Tenancy in Common (TIC) in Commercial Real Estate
Tenancy in common (TIC) is a type of commercial real estate ownership structure in which more than one party owns a specific property. Tenancy in common can make it easier for commercial real estate borrowers to get financing for a property, but can cause a variety of legal and practical complications if property owners are not careful.
Interest-Only Loans in Commercial Real Estate
An interest-only loan is a type of loan in which the borrower only needs to pay the interest, not the principal, for a specific amount of time. This period will typically be laid out in the loan agreement. After the interest-only period of the loan ends, the loan will become a typical, amortizing loan, in which the borrower contributes to both the interest and the principal of the loan with each payment.
Residual Land Value in Commercial Real Estate
Residual land value is a metric that equals the value of the land, after all costs of developing have been subtracted.
Pari Passu in Commercial Real Estate
In commercial real estate, pari passu simply means that two investors, creditors, or assets are on equal footing— that is, without preference to one or the other — particularly in regards to syndication payouts.
SOFR: Secured Overnight Financing Rate in Commercial Real Estate
Most commercial real estate loan interest rates are currently set by using the LIBOR (London Interbank Offered Rate) as a benchmark. LIBOR is calculated by measuring the interest rates at which banks lend to each other (specifically short-term, unsecured lending). However, due to a variety of reasons, banks are set to stop reporting LIBOR rates by the end of 2021, and SOFR (Secured Overnight Financing Rate) is the reference rate that will replace it.
New Markets Tax Credits (NMTC) in Commercial Real Estate
The New Markets Tax Credit (NMTC) is a federal tax incentive program designed to encourage investment in low-income communities. Since congress started allocating credits in 2003, the program has issued approximately $25 billion in tax credits. Specialized investment vehicles called community development entities (CDEs) compete for NMTCs, which are allocated by the U.S. Department of the Treasury. Once a CDE has been allocated NMTCs, they can award investors the tax credits. In order to qualify for NMTCs, a CDE needs to invest or provide loans to a business located in one of approximately 31,000 qualified low-income census tracts.
Opportunity Zones in Commercial Real Estate
Opportunity Zones are economically disadvantaged census tracts across the United States in which investors can gain tax benefits by investing in eligible properties and businesses. Right now, there are 8,700 Qualified Opportunity Zones (QOZs) across the country. To gain the tax benefits of the Opportunity Zones program, an investor must invest in an Opportunity Fund, a special investment vehicle which needs to hold at least 90% of its assets in eligible property or businesses located inside an Opportunity Zone.
Historic Tax Credits (HTC) in Commercial Real Estate
The Historic Tax Credit, or HTC program, is a 20% federal tax credit designed to encourage investors to fund the substantial rehabilitation of historic structures.
Net Effective Rent in Commercial Real Estate
Net effective rent is a calculation of average monthly rental cost that incorporates landlord rental concessions, typically a free month of rent. For example, if an apartment was being advertised with a net effective rent of $1500/month for a 12-month lease with one month of free rent, it might actually have a monthly rent of $1625. However, if you take the entire rent paid over the 13-month period, it actually has an average, or “net effective” rent of $1500/month.
Ground Lease in Commercial Real Estate
A ground lease is a type of long-term lease agreement that allows the tenant to build on and make significant improvements to the leased property. Ground leases usually last between 50-99 years, and generally stipulate that the property and all improvements made during the lease will revert to the landlord after the termination of the lease.
Effective Gross Income in Commercial Real Estate
Effective gross income (EGI), is all the income generated by a property, including rent, tenant reimbursements, and income from sources such as vending machines and laundry machines. It can also be defined as a property’s potential gross income, after expenses such as vacancies and credit costs have been subtracted. EGI is an efficient way to estimate a property’s value and cash flow
Lease Assignment in Commercial Real Estate
A lease assignment occurs when a tenant fully transfers their lease to another party. This is particularly important for tenants who wish to get out of their leases early due to financial issues, especially if a landlord does not allow subleases. In general, the landlord must agree to the lease transfer, and usually records their consent to it via a document called a “license to assign.”
Commercial MLS in Commercial Real Estate
A multiple listing service, or MLS, is a software system used by real estate brokers in order to represent the sellers of properties, search for properties for buyers, and to establish commission rates for other brokers who may help a broker sell a property. There are approximately 900 MLS services in the United States, most of which are intended for residential property brokers in specific local areas. However, there are only a few commercial MLS providers that stand out, including LoopNet, CoStar, CREXi, Brevitas, and ApartmentBuildings.com.
