Commercial Real Estate Terms to Know in 2024
Like any industry, Commercial Real Estate (CRE) has its fair share of terminology. We've created this cheat-sheet for you that includes some of the more common CRE terms.
Triple Net (NNN):
Triple Net, often abbreviated as NNN, refers to a lease agreement in Commercial Real Estate where tenants are responsible for paying property taxes, insurance, and maintenance costs in addition to rent. This type of lease shifts the financial responsibilities from the landlord to the tenant.
CAM Fees:
CAM fees, or Common Area Maintenance fees, include the costs of operating a commercial property. These fees include maintenance of shared areas: hallways, elevators, stairways, lobbies, public restrooms, parking lots, sidewalks, etc. CAM fees can be a component in NNN lease terms.
Land Contract:
A land contract, also known as a Contract for Deed or Installment Contract, is a real estate agreement where the buyer makes payments directly to the seller over time, usually with interest, until the full purchase price is paid.
1031 Exchange:
A 1031 Exchange, named after Section 1031 of the Internal Revenue Code, allows real estate investors to defer paying Capital Gains taxes on the sale of investment properties by reinvesting the proceeds into a like-kind property within a defined timeframe.
Seller Financing:
Seller financing, also known as owner financing, occurs when the seller of a property provides financing to the buyer, allowing them to purchase the property without obtaining a traditional mortgage from a bank or financial institution. The buyer makes payments directly to the seller over time, typically with interest. A Land Contract is a form of Seller Financing.
Cap Rate:
Cap Rate, short for capitalization rate, is a key metric used in CRE to evaluate the Return-on Investment (ROI) of a property. It is calculated by dividing the property's Net Operating Income (NOI) by its current market value or purchase price. Cap rates help investors assess the profitability and risk associated with a property investment.
Personal Guarantee:
A personal guarantee is a legal agreement where an individual (usually the property owner or a business owner) agrees to be personally liable for a CRE loan or lease obligation. By signing a personal guarantee, the individual pledges their personal assets as collateral, making them personally responsible for fulfilling the terms of the agreement in case of default.
LOI:
A Letter of Intent is used in Commercial Real Estate to put the major points of a proposed purchase or lease into writing. It can be used to outline some of the basic, fundamental terms of an agreement before negotiating and finalizing all the fine points and details and typically is a non-legally binding document.
Option to Renew:
The right of a tenant to extend the lease term for a specified period of time at a predefined rental rate. In many instances, the rate is defined as a percentage of market rent, and in other instances, the rate is a specified dollar amount.
