A Fresh Take on CRE

CRE Terms Cheat Sheet for Brokers (And Everyone Else)

You can spend countless hours poring over lists of commercial real estate terms, or you can read this quick CRE Cheat Sheet packed with the CRE terms you actually need to know. Our Cheat Sheet contains only real broker speak. Have a quick read to test your knowledge, or send it to interns, junior associates, and those looking to get into the business. They'll be talking the talk in no time! Click here for a PDF version.

Investment Sales and Development

Back of the Envelope (BOE)

BOE is a time saving measure used by investors to evaluate investment opportunities. The BOE determines whether a potential real estate investment makes the cut, before additional time is spent on extended analysis.

Cap Rate

Also known as Capitalization Rate, the Cap Rate is the ratio between the Annual Net Operating Income (NOI) and the asset’s current market value. For example, an office building with an NOI of $400,000 that can be sold for $10M has a cap rate of 4%. ($400,000 / $10,000,000 = 4%). This means that the building will return 4% of the building's cost with the year's net proceeds. Investors in prime markets may be willing to accept lower Cap Rates (a smaller annual return) in return for lower risk or higher potential appreciation of the property.

Net Operating Income (NOI)

A property’s annual gross income, less operating expenses, before the cost of financing and income tax.

Operating Expenses

All expenses that are incurred during the regular operation of a commercial property. OPEX usually include property taxes, property insurance, cleaning and maintenance, landscaping, and the cost of utilities.

CAM (Common Area Maintenance)

In triple net leases (NNN) and in some modified gross leases, tenants pay the base rent, as well as additional fees for expenses related to the upkeep of the common areas of the property. Examples of CAM expenses include cleaning, landscaping, and snow removal. CAM charges are often capped to limit the amount charges can rise every year.

DSCR

Debt Service Coverage Ratio is the ratio between the annual Net Operating Income (NOI) and the annual debt service (principal and interest). Commercial lenders use this ratio as a measure of risk to determine whether the property’s NOI will be sufficient to cover the debt payments. For example, with an NOI of $125,000 and an annual debt service of $100,000, the DSCR will be 1.25, which is acceptable to most investors.

LTV (Loan to Value)

LTV is the ratio of a mortgage loan to property value. A mortgage loan for $6 million on a property worth $10 million is given at a 60% LTV.

Pro Forma

Cash flow projection that is used to model the possible income / return from commercial real estate. The Pro Forma is usually a spreadsheet containing different income and expense scenarios for the property.

Trophy Building

Investment grade properties that are the best in class. They are industry leaders in all respects–location, desirability, architecture, technology, finishes, and environmental sustainability.

Development Specific Terms

FAR - Floor Area Ratio

FAR is a ratio between the property’s land area and the size of the building that can be legally constructed on the property. For example, a lot size of 20,000 SQFT with an FAR of 5 allows a developer to construct a 100,000 SQFT building. The FAR is determined by the local municipality as part of the zoning regulations for the district, neighborhood or city.

Zoning

Zoning refers to local laws governing the permitted use of land or real estate in a given area. Zoning laws determine what types of property may be developed (for example, commercial vs. residential), as well as the guidelines and restrictions for development, including FAR, height, and required parking.

General CRE Brokerage

Capital Markets

As a CRE service line, Capital Markets departments combine Investment Sales brokerage services with financing services such as investment banking and debt financing.

Corporate Real Estate

Corporate real estate refers to property held by a business enterprise for operations, such as the company’s headquarters, satellite offices and manufacturing facilities. Corporate real estate brokers typically work with one client and represent that client’s interest in leasing, acquisition, disposition and maximizing operational efficiencies.

Investment Sales

Investment sales brokers represent buyers and sellers of commercial real estate assets. These include multifamily (apartment buildings), office, retail and industrial properties.

Floor Plate a Floor Plate is the rentable area in one entire floor of a building. In layer-cake office buildings, lower floors are larger, and therefore have larger floor plates than higher floors.

