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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.