Terms to Know

Navigating the complex world of commercial real estate can seem daunting, yet you can simplify the process by becoming familiar with a few key terms:

1031 Exchange
In a typical transaction, the property owner is taxed on any gain realized from the sale. However, through a Section 1031 Exchange, the tax on the gain is deferred until some future date.  Section 1031 of the Internal Revenue Code provides that no gain or loss shall be recognized on the exchange of property held for productive use in a trade or business, or for investment. A tax-deferred exchange is a method by which a property owner trades one or more relinquished properties for one or more replacement properties of “like-kind”, while deferring the payment of federal income taxes and some state taxes on the transaction.  The procedures for this transaction are very detailed and should only be undertaken with the assistance of qualified CPA or advisor.

A real estate appraisal, property valuation or land valuation is the process of valuing property.  Appraisals are needed because every property is different from the next, a factor that doesn’t affect other financial assets. Furthermore, all properties differ from each other in their location – which is an important factor in their value. The appraiser usually provides a written report on this value to his or her client. These reports are used as the basis for loans, tax matters, and so on. Often, the appraisal report is used by both parties to set the sale price of the property appraised.  An appraisal used for lending must be ordered by the lender (although the borrower typically pays for it)

Many office and retail buildings start out with tenant spaces consisting of little more than four walls and a door. The idea is that the spaces will be finished to meet the specific needs of each tenant.  The process of finishing this raw space is known as the “build-out.” There can be extensive negotiations between the building owner (landlord) and the tenant over the details and financial implications of this process.

CAM Charges
Common Area Maintenance charges. Those charges levied on or the expenses incurred in maintaining the common areas of a building.  These may include hallways, entrance vestibules, elevators, parking areas, landscaping, or loading areas.  They may or may not include real estate taxes or property insurance. A lease or contract must be clear as to what is included.

Cap Rate
A rate of return on a real estate investment property based on the expected income that the property will generate. Capitalization rate is used to estimate an investor’s potential return on his or her investment. This is done with a simple formula: divide the pre debt net income of the property by the total value of the property.  It is primarily used for comparison and not for a full analysis of the asset.

A CCIM (Certified Commercial Investment Member) is a recognized expert in the commercial and investment real estate industry. The CCIM designation is earned after successfully completing a process that ensures CCIMs are proficient not only in theory, but also in practice. This elite corps of CCIMs includes brokers, leasing professionals, investment counselors, asset managers, appraisers, corporate real estate executives, property managers, developers, institutional investors, commercial lenders, attorneys, bankers, and other allied professionals.  A CCIM is part of a global commercial real estate network with members across North America and more than 30 countries.

A contingency is a statement or stipulation added to your contract that will allow you the right to back out of the deal without penalty under specific circumstances. Contingencies are often used by buyers who aren’t 100% convinced they’re ready or able to buy the property, and want some extra time to prepare.

Due Diligence
A period within a lease or purchase contract allowing the buyer or tenant a certain period of time to evaluate the property to ensure it is acceptable to the tenant or buyer.  These evaluations may include environmental studies, surveys, zoning approvals, physical inspections, financing and myriad other issues. 

Escrow is an arrangement through which parties to a CRE transaction deposit funds and deeds to a third party. Often, money and/or property are delivered to the third party, an escrow agent, for holding until certain conditions and events have been fulfilled. An escrow holder takes on several duties, including safeguarding the assets and distributing the funds only after the completion of specific conditions.

Estoppel Certificate
An instrument which itself prevents individuals from later asserting facts different from those contained in the document. Often required by the buyer of a leased property.  The tenant is essentially affirming the lease is in place and that there have been no defaults under its terms. 

Gross Lease
A lease in which the stated rent includes the operating expenses of the building. Same as Fully Serviced Lease. Opposite of Net Lease.  The lease must be carefully reviwed to ensure which items are included.

Net Lease (See also “Triple Net”).
Today this generally indicates a lease in which the stated rent excludes the insurance, utilities, operating expenses and real estate taxes for the building. The tenant is then responsible for the payment of these costs either directly or as additional rent. Opposite of Gross or Fully Serviced Lease.

Operating Expenses
The cost of operating an office building, such as janitorial, management fees, utilities, and similar day to day expenses, as well as taxes, insurance, and a reserve for replacement of items which periodically wear out. Should not include capital expenses such as roof replacement nor expenses associated with the production of income such as leasing commissions and legal fees.

An option is a right given to purchase or lease a property under specified terms within a specified time. If the right is not exercised, the option holder is not subject to liability for damages. If the holder of the option exercises it, the grantor of option must perform the option’s requirements.

Pass Throughs
An increase in operating expenses over the base year amount that is billed to the tenant as additional rent.

Triple Net
A lease requiring the tenant to pay in addition to a fixed rental, the expenses of the property leases, such as taxes, insurance, maintenance, utilities, cleaning etc. The terms “net net”, “net net net”, “triple net”, and other such repetitions are used.

Zoning is a type of land use planning used by local governments in most developed countries.  The word is derived from the practice of designating permitted uses of land based on mapped zones which separate one set of land uses from another. Zoning may be use-based (regulating the uses to which land may be put), or it may regulate building height, lot coverage, and similar characteristics, or some combination of these.