Your Guide to Understanding Commercial Real Estate Jargon
By The Drotos Ryals Group
If you have ever been amongst a group of Commercial Real Estate Brokers, Investors, Lenders, Developers, or Attorneys it may be as if they are speaking a foreign language. Just as in other professions, a specific jargon is used which includes industry specific terms, acronyms, and lingo. Although this is by no means a comprehensive list, it should provide a non-practitioner some of the most widely used terms so that CRE speak will start to make more sense:
LOI (Letter of Intent): This document is created as a first step in negotiating a Commercial Real Estate purchase or a lease. Due to the fact that most Purchase and Sale Agreements (PSA) and lease documents are lengthy and complicated, the LOI outlines the general terms of the deal. This acts as a basic first layer of negotiation and usually saves time before the formal legal documents are drafted.
Gross Lease: A type of lease that is a set amount that usually includes: Base Rent, Insurance, Property Taxes, and Common Area Maintenance (CAM). A Full Service lease would include all of the above but many times utilities and janitorial as well.
NNN Lease (Triple Net): In a NNN lease a Tenant would pay a set base rent amount plus their pro-rated share of operating expenses. Typically, the base rent amount would be less than a Gross or Full service lease not taking into account the additional rent paid for the NNN’s.
CAM /NNN’s / Pass-thru’s: All 3 of the terms are used interchangeably however they don’t necessarily encompass the same items. In CRE leases many times a Tenant is required to pay their proportionate share of Common Area Maintenance (CAM), Property Taxes, & Insurance. This is typical in retail leases. NNN’s (pronounced triple nets) encompass any expense that is passed through from Landlord to Tenant. This is the same with Pass-thru’s. Many times the term CAM is used to refer to not only Common Area Maintenance but Insurance and Property Taxes as well, which can be a source of confusion.
TI (Tenant Improvements): When a Tenant leases new space, very rarely is the space configured exactly how they need it. The construction and build-out that happens to customize the space is called TI (Tenant Improvements). Many times a Landlord will contribute funds to off-set this cost for a Tenant.
CAP (Capitalization Rate): The ratio of Net Operating Income (NOI) to property asset value or price. This is a rate of return that can be expected from an investment property based on the expected income the property will generate.
COLA (Cost of Living Adjustments) or Rent Escalations: A typical lease clause that requires that a Tenant’s rent go up by some factor periodically. This is usually to keep pace with inflation.
Percentage Rent: A typical clause in a retail/restaurant lease that allows the Landlord to share in the gross profits over a specific breakpoint or threshold in sales. This rewards the Landlord for a Tenant’s success in their property.
ROFR (Right of First Refusal): Contractual right where a Seller/Landlord must give the holder (many times an existing Tenant or adjacent owner in a commercial condominium project) the right to match an offer to purchase or lease, within a specific time frame, at the price and terms that a 3rd party and Seller/Landlord have agreed upon.
Rentable vs. Usable Square Footage: The space that a Tenant leases from the walls in is referred to as usable square footage. Many times in a multi-tenant situation a Tenant will also have to pay for a share of a common area which can include hallways, lobby, bathrooms, breakrooms, etc. The combination of the two is referred to as rentable or leasable square footage.
The following acronyms are industry specific organizations and designations:
CCIM (Certified Commercial Investment Member): A prestigious designation and international organization that recognizes Commercial Real Estate practitioners that have proven track records of success and expertise in the field. Designees complete a comprehensive education requirement along with a portfolio of real transactions to achieve the designation.
SIOR (Society of Industrial & Office Realtors): A prestigious designation and international organization that recognizes the most knowledgeable, experienced, and successful commercial brokers in the areas of Office and Industrial assets.
ULI (Urban Land Institute): An International organization with over 35,000 members that brings together leaders from across the fields of real estate and land use policy to exchange best practices and serve community needs.
NAIOP (Commercial Real Estate Development Association): A North American industry organization that specifically focuses on the development of commercial real estate.
ICSC (International Council of Shopping Centers): An international organization that focuses on retail real estate and advancing the shopping center industry. Members include Brokers, Developers, Engineers, Appraisers etc.