Tenant Reimbursements in Commercial Real Estate
Tenant reimbursements, also known as tenant recoveries, are expenses which are paid back to a landlord by a tenant. Common examples of tenant reimbursements include property taxes, property insurance, maintenance and repair costs, and other operational expenses.
Refinancing Commercial Real Estate Loans
Refinancing commercial real estate can be done for a variety of reasons. In many cases, borrowers get cash out refinances in order to free up capital to make renovations/property improvements, or to invest in other properties. In other situations, borrowers may wish to refinance a commercial property in order to achieve a better interest rate or a longer amortization, which can help them increase monthly cash flow.
Commercial Property Management Fees in Commercial Real Estate
A typical commercial property management fee is anywhere between 4-12% of the rent for a commercial property, though this can vary greatly upon several factors, including the location, size and condition of the property, the amount, type, and quality of tenants, the specific services that the company is expected to perform, and the average property management rates for that area.
Commercial Equity Loans: The Basics
If you need capital to make repairs or renovations to your commercial property, or you’d like additional funds to purchase a new investment property, you may want to take out a commercial equity loan. Commercial equity loans allow you to tap into the equity you’ve built up in a property in order to get cash. These loans are typically offered by banks, but can be offered by private lenders. Commercial equity financing is also ideal for business owners that need additional funds to pay bills or expand their business.
Lease Renewal in Commercial Real Estate
Commercial leases can last as little as a few months, or as long as 20 years or more. In contrast, multifamily apartment leases are typically 12 months, with some leases ranging as long as 24 months. However, before a lease is up, a landlord has the option of allowing a tenant to renew their lease. Whether they want a tenant to renew is up to several factors, including the tenants behavior, as well as individual factors involving the property.
Debt Coverage Ratio in Commercial Real Estate
Debt Coverage Ratio (DCR), is a measurement of a property’s net operating income divided by its debt service. A property’s Debt Coverage Ratio, which is also known as its Debt Service Coverage Ratio (DSCR), is one of the most important eligibility factors for Commercial Real Estate Loans Keep in mind that net operating income can be calculated by subtracting a property’s gross revenue by its operating expenses. DCR/DSCR can also be applied to an entire company, as well as a single property, which is more relevant in the case of owner-occupied commercial properties.
Earnest Money in Commercial Real Estate
Earnest money is a deposit made to the seller of a commercial property in order to demonstrate the buyer’s intention to purchase the property.
Commercial Equity Lines of Credit in Commercial Real Estate
Commercial equity lines of credit, also known as CELOCs, involve a commercial real estate owner being given a line of credit that allows them to borrower against the equity in their property. Commercial equity lines of credit can be used for a variety of purposes, including growing your business by hiring new employees, obtaining new inventory, financing property improvements, or even purchasing a new piece of real estate. CELOCs are much like the home equity lines of credit (HELOCs) found in residential real estate.
Subletting in Commercial Real Estate
A sublease, or sublet, occurs when a tenant assigns part or all of their lease to a new tenant. In general, most commercial leases permit subletting, but not all do. Many commercial landlords will charge a fee for subletting in order to compensate for the additional risks and hassles that may occur due to dealing with an additional tenant.
Loan Seasoning in Commercial Real Estate
In commercial real estate finance, seasoning refers to the amount of time that a borrower has held a specific loan. Therefore, a seasoned loan is a one that has been held for a certain period of time. Many types of loans, including HUD multifamily loans and Fannie Mae/Freddie Mac multifamily loans have specific loan seasoning rules, especially when it comes to refinancing. In addition, most commercial and multifamily lenders will not let you take out a commercial equity line of credit unless your loan has been seasoned for at least one year.
Return on Investment in Commercial Real Estate
In commercial real estate, return on investment (also known as ROI), is a measurement of how much money an investor receives from an investment after all expenses have been deducted. The formula for ROI is ROI = (Investment Gain - Investment Cost)/Cost of Investment.
Investment Variables in Commercial Real Estate
When it comes to making a decision on whether to invest in a commercial property, there are a variety of variables that an investor can take into account. First and foremost, in many cases, is return on investment, which calculates the amount of money that a investor will make compared to the amount of money they’ve invested into the property, minus any expenses. Other variables include the safety of an investment property, a property’s development potential, the property’s location, and an individual investor’s financial instincts.
