Commercial Real Estate Glossary
Commercial Real Estate Terms
The world of commercial real estate is as intriguing as it is complex. When it comes to buying, selling, or leasing commercial real estate, it’s always good to understand the lingo used by agents, brokers, and industry professionals alike. Below you’ll find some of the most commonly used commercial real estate terms in the market, and learn how they’re used in a transaction.
A
Absorption rate:
The rate at which vacant spaces are leased in a specific real estate market.
Accessible Parking:
Parking spaces are designated for people with disabilities, in compliance with the Americans with Disabilities Act (ADA).
Aerial survey:
A type of survey that uses aerial photography or remote sensing technology to gather information about a commercial property.
B
Brokerage:
The business of helping buyers, sellers, or renters of commercial properties, connecting them and facilitating transactions.
Building envelope:
The physical boundaries of a commercial building, including walls, roof, and foundation, are designed to protect the interior from the elements.
Build-to-suit:
A type of commercial property development, in which a landlord builds a property specifically for a tenant, based on their specific needs and specifications.
Building class:
A classification system that categorizes commercial buildings based on factors such as age, location, quality, and design.
C
Cap rate:
A ratio used to determine the financial performance of a commercial property, calculated as the net operating income divided by the current market value.Common area factor (CAF):
The ratio of common areas to rentable areas in a commercial property, used to calculate the cost of common area maintenance.Common area maintenance (CAM):
The cost of maintaining and operating common areas of a commercial property, such as lobbies, hallways, elevators, and restrooms, passed on to tenants as additional rent.Commercial space:
A property used for business purposes, such as offices, retail spaces, and industrial buildings.Commercial lease:
An agreement between a landlord and tenant for the rental of commercial property, typically for business purposes.Common area maintenance (CAM):
The cost of maintaining shared spaces in a commercial property, such as lobbies, elevators, and bathrooms.Concession:
An inducement provided by a landlord to a tenant, such as rent-free periods, tenant improvement allowances, or reduced rent.Class A, B, C buildings:
A system of classification for commercial buildings based on factors such as age, location, quality, and design, where Class A buildings are the highest quality, and Class C buildings are the lowest.D
Dead rent:
Rent charged for a commercial property, despite the fact that the property is not being used or is not fully leased.Due diligence:
The process of thoroughly researchingDue diligence:
The investigation and analysis of a commercial property prior to purchase or lease, to assess its value, risks, and potential returns.E
E-commerce fulfillment center:
A type of commercial property designed specifically for the storage and distribution of e-commerce goods.
Escalation clause:
A provision in a commercial lease that allows for rent increases over time, based on predetermined factors such as inflation or changes in operating expenses.
F
Footprint:
The area covered by a commercial building, including the building itself and its surrounding outdoor spaces.G
Gross lease:
A type of commercial lease in which the landlord is responsible for all operating expenses, including property taxes, insurance, and maintenance, and the tenant pays only rent.Gross leaseable area (GLA):
The total area of a commercial building that is available for lease, including both office and common spaces.Gross building area (GBA):
The total floor area of a building, including all floors and underground space.Gross lease:
A type of commercial lease in which the tenant pays a fixed amount for rent, and the landlord covers all operating expenses and property taxes.H
Hard costs:
The tangible costs associated with a commercial property, such as construction, renovations, and land acquisition.
I
Indemnification:
A legal agreement in which one party agrees to compensate the other in the event of a loss or damage, typically included in commercial lease agreements.
J
Joint venture:
A business relationship in which two or more parties pool their resources and skills to develop or operate a commercial property.
K
Key money:
A payment made by a tenant to a landlord, in addition to rent and security deposit, to secure a commercial lease.
