Commercial Real Estate Jargon Investors Should Know

Commercial real estate investment is a new territory for many real estate investors. The following is the alphabetical list of most commonly used terms in this area.

Anchored tenants: big brand-name national tenants, e.g. Albertsons, Longs Drug, Walmart that bring in lots of traffic to the shopping center.

CAM: Common Area Maintenance. Associated with CAM is CAM fees. For NNN leases, the term CAM fees refer to the money tenants pay landlord to cover property taxes, insurance and maintenance.

Cap rate: Return of investment in the first year of ownership. Capitalization rate is the ratio of 1st year Net Operating Income over the purchase price. The higher the cap rate, the higher the rental income. For people who invest in the stock market, cap rate is the inverse of P/E ratio.

Cash on cash: annual percentage return of your down payment not including appreciation. First year cash flow divided by your initial down payment.

Conduit loan: also called Commercial Mortgage Backed Securities (CMBS) loan often with the lower rate than traditional commercial loan but either has high pre-payment penalty (called defeasance or Yield Maintenance Penalty) or does not have payoff flexibility.

CPD: Car Per Day or traffic volume on a road.

CPI: Consumer Price Index. It’s often used to calculate annual rental increase to compensate for inflation.

Due Diligence Period: the duration after acceptance normally 15-30 days to allow buyer to investigate about the property. Buyer can cancel the contract during this time for any reasons and get full refund of the deposit.

Estoppel Certificate: a letter provided and signed by tenant confirming the current rent and terms.

Full-service lease: lease in which tenant pays rent that covers everything including utilities.

Gross income: total annual income before any expenses.

Gross lease: lease in which tenants just pay rent. Landlord pays tax, insurance, & maintenance.

GLA: Gross Leaseable Area or total rentable area. This is the space that can be leased and receive rental income. It does not include spaces for utilities room, elevator, etc.

GRM: Gross Rent Multiplier for apartment. Ratio of purchase price over annual income.

LLC: Limited Liabilities Company. A legal entity many investors formed to own commercial properties.

LOI: Letter of Intent/Interest or the normally non-binding offer letter used to make an offer to buy a commercial property.

MAI appraiser: Member Appraisal Institute commercial appraiser.

Master lease: lease signed by the seller to rent the vacant space to provide rent guarantee.

Mixed Use: commercial properties with retail on 1st floor and apartment on upper floors.

Triple Net (NNN) lease: lease in which tenants pay base rent plus property tax, insurance & CAM fees. Absolute NNN lease is NNN lease that tenants also pay property management fee.

NOI: Net Operating Income. Annual income after all expenses (property taxes, ins., & maintenance) except mortgage payment.

Pad: stand alone building in a prime location of a big shopping center.

Pass Thru: see reimbursement.

Percentage lease: lease in which tenant pays base rent plus a percentage of tenant’s revenue.

Phase I Report: inspection report that provides an assessment for soil/environment contamination. It’s normally required by the lender as part of loan approval process for a commercial property.

Phase II Report: inspection report for soil & groundwater subsurface investigation. This inspection is more extensive which involves testing to see if there is any soil and water contamination.

Proforma income: potential, i.e. higher, income when the property is 100% leased.

Proforma Cap rate: potential cap rate assuming property is 100% leased at market rent.

Reimbursement: the share of property tax, insurance & CAM fees that a tenant has to pay the landlord besides the base rent.

Rent guarantee: rent paid by the seller to buyer for vacant spaces until they are leased.

SBA Loan: a government-guaranteed loan for owner-occupied properties.

SNDA: Subordination, Non-disturbance, and Attornment. it’s an agreement required by lender, signed by the tenants agreeing: the new lien in 1st position; lender as landlord in case of foreclosure; lease as valid as long as tenant is not in default.

TIC: Tenants In Common. A way for small/self-directed IRA investors to own a fraction of high-valued properties as tenants in common.