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Key Commercial Real Estate Terms – FAQs

1. What is Net Operating Income (NOI)?
NOI is the total income a property generates after operating expenses, excluding financing costs and taxes.
2. What is Cap Rate?
Capitalization Rate is a measure used to calculate the return on investment, determined by dividing NOI by the property’s current market value.
3. What is Cash on Cash Return?
This is the cash income earned on the cash invested in a property, calculated as cash income divided by the amount of cash invested.
4. What is Gross Rent Multiplier (GRM)?
GRM is a property’s market value divided by its annual gross rental income, used to compare properties and assess value.
5. What is Building Class?
Properties are classified into Class A, B, or C based on location, age, and condition, indicating quality and investment potential.
6. What is Leasehold Improvement?
Improvements made to rental premises by or for a tenant. Also known as tenant improvements (TI).
7. What is a Triple Net Lease (NNN)?
A lease agreement where the tenant agrees to pay all operating expenses, including property taxes, insurance, and maintenance.
8. What is Vacancy Rate?
The percentage of all available units in a rental property that are vacant or unoccupied at a given time.
9. What is Absorption?
The rate at which rentable space is filled. Negative absorption indicates more space becoming vacant.
10. What is Due Diligence?
A comprehensive appraisal of a property to evaluate its commercial potential, including legal, financial, and physical conditions.
11. What is a Mezzanine Loan?
A secondary loan that fills the gap between the primary loan and the total amount needed. It is often secured by the stock of the company owning the property, not the real estate itself.
12. What is an Anchor Tenant?
A large, well-known commercial tenant that serves as the main draw to a property, often in retail spaces.
13. What is Escalation Clause?
A clause in a lease that allows the landlord to increase rent at set future dates or based on specified conditions.
14. What is a Full Service Lease?
A lease in which the landlord pays for all the building’s operating expenses, including utilities, property management fees, and maintenance.
15. What is a Ground Lease?
A long-term lease of land on which the tenant can build a property. The tenant owns the buildings but not the land.

RealLaunch Tip of the Week:

Find hidden zoning potentials

Flip the script on commercial real estate investing: Consider properties with ‘hidden’ zoning potentials. Uncover sites zoned for multiple uses or those due for rezoning. This foresight can turn an average investment into a goldmine by anticipating future community developments and market shifts.


  1. Local Government Websites: Most city or county websites have zoning maps and regulations.
  2. Planning Department: Visit or call your local planning department for insights on current zoning and potential changes.
  3. Real Estate Agents: Experienced local agents often have knowledge about zoning and future developments.
  4. Public Hearings: Attend city council or planning commission meetings where rezoning and development plans are discussed.
  5. Online Databases: Websites like LoopNet or CityFeet provide zoning information on specific properties.
  6. Networking: Connect with local developers, investors, and land use attorneys who stay informed about zoning changes.

Valuation Calculator Plugin


Download the PRO Version to use the advanced Full Analysis button features. This extends your user to a full commercial real estate valuation analysis.

Use shortcode [crevc-calculator] to insert calculator to your page or post.

Shortcode Options:

• downpayment=15 (Example: 15%)
• price=1500000 (Example: $1,500,000)
• rate=3.5 (Example: 3.5%)
• term=15 (Example: 15 years)
• noi=60000 (Example: $60,000)
• fullanalysis_labeltext=’Do Full Analysis’
• fullanalysis_buttonbg=’#34CE57′
• fullanalysis_buttontext_color=’#ffffff’
• valuation_bgcolor=’#E6F0FA’
• valuation_textcolor=’#000000′

Example: [crevc-calculator price=1500000 rate=3.5]

Browse to Settings > Valuation Calculator in your WP-Admin area to modify the default settings for the calculator.


Valuation Calculator

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Reputation Management Tool

RealLaunch is launching a new Reputation Management Tool. As a broker, you need more Google Reviews and social media reviews to stay ahead of the competition. If you search “bellingham realtors”, for example, you will often see Google promoting the highest reviewed brokers and realtors. We can help you be at the top of the list!

Submit your info below and we will get you started.