Appraisals in Commercial Real Estate
An appraisal is a professional estimation of the market value of a property, which needs to be conducted by a certified appraiser in the area which the property is located. In most cases, commercial real estate lenders require an appraisal before they approve a borrower for a loan.
1031 Exchanges in Commercial Real Estate
When an investor or developer sells a commercial property, they'll usually have to pay taxes then and there-- but not always. An IRS 1031 exchange is a transaction that allows a commercial property seller to defer paying taxes on the sale of the property if they use the funds to buy another, similar property within a specific period of time.
Waterfall and Promote Structures in Commercial Real Estate
A waterfall and promote structure, also known as a waterfall model, is a method for distributing the profits from a real estate investment in an uneven way. Typically, the project's sponsor (the individual or group putting most of the work in to identify, acquire, and manage the property) will receive a disproportionate share of the profits, known as a promote, as long as the project hits certain profitability benchmarks.
RevPar: Revenue Per Available Room in Commercial Real Estate
RevPar, or revenue per available room, is a measure of a hotel's financial performance, which can be calculated by dividing a hotel's total room revenue by the amount of available rooms. Another easy way to calculate RevPar is to multiply a hotel property's ADR (average daily rate) by its occupancy rate.
Floor Plate in Commercial Real Estate
In commercial real estate, the floor plate is the amount of leasable square footage on an individual floor of a building.
Break-even Ratio in Commercial Real Estate
The break-even ratio for a property is the percentage of its gross operating income that the property needs to break even, i.e. for costs to equal expenses. Investors can use a property's break-even ratio to determine if it's a good investment; too high of a break-even ratio may be a red flag. Break-even ratio can be calculated using the formula below: Debt Service + Operating Expenses/Gross Operating Income = Break-even Ratio
Restrictive Covenants in Commercial Real Estate
Restrictive covenants are restrictions placed on the use of a property. In commercial real estate, restrictive covenants may be placed on a property by a lender, restricting the activity of the owner while a loan is being repaid, or, by an owner, restricting the activity of tenants. In addition, restrictive covenants can also be written into a property's deed, either for a certain number of years or indefinitely.
Power Centers in Commercial Real Estate
A power center is an outdoor shopping center with multiple big-box retailers, as well as an array of smaller retailers, restaurants, and other kinds of businesses. Power centers are typically located in suburban areas due to cost and space restrictions, but can sometimes be located in urban areas as well. Many power centers are set up as large strip centers, but also may contain several out-parcels, pieces of land intended for individual tenants, such as banks or fast-food chains.
Operating Expense Ratio in Commercial Real Estate
An operating expense ratio, or OER, sometimes simply known as an expense ratio, is a metric comparing a property's operating expenses to the amount of income it generates. To determine a property's operating expense ratio, you can use the formula below: Operating Expenses/Gross Operating Income = Operating Expense Ratio For example, a building with operating expenses of $40,000 a year that brings in $100,000 of gross income would have a 40% OER.
Clear Height in Commercial Real Estate
In industrial real estate, a property's clear height is the height to which product can safely be stored on racking. Clear height can also be defined as the height of a building from the floor to the bottom of the lowest hanging item on the ceiling (i.e. sprinklers, lights, etc.). In recent years, clear height has become much more important due to the increase in online retailers, many of whom are trying to increase warehouse efficiency in any way possible.
Amortization in Commercial Real Estate
Amortization is the process of spreading a loan into payments that consist of both principal and interest over a set timeline, called an amortization schedule.
Anchor Tenants in Commercial Real Estate
An anchor tenant is the largest or most prominent store in a retail commercial real estate development, intended to help draw customers into the area. In strip centers and power centers, anchor tenants are often big-box stores or grocery stores, while in shopping malls, they're more likely to be department stores.
Prepayment Penalties in Commercial Real Estate
In commercial real estate loans, a prepayment penalty is a fee charged to borrower if they attempt to repay their loan early. When a lender issues a loan, they typically want to lock in their profit for a certain amount of time, so the prepayment penalty is a way to compensate them for their financial loss if the loan is paid off early.
Equity Multiple in Commercial Real Estate
The equity multiple is one of the most important and effective financial metrics used in commercial real estate. An equity multiple is designed to compare the cash that an investor has put into an investment to the amount of cash that the investment has generated over a specific period of time.
