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Glossary of useful terms related to commercial real estate industry

Commercial real estate is far more complex than residential real estate. The contracts are longer, often the price tags are higher, and included in the process are many complex terms that an ordinary person does not understand. Before entering into a commercial real estate deal, make sure you are aware of these terms.

  • CAPITALIZATION RATE (CAP Rate) A Capitalization Rate, also known as a “CAP Rate,” is a term that is used to help determine the potential real estate deal. This term is based off of an algorithm by dividing the net operating income (NOI) by the sales price of the property (the fair market value of the property). Therefore, this result gives you the return rate on your real estate interment. Many real estate investors acquire what the CAP rate is on property before purchasing a commercial real estate lot.
  • USABLE SQUARE FOOTAGE USF, or usable square footage, is the amount of space that is actually available to be used in a commercial real estate rental property. There is a tremendous amount of space that is not useable such as exit hallways, stairways, bathrooms, etc. Therefore, the USF gives you an accurate idea of how much working space you have.
  • RENTABLE SQUARE FOOTAGE RSF, or rentable square footage, is the total amount of space, including any shared space. This footage will give you an accurate expectation of the amount of working space and shared space such as lobbies, bathrooms, hallways, etc. Landlords primarily use this number to determine the rental amount for the commercial property.
  • COMMON AREA MAINTENANCE CAM, or the Common Area Maintenances, is the amount of expenses you are responsible to pay for maintaining the building. Each landlord may calculate this differently; however, you should inquire with the landlord how the CAM has been calculated.
  • RIGHT OF FIRST REFUSAL or ROFR, gives the tenant the ability to accept or decline any additional space that the landlord has available to rent. Therefore, the landlord would be required to offer to the tenant with a ROFR clause included in their lease any additional space before offering that space to the general public.
  • SUBLEASE CLAUSE A sublease clause may or may not be included in the contract. This clause either permits or prohibits a tenant from subleasing their space to another individual or business. A sublease occurs when the tenant rents to someone else only a partial amount of time during the remaining time of the lease. Make sure you know if you are permitted to sublease in case an emergency arises.
  • ASSIGNMENT CLAUSE An assignment clause may prevent or prohibit the tenant from transferring the entire interest away to another person. Unlike sublease clauses which permit a tenant to reassume the space, after subleasing to someone else, the assignment clause transfers all the interest and does not allow the transferor to reassume his or her interest. In an assignment situation, the person who receives the assignment will be responsible for rent until the end of the lease term.
  • ESCSALATION CLAUSE An escalation clause will explain the amount the rent will escalate or increase annually. The increase may be determined based upon the property taxes, operating expenses, or even the Consumer Price Index.
  • ABSOLUTE TRIPLE NET LEASE (Bond Lease) A net lease where the tenant agrees to pay a monthly lump sum base rent as well as the property taxes, the property insurance, and the maintenance. Under an absolute triple net lease there are no legal defenses if a tenant fails to meet his responsibilities.
  • APR Annual Percentage Rate. This is meant to be a way of comparing the cost of credit. It takes into account most of the up-front and on-going costs involved in taking out a mortgage. You cannot always rely on it because lenders work it out in different ways.
  • ASSET BASED FINANCE This is a specialized method of providing structured working capital and term loans that are secured by accounts receivable, inventory, machinery, equipment, and/or property. Maintain a greater level of flexibility than traditional bank financing & unlock vast sums of cash that have been invested in the business infrastructure.
  • ARRANGEMENT FEE A fee you pay to the lender to cover the administration costs of arranging the mortgage. The fees are known as the: • application fee • booking fee • completion fee • draw-down fee
  • BRIDGING LOANS This is an effective vehicle to immediately capitalize on a purchase opportunity. It is a form of short-term financing which is expected to be paid back – generally within the range of 6 to 36 months – once the borrower obtains more permanent, lower cost financing.
  • BUILDINGS INSURANCE This covers the cost of rebuilding or repairing the structure of the property. Lenders insist you have enough buildings insurance before they give you a commercial mortgage. With leasehold properties, it is the freeholder’s responsibility to arrange buildings insurance, although the freeholder will usually pass on the charges to the leaseholder.
  • BUILDINGS & CONTENTS INSURANCE This is combined insurance, which may be cheaper than one policy for buildings insurance and another separate policy for contents insurance.
  • COMMERCIAL MORTGAGE Commercial mortgage Lenders will finance: Shopping centers, industrial buildings, office buildings, Farms, Franchises, Garage Showrooms, Petrol stations, Retail units, Schools & nurseries, Golf courses, Hotels and more.
  • CAPITAL AND INTEREST Your monthly payments are partly to pay the interest on the amount you borrowed and partly to repay the outstanding mortgage. Also known as a repayment mortgage.