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Seven Traits to Look for in a Real Estate Broker

I’ve been involved in commercial real estate for more than 25 years. Since then, I’ve come to understand what works and what doesn’t when it comes to the relationship between a client and their broker. I put together a list of 7 key traits for brokers to strive for, developed from my many years of experience in the field.

1. Brush up on your communication skills.

Communication is key to any successful relationship. It may seem simple, but it’s crucial to maintaining trust with a client.

If you’re a commercial broker, you need to be in contact with your clients on a regular basis.

Update your clients on new investment opportunities; be clear about what you are going to do once you take on the property as a listing; and inform your clients about the marketplace.

If you’re leasing a property for your client, generate a weekly report detailing activity, even if there is none. Don’t be afraid to explain why an office building, for example, leased in a certain market and not the one you’re representing. These conversations build trust and hold you, the broker, accountable.

The door should always be open.

2. Maintain professionalism at all times.

Sure, this may seem pretty straightforward, but putting it in practice is a different story.

As a broker, you should constantly be willing to learn. Be ready to go the extra mile.

I, for example, am certified with the Certified Commercial Investment Member Institute (CCIM) — only one percent of brokers hold that designation. It makes me stand out and gives me the skills to provide a unique and improved service to my clients.

Commit yourself to excellence and hold yourself to a higher standard. Do something that adds value to the client experience.

3. Be knowledgeable and prepared to answer questions.

commerical real estate broker notes

Are you prepared to answer client questions? Do you understand the intricacies of the market? Are you capable of advising your client to achieve the best outcome?

These are all questions you should be replying to with a resounding “yes.”
Being knowledgeable is essential. My CCIM training, for example, taught me how to define a cap rate, calculate a ten-year cash flow analysis and internal rate of return. If you’re able to answer those questions, you have an edge.

More specifically to you, be prepared to tell clients how many properties you sold in the last year, your total dollar volume and other details related to your professional experience and accomplishments. If you specialize in a specific asset class, tell investors.

Understanding the industry and having a specialty is key.

4. Always be honest.

Being transparent with clients has been at the forefront of my business practice for years. Breaching ethical standards to turn a profit or make a deal should simply be off the table at all times.

Even if you make a mistake, be honest with your clients. It’s your responsibility to build a trusting relationship so apologize for your mistakes and make it right. Don’t make up a story.

Client’s appreciate a broker that strives to maintain a high level of integrity at all times.

5. Don’t forget to be tenacious.

Do you prefer to work from 8 a.m to 5 p.m. or do you like to get out and knock on doors? Going the extra mile makes all the difference.

Half of my sales come from properties that aren’t even listed — I’ve sold everything from a movie theatre all the way to a hotel on properties that weren’t listed.

As a broker, it’s your job to stir up deals. Inform the public about the market and make moves.

6. Entrepreneurship opens doors.


A mere 8 percent of brokers own a property outside of their own home. That means more than 90 percent of brokers don’t own an investment property. Run the numbers.

If you’re going to do business and encourage investment, you should know how to answer client questions from experience. That’s why I’ve invested in commercial real estate for years.

Not only has it generated tremendous opportunity for me, but it’s provided me with a unique insight that I can bring to clients. I know what it’s like to be a landlord. I’ve been in those situations and I can tell clients how I handled it on my own.

Being an entrepreneur demonstrates self-motivation and goes a long way in business.

7. Persevere when times are tough.

Transactions that take months to finalize are one of the most challenging aspects about being a broker, but you’ve got to stick with it.

Face it, commercial transactions take time. You have to communicate with your client throughout the process, even if it takes months. Remain up to date on the information and send your client progress reports. You’ll need to continue providing assurance to your client and others involved throughout the process, despite how long it takes.

To counter that, know when it’s time to cut your losses. It’s acceptable to identify that a transaction is not working. Inform your client and choose what’s best.

Learn to persevere and you’ll be successful in the long run.

The 5 Types of Commercial Real Estate

To help manage the colossal scope of their industry, commercial brokers and investors have split it into five types of commercial real estate. Below, I’ll talk about what these different categories include and what to look for when investing in them.


office types of commercial real estate

Office buildings range in size from the small suburban office parks to the towering skyscrapers in downtown New York City. To help differentiate between them, the category is broken down further into Class A, Class B and Class C buildings.