L
Leasehold improvement:
Improvements made to a commercial property by a tenant, typically at their own expense, that remain in place after the lease has ended.Leasehold improvements:
Physical modifications made to a commercial property by the tenant to accommodate their specific business needs.Lease term:
The length of time for which a commercial lease is in effect, typically expressed in years.Loading dock:
An area in a commercial property, typically located at the rear or side of the building, where goods can be loaded and unloaded from delivery trucks.LOI (Letter of Intent):
A document outlining the proposed terms and conditions of a commercial property transaction, prior to the formal negotiation and execution of a lease or purchase agreement.M
Market rent:
The current rental rate for comparable properties in the same geographic area.
Market analysis:
A study of real estate market trends and conditions, used to determine the value and potential of a commercial property.
N
Net lease:
A type of commercial lease in which the tenant pays a base rent, plus a portion of the property’s operating expenses and taxes.Net leaseable area (NLA):
The total area of a commercial building that is available for lease, excluding common spaces such as hallways, lobbies, and restrooms.Net lease:
A type of commercial lease in which the tenant is responsible for a portion of the operating expenses, in addition to rent.NOI:
Net operating income, the amount of money a commercial property generates after operating expenses have been deducted.O
Occupancy rate:
The percentage of a commercial property that is leased or occupied by tenants.
Overbuild:
A commercial property that has been built with more square footage or facilities than the market can support.
P
Parking ratio:
The ratio of the number of parking spaces available in a commercial property, to the number of tenants or occupants.
Pass-through expenses:
Operating expenses incurred by a landlord, passed on to tenants as additional rent, in a net lease or modified gross lease.
Per capita income:
The average income of a specific geographic area, used as a factor in determining the potential demand for commercial properties.
Prime location:
A location with high demand, typically characterized by high foot traffic, accessibility, and proximity to amenities.
Pro forma financial statement:
A projection of a commercial property’s future financial performance, used to estimate potential income and expenses.
Property management:
The overseeing and maintenance of a commercial property, including the management of tenants, finances, and building maintenance.
R
Real estate cycle:
The natural cycle of real estate market growth and decline, characterized by periods of expansion, peak, contraction, and trough.
Renewal option:
A provision in a commercial lease allowing the tenant to renew their lease for a specified period of time, at predetermined rental rates.
Rentable square footage (RSF):
The total square footage of a commercial property that is available for rent, including both office and common spaces.
Rental concession:
An inducement offered by a landlord to a tenant, such as rent-free periods or reduced rent, to encourage the tenant to sign a lease.
S
Site plan:
A detailed drawing or map of a commercial property, showing the location and dimensions of buildings, parking areas, sidewalks, and other features.Soft costs:
The intangible costs associated with a commercial property, such as architectural and engineering fees, permit fees, and financing fees.Stabilized property:
A commercial property that has reached a state of equilibrium, with stable occupancy, rental rates, and operating expenses.Submarket:
A geographic area within a larger real estate market, with similar real estate characteristics and demand.Sublease:
A situation in which a tenant rents a portion of a commercial property that they have already leased, to another tenant.Surrender clause:
A provision in a commercial lease allowing the tenant to terminate their lease early, without penalty.T
Tenant improvement (TI) allowance:
A sum of money provided by a landlord to a tenant, to be used towards customizing the rented space to the tenant’s specific needs.Triple-A tenant:
A tenant with a strong financial profile, good credit rating, and stable track record, considered to be a desirable tenant by landlords.Triple net lease (NNN):
A type of net lease in which the tenant is responsible for paying all property-related expenses, including property taxes, insurance, and common area maintenance.Turnkey property:
A commercial property that is ready for immediate occupancy, with all necessary improvements and renovations already completed. Underwriting: The process of evaluating a commercial property to determine its potential value and risk, used in financing and insurance.V
Vacancy rate:
The percentage of a commercial property that is unoccupied or available for lease.W
Work letter:
A document outlining the specific tenant improvements and renovations to be made to a commercial property, as part of a lease agreement.
Z
Zoning:
The regulatory classification of a commercial property, determining how it can be used and developed.