Leasing

Lessee - The tenant. The party occupying a leased space and paying rent.

Lessor - The landlord. The party receiving the rent and granting permission to use the space.

Sublease Vs. Direct Lease

In a Direct Lease, the tenant (Lessee) has a direct agreement with the property owner (landlord, or Lessor). In a Sublease, the tenant (Sublessee) is leasing the space from another tenant that has an active lease on the same space (Sublessor.) The sublessor may lease out the entire space or a portion of it.

Availability Rate

The amount of office space available to be leased, including vacant space, space available for sublease, and space coming available within the next quarter.

Absorption

The Absorption is the square footage that has been put under lease in a given period of time. Total Absorption (Gross Absorption) is the total new square footage leased by tenants, not accounting for the square feet vacated during the same period. Net Absorption takes both into consideration, and can be calculated as the square footage occupied at the end of a period minus the square footage occupied at the beginning of a period. When demand for space is higher than supply, the Net Absorption is positive. For example, at the end of the year, 500 million SQFT of office is under lease in Manhattan. At the beginning of the year, only 495 million was under lease. Net Absorption for the year is 5 million SQFT.

Vacancy Rate

The Vacancy Rate is the percentage of currently available units in a property, a portfolio, a city submarket or an entire market at a particular time.

Agency / Landlord Representation

In commercial leasing, landlord representatives (LL Reps) are hired by the owners of commercial properties to represent the landlords in leasing transactions. Successful LL reps maintain long term relationships with owners and may be in charge of multi-unit office, industrial or retail properties, or even portfolios of several properties. A good LL Rep will strive for low vacancy rates and high rents. LL Reps and Tenant Reps often sit on opposite side of the negotiation table, both trying to secure the best terms for their clients. Good agency brokers can enjoy a steady stream of repeat business from the landlords they represent.

Tenant Rep

Tenant Rep brokers represent tenants looking to lease commercial property. The Tenant Rep’s responsibilities include: analyzing the tenant’s space needs, identifying properties that fit the tenant’s needs, and protecting the tenant’s interests in the negotiation process.

Leasing - Space Definitions

Loss Factor, Load Factor, Rentable Area, Usable Area

Rentable Area - the square footage of the area inside a building, including common areas such as hallways and the lobby, and excluding holes cut in the building Floor Plate for mechanical ducts, elevators and stairs. Tenants pay for the entire rentable area.

Usable Area - the area that is exclusively used by the tenant. This normally includes the area within the boundaries of the space that is being leased. Columns, recessed entrances and other obstructions are counted as useable areas, although the tenant cannot physically use those areas.

Carpetable/Assignable Area - the area that is truly usable by a tenant. This does not include columns, convectors, or other obstructions. Simply put, this is the area where you could actually place carpet and furniture.

Loss Factor is the percentage of the rentable area the tenant cannot use. If the Rentable Area is 10,000 SQFT and the Usable Area is 7,500 SQFT, the Loss Factor is 2,500 divided by 10,000, or 25%.

Load Factor (same as Add-on Factor) - While Loss Factor is the percentage of the Rentable Area tenants can't use, the Load Factor indicates how much larger the Rentable Area is than the Usable Area. In the example above, the Usable Area is 7,500 SQFT and the non-usable area is 2,500 SQFT. The Load Factor is 2,500 divided by 7,500, or 33%. In other words, although the tenant can only use 7,500 SQFT, they are paying for a space that is 33% larger than the actual usable space. High Load Factors are in the landlord’s advantage, and low Load Factors are in the tenant’s advantage.

White box

The interior condition of a space where the improvements generally consist of heating/cooling with delivery systems, lighting, electrical switches and outlets, lavatories, a finished ceiling, walls that are prepped for painting, and a concrete slab floor. Also referred to as "vanilla box".

Shell Lease

A lease in which the tenant rents the space with an unfinished interior where the tenant will finish construction and make improvements.

Plug & Play

Commercial space that is already outfitted with all telecommunication and wiring needs, where the infrastructure is maintained by the landlord. These spaces are attractive to small businesses who are weary to move during a down market and don’t want to put much capital into moving costs.

