When you work in any industry, you learn the lingo, and you assume everyone else knows the lingo too. But every field has its own set of terms, and commercial real estate is no different. For those who don’t live and breathe commercial real estate every day like I do, it can be hard to understand exactly what everything means. Just like I don’t understand some of the high-level terms doctors and other professionals use, sometimes the people I talk to don’t recognize the words I use regularly.
So, in order to bridge this gap, I’ve put together a list of common terms people ask me about. Understanding what each term means will give you an advantage when you’re speaking to sales reps, financial reps, and other people in the commercial buying process. It will also give you more confidence when you’re investing.
Absorption rate tells you the number of units that were occupied over a period of time (usually a year). Rather than telling you how much space was vacant, absorption tells you the growth in used space.
Short for Capitalization Rate. A Cap Rate is a measure a property’s potential income and value. It can also be used to objectively compare two or more properties. The cap rate is calculated by dividing the net operating income by the purchase price.
Cash flow is the amount of money moving in your investments. This includes cash coming in through different income sources, as well as cash going out due to your expenses.
Physical assets lose value over time, including commercial real estate. Depreciation is the decline in value over time or due to market conditions.
Due diligence is the process of assessing a property, its related documents, and all relevant information before purchasing a property. It’s important to either inspect this information for yourself or have a professional inspect it to be sure you have accurate information about the property. Items may include financial, environmental, and legal considerations.
Net Operating Income (NOI)
Your NOI is one of the most important numbers in commercial real estate. It’s a measure of a property’s profitability. To calculate it, take the total revenue of the property minus all of your operating expenses.
Operating expenses are the costs necessary to run and maintain a building. They can include real estate taxes, property insurance, maintenance expenses, and utilities. Operating expenses don’t include your mortgage or interest payments.
Rate of Return
This is the gain or loss you experience in an investment over a period of time. It’s expressed as a percentage.
Real Estate Investment Trust (REIT)
A REIT is a publicly traded organization that invests in real estate. Investors can purchase certificates of ownership in a trust. The trust then uses the money to invest in commercial property. Individuals have the opportunity to invest their capital in a property, but still have the ability to trade or sell their stake at any time.
Vacancy rate tells you the number of units that were available or unoccupied over a period of time (usually a year). This can help you judge an area you’re interested in investing in.
Zoning is an official designation that states how a piece of land may be used. For example, a business that works with toxic chemicals will need a higher zoning to operate in a specific area.
These are just some of the terms clients have asked me about in recent months. I’m always adding to the list, and I’m more than happy to answer any questions about commercial real estate terminology or options. Please get in touch with me to learn more and ask questions.