the property.

Capitalization

This is the anticipated stabilized rate of return from an investment. Also known as the cap rate.

Cash flow analysis

A projection of the buyer's estimated cash flow over the holding period.

Clear title

Any property that is free of any and all competing claims, mortgages, liens, and encumbrances.

Comparables

A term used to refer to area rents or competitive rental properties or area sales that have sold, implying that "rent comps" and "sales comps" are comparable in size, location, condition, amenities, etc., to the subject property.

Contingent offer

This is an offer to purchase property subject to certain conditions, including the buyer's approval of income and expense statements, title commitment, physical condition of the property, loan commitment, etc. - being met. The specific amount of time allowed to clear these provisions is called the inspection or contingency period.

Density

This is the amount of total square feet buildable on a set land. For example high density properties feature more floors.

Encroachment

A building, part of a building or obstruction which intrudes on another property.

Encumbrance

A claim, lien, charge or other liability attached to real property which may diminish its value.

Escalation clause

A clause in a lease providing for an increase in rent at a future time. This could be a fixed or pre-determined rate increase, or a cost of living increase that ties the rent to a cost of living index, or direct expense - the rent is adjusted according to changes in the expenses of the property such as a tax increase.

First right of refusal

An option in a lease provided to a tenant in a lease contract providing first right to occupy space or match an incoming offer on adjacent space that may be required for the tenant's future expansion.

Floor space ratio

Also known as FSR, the maximum floor space of a building relative to its land area

Free and clear

When there are no liens or loans against real property

Graduated lease

A lease that details for changes in the rental rate, usually based on periodic appraisal or time.

Gross lease

A lease where the tenant pays all or part of the expenses of the leased property, such as taxes, insurance, maintenance, utilities, etc.

Gross rent multiplie

Sales price or value divided by annual effective gross income. For example if sale price is $325,000 and the effective gross annual income is $50,000 the G.R.M. is 6.5 ($325,000 /$50,000).

Gross up area

It is the space leased but not occupied by the tenant, usually for areas as washrooms, lobby area and utility centers.

Interest only mortgage

A non-amortizing loan where the lender receives only interest during the term of the loan and recovers the principal in a lump sum at the end of the term.

Landlord

Company or individual who rents property to another

Lease

A contract where one party (the landlord) agrees to allow another party (tenant) the exclusive, common and/or joint right(s) to use a property for a specific period of time

Leaseback

A transaction where an investor purchases property and then leases it back to the seller.

Lease buyout

When a landlord offers to take over the current lease of a tenant.

Lessee           

The tenant, or the party a property is rented to.

Lessor

The landlord, or the one who rents the property to another.

Letter of intent

A formal method of stating there is interest in a property, but it is not an offer and creates no obligation.

Lien

A hold or claim which one person has upon property of another as security for a debt, charge, tax or judgment.

Loan-to-value ratio

This is the principal amount of a loan as a percent of lending value. For example, if property is purchased for $500,000 and is financed by a bank loan for $300,000 the 'loan-to-value" ratio is 60% of the property's lending value to a borrower.

Mill rate

Equal to one tenth of a cent. Used in expressing a tax rate Ten mills would be the same as ten dollars per thousand.

Mortgage

A legal document pledging a described property for the performance of the repayment of a loan; a loan secured by a pledge or conditional conveyance of real estate.

Negative cash flow

When the income from an investment property does not equal the usual expenses. The owner must come up with cash each month to meet these expenses.

Net income

The difference between effective gross income (property) and the operating expenses including taxes and insurance. The term is qualified as net income before debt service.

Net lease

A lease requiring the tenant to pay, in addition to a fixed rental, the expense of the property leased, such as taxes, insurance, maintenance etc.

Net-net lease

A lease in which the tenant pays a rent to the landlord that includes all real estate taxes only and does not include any portion of the operating expenses.

Net-net-net lease

Also known as a triple net lease, when the tenant pays rent to the landlord that does not include all property taxes and operating expenses.

Net operating income

Also known as NOI. This is the annual net income remaining after deducting all fixed and operating variable expenses, but before debt service and income tax. The specific formula is:

NOI = Scheduled rental income + other income - vacancy and credit losses - operating expenses

Net rentable area

Also known as net rentable square feet. This is the total amount of square feet that can be used for rental income. It typically excludes stairways, elevators, hallways, common areas, etc.

Net rent multiplier

The factor resulting from dividing the net operating income into the sale or purchase price.

Non-conforming use

Property used for purposes that do not conform to the permitted uses in the municipal or provincial zoning by-laws.

On-site improvements

Work completed on a property that improves its value.

Option

The right to purchase or lease a property at a certain price within a designated period of time for which a consideration is paid.

Payback period

The time required for the complete recovery of an investment; often used with the concept that all income is considered a return of capital until the entire investment is recaptured and that income received after complete payback is considered profit.

Percentage lease

A percentage lease is when the tenant pays a minimum rent then also pays a percentage of the volume of the business done on the premises whichever is greater. The percentage paid differs according to the types of business.

Phase I Level Audit

This refers to an initial environmental assessment of a facility by a qualified environmental engineering firm for potential contamination to determine if further investigations are warranted. Phase II level audit investigations would require further subsurface sampling, electromagnetic and hydro-geological study.

Pre-lease

The leasing of a property or space that has not been developed or constructed.

Pro Forma

Means "for form only". A study prepared to estimate future Income, expenses and potential profit or loss.

Radius Clause

In a percentage lease, it is customary to have a clause that details the distance from the property that a competing store from the same chain may be located. This is usually a distance sufficient so that two stores from the same chain are not in the same trade area.

Retail premises

Premises used for the sole purpose of selling goods and/or services to the general public

Unencumbered

This is a property or land that has no liens, claims or mortgages against it.

Vacancy rate

The percentage of total scheduled rental income lost to vacancy and bad credit costs.

Yield

This is the ratio of income from an investment to the total cost of the investment over a given period of time.

Zoning

The rules of a municipality that detail the allowable uses for the real property in specific areas, and only then on specified conditions.

Courtesy of the Real Estate Board of Greater Vancouver (REBGV)

Few transactions are as complex as those in commercial real estate. From finding the right property, lease space or investment to closing the deal, there is a lot more involved than most people think. This is where the expertise of a commercial REALTOR®, their negotiating skills, and procedural knowledge will prove invaluable. If you are looking to buy, sell or lease a commercial or investment property, these are some of the terms you should be familiar with.

                                   

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