Top 10 Common Commercial Real Estate Terms

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Before you start investing in commercial real estate it is a good idea to get a handle on some of commercial real estate’s most common terms and lingo. From abbreviations to zoning there are hundreds of commercial real estate terms that you need to know. For now you can see the top 10 most commonly used terms and their definitions below.

  1. Capitalization Rate – or more commonly known as the ‘cap rate’ is the key rate used in the valuation of income producing commercial real estate properties. The capitalization rate can be calculated by a simple equation: Capitalization Rate = Net Operating Income / Current Market Value.
  2. Net Leasable Area (NLA) – or Net Rentable Area (NRA) is calculated differently that building area as NLA represents the total square footage of the building that can be leased to tenants. This figure is also the area upon which the rental payments are calculated. The difference between building area and NLA is that NLA excludes common areas such as, hallways, stairwells, elevator shafts etc.
  3. Net Operating Income (NOI) – is simply the annual income of the property generated after taking into account all of the revenues and expenses from its operations. NOI is different than Net Income (NI) as it does not include expenses or revenue that does not pertain to the operations of the property (ex. Financing costs).
  4. Tenant Improvement Allowance (TI) – is the amount of funds that a landlord has negotiated into the lease agreement that can be used towards the fit-up or renovation of the space. Often times the tenant needs to renovate a property in order to get it up to operational standards from its original condition
  5. Gross Lease – is a type of lease were the tenant pays a flat rental amount and the landlord pays for all the property charges such as hydro, water, property taxes etc.
  6. Net Lease – is a type of lease were the tenant pays a flat rental amount in addition to the property charges such as hydro, water, property taxes etc.
  7. Debt Service Coverage Ratio (DSCR) – is the ratio of cash available for debt servicing to interest, principal payments. This is calculated by dividing Net Operating Income and Interest Expense.
  8. Vacancy Rate – is the total amount of available space in a property compared to the total rentable area of the property. This number is reflected in the form of a percentage.
  9. Equity – is the difference between the current market value of a property and any loan that is secured by the asset. For example, if a property has a current market value of $1,000,000 and has a loan of $750,000, then the equity in the property is $1,000,000 – $250,000 or 25% ($250,000/$1,000,000)
  10. Common Area Maintenance (CAM) – This is additional rent charged to the tenant of a building that is used to maintain the common areas of the property. These are the areas which are often shared by all the tenants.
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