Class A is the premiere, cream-of-the-crop office building. They usually include high quality designs, a coveted location and above-average rent.

Class B is the average, everyday office building. They compete for a wide range of tenants and have a reasonable rent for the market.

Finally, Class C buildings are beginning to show their wear. They offer functional, if outdated, workspaces at below average rents.

Office real estate is influenced by factors like the local economy and the region’s industry focus – financial and technology companies demand a lot of space. The leasing companies may require special clauses in their contracts like the right to contiguous space.


industrial types of commercial real estate

Industrial buildings are usually located outside of urban areas and along transportation routes. They are separated into four different classes: heavy manufacturing, light assembly, bulk warehouses, and flex industrial (a mix of industrial and office spaces.)

Manufacturing buildings are often outfitted specifically to a single tenant and may require extensive remodeling if a new one moves in. Warehouse are more generic and can be filled fairly quickly should your current tenant move out. Industrial buildings tend to have long leases meaning, over time, rent may fall behind the market.


retail types of commercial real estate

Retail is a huge category that includes buildings like malls, shopping centers, restaurants, big box stores and more.

Before purchasing retail real estate, it’s important to consider its location and the state of the local economy. Both of these will play a big role in the success of your investment. As with industrial buildings, retail spaces generally have long leases that may fall behind current market rent prices, and new tenants may require extensive remodeling to keep with their brand identity.


multifamily types of commercial real estate

Formally considered residential real estate, apartments of all sizes are now considered types of commercial real estate due to growing urbanization.

MultiFamily units are considered one of the safer bets in commercial real estate investment. A single vacancy in large buildings is unlikely to have a heavy effect on income and leases are short enough (1 -2 years) that you can react quickly to changing market prices for rent.

Special Purpose

motel types of commercial real estate

Finally, special purpose buildings are the last of the types of commercial real estate and include everything else not mentioned above. Amusement parks, hospitals, storage units, hotels and more all fall into this category, and each type requires a unique approach.

What Expenses Can a Triple Net (NNN) Lease Cover?

As one of the most preferred lease structures used on the commercial market today, a Triple Net (NNN), or net-net-net, lease is known to ease the financial burden on investors by allocating property ownership expenses to tenants, or lessees.

Triple Net Lease:

sign a commercial lease pen

Investors flock to the Triple Net Lease option for its ability to provide low-risk and long-term returns on often large commercial spaces that are utilized by a small number of tenants. A standard Triple Net Lease requires the tenant to pay base rent plus the cost of covering Common Area Maintenance (CAM), real estate taxes and insurance.

With this lease structure, landlords are off the hook for covering expenses that often result from property ownership. If you apply the concept to a commercial property that’s split between three tenants that generate an estimated $20,000 worth of maintenance per year, or $1,667 per month, cost to each tenant would be $556 to the tenant per month, for example.

Today, property owners have a variety of options to choose from when it comes to developing a leasing structure. A Double Net (NN) Lease, for example, requires the tenant to pay base rent, property taxes and insurance while a Single Net (N) Lease, requires the tenant to pay base rent plus property taxes. Finally, a Gross Net Lease, leaves all variable property expenses to the property owner.

While the Triple Net Lease option is preferable to many, it’s not always easy to identify how the three major components – including maintenance, tax and insurance costs – come together.


When it comes to paying insurance, always know that it’s going to benefit both you and the tenant, so a good policy is worth paying for. Commercial General Liability (CGL) coverage in addition to property and casualty insurance, among other things, are all common expenses that are issued to a tenant in a Triple Net Lease.

If you require tenants to carry insurance, consider who will pay for deductibles and uninsured damage as well. Additionally, while Triple Net Leases allow you to sign off on the cost of insurance, be prepared if a tenant falls through on a payment or chooses not to file a claim.

Property Tax:

triple net lease

Like insurance, identifying who’s responsible for paying property tax is pretty straightforward when composing a Triple Net Lease. With a property tax, realize that the cost of appraisals can go up yearly, resulting in larger tax bills for the tenant. Get involved and contest the appraisal if you see fit – if your tenant chooses to vacate down the road, the tax burden will be left on you.