Discounted Cash Flow Analysis in Commercial Real Estate
Discounted Cash Flow Analysis, or DCF analysis, is a method used to determine the current value of a set of cash flows using a predetermined discount rate. In practice, DCF analysis is often used to compare the potential return from a commercial real estate investment to the estimated return from another investment, such as a stock, mutual fund, private equity investment, or another piece of commercial real estate.
Assumable Loans in Commercial Real Estate
In commercial real estate, an assumable loan is a loan that can be taken over by a buyer when the owner of the property sells. Determining whether or not a loan is assumable (and under what conditions it can be assumed by a new buyer) can be very important, since otherwise, an owner/investor could face significant prepayment penalties if they need to pay off the loan in order to sell the property.
Load Factor in Commercial Real Estate
A load factor, also known as a loss factor, is a metric that compares the amount of space a tenant has to pay for in a commercial lease, versus the amount of space they can actually use.
The 1% and 2% Rules in Commercial Real Estate
The 1% rule states that a property's monthly rent must be at least 1% of its purchase price in order for the owner to break even. The 2% rule states that a property's monthly rent needs to be at least 2% of its purchase price in order for the owner to make a sustainable profit.
Occupancy Rate in Commercial Real Estate
Occupancy rate is an important metric for temporary housing, and can be measured by dividing the number of occupied units by the number of available units.
Multifamily Property Classes in Commercial Real Estate
Much like office properties are classified by quality as either "A", "B", or "C" properties, multifamily properties such as apartments can also be classified this way. However, unlike office buildings, multifamily properties are often classified from "A" through "D."
ARV: After Repair Value in Commercial Real Estate
If you're an investor or developer interested in purchasing and rehabilitating distressed commercial property, after repair value, or ARV, is one metric you should know. The after repair value of a property is simply the property's market value after any repairs, renovations, or improvements have taken place.
CTL: Credit Tenant Leases in Commercial Real Estate
A credit tenant lease (CTL) is a form of commercial real estate financing in which a loan is given for a property with a long-term lease (usually 10+ years), typically held by a nationally recognized tenant with a high credit rating.
Parking Ratio in Commercial Real Estate
A parking ratio is a statistic that takes the number of available parking spaces in commercial property and divides it by the property's entire gross leasable area (GLA).
Expense Stops in Commercial Real Estate
In a full service gross lease, the tenant pays a base rental rate, and landlord is typically responsible for paying any additional expenses (such as CAM fees), except for those that go above a specific amount, called an expense stop. Any expenses that exceed the expense stop then become the responsibility of the tenant.
FAR: Floor Area Ratio in Commercial Real Estate
This metric, particularly important for developers, is the ratio of a building's size compared to the land, and many zoning commissions place limitations on how high a FAR can be for a project.
Breakeven Occupancy in Commercial Real Estate
Breakeven occupancy is the occupancy at which a commercial real estate property goes from having an operating deficit to an operating surplus. It can also be defined as the point at which effective gross income (EGI), equals operating expenditures (OpEx) and debt service. If a property is exactly at breakeven occupancy, it's DSCR will be exactly 1.00.
ADR: Average Daily Rate in Commercial Real Estate
Average Daily Rate, or ADR, is one of the most important metrics that hotels use in order to determine the income and profitability of a property. ADR can be determined by dividing the entire rental income for a day by the number of occupied rooms on a property. For example, if a hotel made $50,000 in one day, as a result of 100 rooms being rented, their ADR for that day would be $500.
LURA: Land Use Restrictive Agreements in Commercial Real Estate
In certain multifamily real estate projects, an owner/developer will give up some of their rights via a Land Use Restrictive Agreement, or LURA, in order to receive tax credits in the future. The LURA will specifically document the restrictions placed upon the property, and typically help guarantee that the project will receive a specific number of LIHTC credits over a specific time period.
LIHTC: Low Income Housing Tax Credits in Commercial Real Estate
Low Income Housing Tax Credits, or LIHTC credits, are federal tax credits designed to encourage private businesses to invest in affordable housing. LIHTCs apply to multifamily apartment developments and eligible mixed-use commercial projects.
GRM: Gross Rent Multiplier in Commercial Real Estate
When it comes to determining whether a commercial or multifamily real estate project is a good investment, there are a variety of methods you can use-- and one of the most effective is to use a project's gross rent multiplier, or GRM, in order to help calculate the value of the property. A gross rent multiplier is defined as the number of years a property would take to pay for itself in gross rent--i.e. not taking into account insurance, property taxes, utilities, and other expenses.)