  • CAPPED RATE An interest rate charged for a set period of months or years which can go up and down with the variable rate, but there is a maximum (capped) interest rate which it cannot go above.
  • CASHBACK A payment you receive when you take out a mortgage, it may be a fixed amount, or a percentage of the amount of the mortgage.
  • COMPLETION When the sale and purchase of the property are finalised, and you become the owner of the house or commercial property.
  • CONTENTS INSURANCE Insurance cover for your possessions. This may include cover against loss or damage away from the home.
  • CONTRACTS The legal documents under which you and the person selling the property agree to buy and sell the property.
  • CONVEYANCING The legal process involved in buying and selling property.
  • CREDIT SEARCH A credit check the commercial mortgage lender will make with specialist credit checking companies to rate your credit worthiness. If you have any Court Judgments or a record of not paying loans or bills they will appear on a report. You can request this report by paying a charge to these companies.
  • CREDIT SCORING The lender’s way of assessing whether you are a good risk, before they make a decision on providing you with a commercial mortgage.
  • CRITICAL ILLNESS Insurance that generally pays out a lump sum if you are diagnosed with a life-threatening illness or disease.
  • DECREASING TERM ASSURANCE Life assurance that pays out an amount if you die during an agreed period or the term of the policy. The amount of cover reduces each year. So, this makes it ideal to cover repayment mortgages where the amount you owe the lender reduces each year. Decreasing term assurance is usually cheaper than level term assurance.
  • DEPOSIT The amount of money you put towards buying a property. With Commercial Mortgages this will be normally be 70% however in certain cases 100% commercial mortgages are available, they will however require additional security.
  • DISBURSEMENTS A solicitor’s expenses – for example, for stamp duty, Land Registry fees, searches, faxes and so on.
  • DISCOUNT TERM The time that a discounted rate applies to a variable-rate mortgage. This term may be for a guaranteed number of months or years, or it could be until a set date in the future.
  • DISCOUNTED RATE A guaranteed reduction in the standard variable mortgage rate. This often lasts for an agreed period.
  • DOUBLE NET LEASE (NN) A double net lease is a net lease where the tenant agrees to pay a monthly lump sum base rent as well as the property taxes and the property insurance. The landlord is responsible for all other operating expenses of the premises.
  • EQUITY The amount of value in a property that isn’t covered by a mortgage – simply take the amount of the mortgage from the valuation to work out the equity.
  • EQUITY RELEASE You take a new, larger mortgage, or increase a mortgage you already have and use some or all of the extra money you have raised for home improvements, holidays or the deposit on another property.
  • ESTATE AGENCY FEES The amount the estate agent charges the person selling the property. This is usually worked out as a percentage of the sale price, and may be negotiable.
  • EXCHANGE OF CONTRACTS The point where you and the person selling the property sign and swap identical contracts that show the price and what fixtures and fittings are being sold, as well as a date when everything will be finalised. When you exchange contracts the deal becomes legally binding, and if you or the seller pull out before completion, you or they will have to pay compensation to the other side.
  • EXECUTION ONLY The company selling or arranging an investment product like a pension or PEP cannot and does not give any advice on the benefits of the scheme – they simply sell the product.
  • FIXED RATE The interest charged on the commercial mortgage is for a set amount for an agreed period of months or years.
  • FIXTURES Any item that is attached to a property, and so is legally part of the property.
  • FLEXIBLE MORTGAGE A type of mortgage where you can make extra payments and even under payments without paying a charge or penalty. Becoming more popular with commercial mortgage lenders.
  • FREEHOLD This is when you own the property and the land it is on.
  • FREEHOLDER Someone who owns the freehold of the property.
  • GAZUMPING This is when the person selling the property accepts an offer from a potential buyer, and then accepts a new, higher offer from another buyer before exchange of contracts.
  • GAZUNDERING This is when the person selling the property accepts an offer, and then the buyer puts in a new, lower offer just before exchange of contracts.
  • GROSS MONTHLY REPAYMENT The amount you must repay to the lender before tax relief, has been applied to interest charges.
  • GROSS LEASE A property lease in which the tenant pays a gross amount of rent and the landlord agrees to pay all expenses which are normally associated with ownership, such as utilities, repairs, insurance, and (sometimes) taxes.
  • GROUND RENT A fee that a leaseholder has to pay the freeholder every year.
  • LAND REGISTRY The official organisation that keeps records of properties. Transfer of ownership has to be registered with the Land Registry.
  • IFAS Independent Financial Advisers. These advisers can give you information on and recommend investment products (endowments, pensions, PEPs) from the whole range of life assurance and investment companies.