Finally, when it comes to allocating responsibility for Common Area Maintenance (CAM), know what all can go into the upkeep of a property. Consider the maintenance of lobbies, elevators and garages as well as heating and cooling expenses. Cost of security services, inspection fees, landscaping, broker fees, advertising and more can also be included under this category.
With so many items to choose from, it’s important to do your due diligence as an investor.

What is Internal Rate of Return (IRR)?

In commercial real estate, it’s smart to think ahead and keep a close eye on the numbers.

As a commercial broker with more than two decades in the ring, I’ve continued to rely on a variety of metrics, including Internal Rate of Return, or IRR, to ensure my investments are sound.

IRR stands strong in its ability to identify the value of an investment over time. In essence, it quantifies the yield you’ll achieve after you invest in a property after an approximate ten year period — a metric used based on the average holding period of about seven to ten years.

The calculation accounts for the income generated by the property with expenses, or the Net Operating Income (NOI), and assumes you’ll sell the property based on future income on the tenth year.

calculating IRR

To calculate the IRR, you’ll need to identify expected cash flows for each year, accounting for outflows in the first year. To calculate cash flows, or the Effective Gross Income (EGI), you must subtract potential gross income from vacancy rates and identify your NOI.

Once you’ve identified assumed income achieved for each year, you should be able to see a steady growth. Ultimately, you should achieve an approximate 1 to 5 percent assumed growth rate per year.

Now that you have calculated the expected NOI through year 10, you are in the green to select a capitalization rate, or a cap rate, which is the ratio between NOI and the property’s asset value. You’ll want to make the selection for year 11, when you plan to sell the property.

Often, I’ll set the cap rate to about .5 percent higher than the rate in which I purchased the property — so if I purchased the property at a cap rate of 6, I’ll use a 6.5 rate in year 10 and cap the year 11 income to produce reversionary value.

IRR spreadsheet

Software programs like Excel do wonders in making IRR calculations a cinch. Often, IRR’s sit around 15 percent, however they can get higher if you’re refinancing a property or are involved in a development.

So, if you’re an investor looking to gauge the profitability of a future commercial real estate deal, I’d recommend taking a look at IRR.

Commercial Real Estate News for Wednesday, April 19

Good morning, investors. In today’s commercial real estate news—Sin City keeps growing, a collection of creative office spaces with jaw-dropping price tags, and PetSmart puts a collar around its largest online competitor.

Investors Cash Chips in Las Vegas

Investors in Las Vegas hit the jackpot last year with a confident economy and a demand for rentals. The mining, logging and construction and the leisure and hospitality sectors all saw growth in 2016.

The Five Creative Office Projects That Fetched the Highest Prices

A short gallery of five creative office spaces that fetched “staggering” returns for their investors. In the last several years, the category has gone from a niche, to a formidable player in the commercial real estate market.

PetSmart Offers to Buy the Company that’s Eating its Lunch Online

The transfer from brick-and-mortar to digital continues. PetSmart has acquired Chewy, a pet supply web-only retailer founded in 2011 that’s grown rapidly in the pet sector. The deal is one of the largest in e-commerce history with an alleged price tag of 3.35 billion.

Commercial Real Estate News for Tuesday, April 18

Good morning, investors. In today’s commercial real estate news—the apartment vacancy rates are hovering around 4.3%, banks are scaling back on their lending, and the time for investing in medical buildings may be over.

Apartment Vacancy Rate “Wobbling,” But Not Rising

People are filling apartments as fast as they’re being built. Vacancy rates hover around 4.3%, similar to what it’s been the last few quarters.

Banks are Suddenly Scaling Back Lending, and Wall Street isn’t Sure What to Make of it

As of last week, banks had not increased lending to commercial and industrial developers for six months, the longest stretch of time since the recession. Consumer loans have also fallen, especially in the auto sector. So far, there’s no consensus on what this all means for the economy.

Past Peak: The Market for MOBs Is Slowing Down Amid Uncertainty

 With the Affordable Care Act sitting indefinitely on the chopping block, many investors are beginning to question whether they should pull out of their medical building investments. While domestic investors move away from MOBs, foreign investors are moving toward senior housing.