FF&E

Stands for furniture, fixtures, and equipment. These items, if not a permanent connection to the structure or utilities of the building, may be removed by the tenant when vacating the space, provided they purchased them in the first place.

Attended Lobby

Similar to a doorman in an apartment building, An Attended Lobby offers the services of a front door attendant to check in guests, maintain security, and direct postal/shipping services.

Direct Elevator Presence

When the space entry is directly off the elevators, not around a corner, or down the hall.

Leasing - Contract Terms, Rent and Concessions

Lease Type: Full Service / Gross, Modified Gross, NN (Double Net), NNN (Triple Net)

The lease type defines what portion of Operating Expenses is paid by the tenant.

Full Service / Gross Lease: In this lease, the landlord is responsible for covering all operating expenses. However, in some cases, the tenant may still be responsible to cover a portion of the annual increases in operating expenses.

Modified Gross Lease - The tenant in a Modified Gross Lease pays a portion of the operating expenses in addition to the base rent. Usually, this portion is for utilities, and sometimes for janitorial services.

Triple Net / NNN Lease - The tenant in a Triple Net Lease is responsible for the base rent, as well as three types of Operating Expenses: property tax, insurance and Maintenance (CAM). The rent portion the landlord receives is a net amount, since the landlord does not need to pay for Operating Expenses. Net leases are more common in large single tenant properties, especially in retail deals.

Double Net / NN Lease - The tenant in a Triple Net Lease is responsible for covering some operating expenses such as property taxes and insurance, but the landlord will cover maintenance expenses (CAM).

Starting Rent

In commercial leasing, the Starting Rent is the rent the tenant pays for the first period of the lease. In longer term leases the rent usually increases after a certain initial period, such as one year, three years, or five years. (See Rent Bumps / Escalations)

Rent Escalations / Bumps

Rent Escalations / Rent Bumps are periodic increases in rent that the tenant and landlord negotiate before the lease signing. The tenant pays the Starting Rent for the initial lease period, and then an increased rent according to the contract. Escalations can be represented as a dollar amount (for example, $4 per square foot) or a percent (for example, 3% increase over the previous year’s rent.)

Net Effective Rent

The Net Effective Rent is the actual rent the landlords receives subtracting concessions provided by the landlord, such as Free Rent and Tenant Improvement Allowance. Net Effective Rent calculation varies among markets, but usually takes into account the Starting Rent, Rent Escalations, Free Rent, TI, and total lease term.

Concessions (TI and Free Rent)

Concessions are benefits provided by the landlord to sweeten the lease deal for tenants, especially in longer term leases. The most common forms of Concessions are Free Rent and Tenant Improvement Allowance (TI).

Free Rent is a lease period for which rent is not charged. The Free Rent period can vary from one to twelve months, depending on the total lease term and starting rent.

Tenant Improvement Allowance (TI) is a negotiated allowance the landlord is giving back to the tenant to renovate or improve the space leased. In many cases, the landlord will pay the contractors directly for the work. TI is usually quoted on a $/ PSF basis, for example, $10 PSF. In slower times, landlords may prefer to provide more concessions rather than lower the asking rent.

BTS / Built to Suit

BTS is a landlord’s agreement to renovate or build a space to suit the requirements of a particular tenant. Tenants and landlords work together to create the scope of work and hire the architect and contractors. BTS agreements are more common in long term leases.

NBI / New Building Installation

New Building Installation is a term used by brokers to describe a space that is newly built or newly renovated and has not been occupied. If the tenant requires further customization to the space, the landlord may cover the cost as a form of TI.

TURNKEY

A term used to describe a space that is ready for move-in as all services are already in place, including wiring, fixtures, floors and paint.

Reliable Landlord

A landlord that a broker can rely on to build space and deliver on time. (And - one who pays commissions immediately after lease signing.) Landlords who are not deemed reliable may be referred to as “Checkered Landlords.”

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