  • INCOME REFERENCES This is confirmation from your employer that you earn the amount you claim in your mortgage application. Accountants may also give confirmation of income if you are self-employed.
  • LEASEHOLD This is when you own the property for a set number of years, after which it goes back to the freeholder.
  • LEASEHOLDER Someone who owns a leasehold property.
  • LOYALTY BONUS These are special schemes if you already have a mortgage, that may provide reduced interest rates or fees, and even services like removals.
  • LTV Loan to value. This is the size of the mortgage as a percentage of the value of the property or the price you are paying for the property.
  • MGI Mortgage guarantee insurance. This is insurance that covers the lender in case your property is repossessed and the lender cannot get back their money.
  • MODIFIED NET LEASE (or Modified Gross) A property lease in which the tenant pays, in addition to the fixed rent, its own utilities, interior maintenance and repairs and insurance. The landlord pays everything else, including real estate property taxes.
  • MORTGAGE A loan to buy a home where you put up the property as security against you paying back the loan.
  • MORTGAGEE The company or organisation which lends you the money under a mortgage.
  • MULTIPLE AGENCY A number of estate agents agree to try to sell the property.
  • MUTUALS Organisations owned by and for the benefit of their members (savers and borrowers), with no outside shareholders. Building societies are mutuals, and so are some insurance and investment companies.
  • NEGATIVE EQUITY This is where the money you owe on the Loan is greater than the value of the property.
  • NET LEASE A property lease in which the tenant pays, in addition to the fixed rent, some or all of the property expenses which normally would be paid by the property owner. These include expenses such as real estate taxes, insurance, maintenance, repairs, utilities and other items.
  • NEW FOR OLD This is insurance cover which will pay the full cost of replacing damaged or lost property with a similar, new item.
  • PERCENTAGE ADVANCE The size of the Loan worked out as a percentage of the price you are paying for the property or valuation.
  • POSSESSION The lenders’ term for repossessing your property.
  • PURCHASER The buyer of the property.
  • REBUILDING COST This is the recommended amount (from your property valuation) that you should take out buildings insurance cover for. This may be higher or lower than the market value of your property.
  • REMORTGAGE A new loan, allows you to release cash and possible reduce the rate you are paying by switching to another lender.
  • REMOVAL EXPENSES The cost of hiring a removal firm. This may depend on the total amount and size of your possessions, the distance traveled, the number of stairs and so on.
  • REPAYMENT Your monthly payments are partly to pay the interest on the amount you borrowed and partly to repay the outstanding loan. Also known as a capital and interest mortgage.
  • REPLACEMENT VALUE This is the cost of buying the same or similar items as new if you have to replace them in the even of a claim.
  • SEARCHES Checks carried out during the conveyancing. These checks are made with local authorities and other official organisations to check planning proposals and other matters that may affect the value of the property, and if it can be sold in the future.
  • SINGLE NET LAESE A single net lease is a net lease where the tenant agrees to pay a monthly lump sum base rent as well as the property taxes. The landlord is responsible for all other operating expenses of the premises.
  • SOLICITOR The person who deals with the conveyancing.
  • STRUCTURAL SURVEY This is the most wide-ranging check of the outside and inside of a property. This is carried out by a professional surveyor, and it should pick up all but the most hidden faults. The structural survey is optional and you must pay the bill, but it provides the greatest protection for the potential buyer in terms of the information it provides. It also gives you cover against negligence by the surveyor.
  • SVR Standard variable rate. The interest rate the lender charges goes up and down, with your interest payments changing accordingly.
  • TIE-IN PERIOD As a condition of a special mortgage deal (discount or fixed rate, for example), you may have to agree to stay with the lender for a period of months or years after the deal has ended. If you move your loan elsewhere during this period, you may have to pay an early redemption charge.
  • TERM The period of years over which you take the mortgage and when you have to repay it.
  • THIRD PARTY BUILDINGS INSURANCE A charge a lender may make if you decide to take buildings insurance from someone other than the lender.
  • TITLE DEEDS Documents to show proof of who owns the freehold and leasehold property.
  • TRANSFER DEED A document that, once you sign it, actually transfers the ownership of the property to you.
  • TRIPLE NET LEASE (NNN) A Triple net lease is a net lease where the tenant agrees to pay a monthly lump sum base rent as well as the property taxes, the property insurance, and the maintenance.
  • VALUATION A commercial valuation of your property in order to find out how much it is worth and whether it is suitable to lend on. This is carried out by a professional surveyor for the lender.
  • VARIABLE RATE The interest rate the lender charges goes up and down, with your interest payments changing accordingly.
  • VENDOR The person or business selling the property.

 

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