Terminology abounds in the world of commercial real estate (CRE). It’s a complex and nuanced industry. Whether you’re new to the business, a client looking to better understand, or a seasoned professional just looking to refresh your terminology, it never hurts to brush up on the concepts integral to our business.
Cap Rate
Cap rate is short for capitalization rate. This is a key metric used to evaluate the potential profitability of a commercial real estate investment. You calculate it by dividing the property’s net operating income (NOI) by its current market value. A higher cap rate generally indicates a higher potential return on investment, although it’s still essential to consider other factors as well, such as location and market trends,
Triple Net Lease (NNN)
A triple net lease (NNN) is a commercial lease arrangement in which the tenant takes on additional responsibilities beyond the base rent. The lessee not only pays the base rental rate but also covers operating expenses such as property taxes, insurance and maintenance costs for the leased property. Historically, triple net leases were associated with tenants renting entire freestanding commercial buildings. The arrangement is a benefit for landlords, offering a predictable income stream while shifting operating costs to the tenant.
Build-to-suit
This refers to the customized construction of a commercial property. The developer constructs a building based on a single tenant’s specific requirements and preferences. The tenants often commit to a long-term lease, and the property is tailored to their unique business needs. An example of a build-to-suit transaction would be a technology company whose daily business operations require a specialized facility (in this case, one with a customized office space and advanced technology infrastructure).
Anchor Tenant
In commercial real estate, an anchor tenant is a major tenant – usually a large, prominent retailer or business – that occupies a significant portion of a shopping center or commercial property. Having a reputable anchor tenant can attract other tenants and drive foot traffic, contributing to the overall success of the entire property. In Florida, Publix often serves as an anchor tenant for shopping centers. Other examples include Target, Home Depot, movie theaters, and popular restaurants.
Gross Lease / Full-Service Lease
A gross lease or full-service lease is a commercial lease arrangement in which the tenant pays a fixed, all-inclusive fee to cover rent and various costs associated with property ownership. In a gross lease, the landlord is responsible for handling and covering additional expenses such as property taxes, maintenance, utilities, and other fixed charges. This structure simplifies financial arrangements for tenants, as they make a single payment to the landlord. However, gross leases tend to be costlier than the alternative because landlords often build in a “load factor: to compensate for expenses.
Modified Gross Lease
A modified gross lease is a type of a commercial lease agreement in which both the tenant and landlord share the responsibility for property-related expenses. In a modified gross lease (unlike a traditional gross lease), certain expenses such as property taxes, maintenance, and utilities are divided between the tenant and the landlord. This lease structure offers a middle ground between a gross lease and net lease. It is designed to balance the interests of both parties.
Absorption Rate
Absorption rate is the rate at which available commercial real estate space is lease or sold in a specific market during a set period. This metric helps CRE advisors assess the demand for space and understand market trends – factors that can influence investment decisions. Among other things, this calculation can provide information about how long it might take to sell a supply of homes in a given area.
Land Use Zoning
This is the legal designation assigned by local governments to regulate the use of land within their jurisdiction. Zoning ordinances specify the permissible types of developments, such as residential, commercial, industrial, or mixed use. This has a marked effect on property values and development possibilities. It’s important for a CRE advisor to understand the nuances of zoning and the process of getting a property rezoned to fit the client’s use.
Gross Rental Income
The total income generated from a property before deducting expenses in the gross rental income. It includes base rent and additional income from expenses, like parking fees or utility reimbursements. This differs from net rent, which is the final amount a landlord will receive after deducting all expenses from the gross operating income.
The advisors at SVN | Commercial Advisory Group have a solid grasp of CRE terminology and the underlying concepts that can help investors make wise, profitable decisions. Check us out at suncoastsvn.com. Let us put our knowledge to work for you.