COMMERCIAL REAL ESTATE GLOSSARY

COMMERCIAL REAL ESTATE GLOSSARY

Building Classifications – Commercial buildings are separated into three different classes, depending on quality and desirability.

Cash on Cash Return – This represents a real estate investment’s stability. A high cash on cash return shows that the property is sustainable and can pay for itself in the long-term. It is calculated by dividing the annual pre-tax cash flow by the actual cash invested in the property.

Class A Buildings – The newest and highest quality buildings, they usually have the best locations but are also the most expensive.

Class B Buildings – These buildings are typically a bit older, but are still good quality buildings in good neighborhoods.

Class C Buildings – Class C buildings are older and need updating. They typically have the lowest rents, and are most affordable.

CERCLA – A federal environmental statute, also known as “Superfund,” which regulates the investigation and clean-up process for sites contaminated with hazardous substances. Potential liability under CERCLA is typically examined in a Phase I Environmental Site Assessment.

Common Area Maintenance Fees – Fees paid by tenants to landlords to help cover the costs associated with overhead and operating expenses for common areas in commercial buildings. Common areas include hallways, elevators, parking lots, lobbies, and public bathrooms.

Deed of Trust – A financial lending document, where a piece of property is pledged as security for the loan in a transaction. Deeds of Trust accompany a Promissory Note.

Estoppel Certificates – A certification that neither the tenant nor the seller is in default under the leases and that rent has been paid through a specified date.

Expansion Clauses – A part of a lease agreement, these mechanisms allow the tenant either guaranteed or preferential rights to expand within the building from which they are leasing.

FIRPTA – The Foreign Investment in Real Property Tax Act, which imposes U.S. income tax on foreign persons selling U.S. real estate.

Inspection Period – The time frame before the scheduled closing date where  the buyer should complete its due diligence and thoroughly inspect the property and its surroundings. This important to determine the property’s present condition as well as the economic feasibility of the deal.

Letter of Intent – A short, but formal letter that states the intent to enter into a contractual agreement to lease or purchase a commercial property. It includes the initial offer and initiates the negotiation and due diligence phase of the process.

Mortgage – A type of property financing where a loan is given to purchase real estate, and the collateral used to secure the loan is the real estate itself.

Net Operating Income (NOI) – The NOI is used to determine the property’s worth and to predict what the cash flow might look like. It is calculated by subtracting your expenses from your gross income from the property.

Nonrecourse Loan – These loans favor the borrower. If there is a balance due after selling the asset collateralized with the loan, the lender has to accept the loss. Many traditional mortgages are non-recourse loans.

Option to Purchase – A contract between the Buyer and Seller, which gives the Buyer the option, but not the obligation, to purchase the property. The Option includes an agreed upon price which is good for a specific time frame.

Owner Financing – A transaction where a property’s Seller finances the purchase directly with the person buying it, either in whole or in part. These financing agreements may require higher interest rates than institutional means of financing, but may have lower requirements towards the Buyer’s credit history.

Phase I Environmental Site Assessment – Typically referred to as an ESA, a Phase I Assessment is done to research the current and historical uses of a property in a real estate transaction. It is used to identify actual or potential environmental contamination that may impact the property value or impose liability.

Promissory Note – A financial lending document that contains a written promise by the Borrower to repay the Lender a certain amount of money within a certain time frame. A Promissory Note is typically secured by a Deed of Trust.

Recourse Loan – These loans favor the lender, as they are secured by collateral. If the borrower defaults on the payment schedule, the lender can go after the borrower’s other assets.

Right of First Refusal – A type of expansion clause, this gives the potentially interested party (usually the tenant) the right to by a property before the owner negotiates any other offers.