Sale Leaseback in Commercial Real Estate
In commercial real estate, a sale leaseback is a transaction in which one party sells a piece of real estate, and then leases that real estate back from the new owner, usually under a pre-arranged contract. Sale leasebacks can be especially helpful for business owners who are holding onto expensive retail or office property, but have cash flow problems or need equity to expand their business.
PSF: Per Square Foot in Commercial Real Estate
PSF, or per square foot, is the way that many commercial real estate rental and sale transactions are calculated. Most commercial leases are set at a specific PSF rate.
Percentage Leases in Commercial Real Estate
In commercial real estate, a percentage lease is a form of lease that requires a tenant to pay a percentage of their revenues in addition to a base rent, which will usually be calculated per square foot (PSF). Percentage lease arrangements are often open to significant negotiations before signing, since tenants and landlords may have different financial needs.
NPV: Net Present Value in Commercial Real Estate
Net present value, or NPV, is a financial metric that can help commercial real estate investors determine whether they're getting a certain return-- a 'target yield,' given the amount of their initial investment. Using the NPV equation, you can take a building's current net cash flows and your required rate of return, and determine what a building's value is to you, the investor, right now.
GLA: Gross Leasable Area in Commercial Real Estate
Gross leasable area (GLA) is the amount of space in a commercial building that can be rented by a tenant, including basements, mezzanines, or upper floors.
GSF: Gross Square Feet in Commercial Real Estate
Gross square feet, or GSF, is the entire square footage of a building. GSF typically includes areas such as the building core, maintenance and operations areas, stairwells, elevator shafts, equipment areas, attics, garages, balconies, excavated basement areas, mezzanines, corridors and walkways.
Class A, B, and C Office Buildings in Commercial Real Estate
Explore the different office asset classes and how properties are classified into each category.
S&U: Sources and Uses in Commercial Real Estate
A S&U, or sources and uses statement, is a document that shows where the funding for a commercial real estate project is coming from-- and how that capital is used. For S&U statements, the combined sources of funds needs to exactly match the combined uses of funds.
TTM: Trailing Twelve Months in Commercial Real Estate
TTM, or trailing twelve months, is measurement of a project's financial data for the last 12 months. TTM figures do not always represent the last fiscal year, though they might-- it is simply a snapshot of the last 12 months of financial activity. Taking a look at an existing commercial real estate project's TTM, as well as its rent roll, can be some of the best ways to determine the property's potential profitability.
T3: Trailing Three Months in Commercial Real Estate
T3, or trailing three months, is measurement of a commercial real estate project's finances for the last 3 months. T3 can be a great tool for investors, since it can help look at a project's most recent profitability, especially if rents or occupancy numbers have recently changed.
RR: Rent Rolls in Commercial Real Estate
A rent roll is a list of a property’s current tenants and how much they pay in rent. In practice, a rent roll is perhaps the best way to determine the true income of an existing commercial property.
R&M: Repairs and Maintenance in Commercial Real Estate
R&M, or repairs and maintenance, refers to work done on a commercial property that is designed simply to maintain the property’s current condition. This includes work done to prevent the further deterioration of building component or system or to replace a building component at the end of its useful life.
GPR: Gross Potential Rent in Commercial Real Estate
GPR, or gross potential rent, is the maximum amount of rent money an owner or investor can expect to make from a property during a specific time period. Gross potential rent assumes 100% occupancy, so it can be calculated by taking by adding together the market rent of every unit in a project.
FNMA: Fannie Mae Mortgage Association in Commercial Real Estate
FNMA, or Fannie Mae Mortgage Association, is a U.S. government sponsored enterprise that focuses on expanding housing opportunities across the United States. To do so, it purchases residential mortgages from lenders and securitizes, or pools them, into mortgage-backed securities. While Fannie Mae does not offer direct commercial real estate loans, investors can rent a certain amount of commercial space if they use an FNMA loan to purchase a multifamily property.
BPO/BOV: Broker Price Opinions in Commercial Real Estate
A BPO, or broker price opinion, also known as a BOV, or broker opinion of value, is an estimate provided by a real estate broker to help a potential investor get a better idea of how much they should bid for a property. A BPO/BOV is not held to the same standard as an appraisal, but it is typically much faster and much less expensive.
CMBS: Commercial Mortgage Backed Securities in Commercial Real Estate
A Commercial Mortgage Backed Security (CMBS) loan is a fixed income security backed by a commercial mortgage. These loans are for commercial property such as malls, apartments, office buildings and factories.