Commercial Real Estate Jargon Investors Need to Know

Commercial real estate investing is new territory for many real estate investors. The following is the alphabetical list of the most used terms in this area.

Pinned Supporters: large national brand name tenants eg Albertsons, Longs Drug, Walmart that bring heavy traffic to the mall.

CAM: Maintenance of Common Areas. Associated with CAM are CAM fees. For NNN leases, the term CAM fees refers to the money tenants pay the landlord to cover property taxes, insurance, and maintenance.

Capitalization rate: Return on investment in the first year of ownership. The capitalization rate is the ratio of the first year’s net operating income to the purchase price. The higher the cap rate, the higher the rental income. For people who invest in the stock market, the cap rate is the inverse of the P/E ratio.

Cash in cash: Annual Percentage Yield on your down payment excluding appreciation. First year cash flow divided by your down payment.

Conduit Loan: also called a commercial mortgage-backed securities (CMBS) loan, often with a lower rate than a traditional commercial loan, but has a high prepayment penalty (called a charge-off or performance maintenance penalty) or no payment flexibility .

CPD: Car Per Day or volume of traffic on a highway.

ICC: Consumer’s price index. It is often used to calculate the annual rent increase to offset inflation.

Due diligence period: the duration after acceptance is normally 15 to 30 days to allow the buyer to investigate the property. The buyer can cancel the contract during this time for any reason and get a full refund of the deposit.

Certificate of impediment: a letter provided and signed by the tenant confirming the current lease and terms.

Full Service Lease: lease in which the tenant pays rent that covers everything, including utilities.

Gross income: Total annual income before any expenses.

Gross Lease: lease in which tenants only pay rent. Owner pays taxes, insurance and maintenance.

GLA: Gross Leasable Area or total profitable area. This is space that can be leased and receive rental income. Does not include spaces for utility room, elevator, etc.

GRM: Gross Rent Multiplier per apartment. Ratio of purchase price over annual income.

LLCs: Limited Liability Company. A legal entity formed by many investors to own commercial property.

LAW: Letter of Intent/Interest or the normally non-binding letter of offer used to make an offer to purchase commercial property.

CAN price: Member of the Commercial Appraiser of the Appraisal Institute.

Master lease: lease agreement signed by the seller to rent the vacant space to provide rental guarantee.

Mixed use: commercial premises with a commercial space on the 1st floor and an apartment on the upper floors.

Triple Net Lease (NNN): lease in which tenants pay base rent plus property tax, insurance, and CAM fees. The absolute NNN lease is an NNN lease in which the tenants also pay the property management fee.

NO: The operating margin. Annual income after all expenses (property taxes, insurance, and maintenance) except mortgage payment.

Pad: independent building in a privileged location of a large shopping center.

Pass through: see refund

Lease Percentage: lease in which the tenant pays the base rent plus a percentage of the tenant’s income.

Phase I Report: inspection report providing an assessment of soil/environmental contamination. It is typically required by the lender as part of the loan approval process for a commercial property.

Phase II Report: inspection report for subsurface soil and groundwater investigation. This inspection is more extensive and includes testing for soil and water contamination.

Pro forma income: potential income, that is, higher, when the property is 100% leased.

Pro forma capitalization rate: potential capitalization rate assuming property is leased 100% at market rent.

Refund: the portion of property tax, insurance, and CAM fees that a tenant has to pay to the landlord in addition to the base rent.

Rental Guarantee: Rent paid by seller to buyer for vacant spaces until leased.

SBA loan: a government-guaranteed loan for owner-occupied properties.

NSDA: Subordination, No Disturbance and Arrangement. it is an agreement required by the lender, signed by the tenants agreeing: the new deposit in 1st position; lender as lessor in case of foreclosure; lease as valid as long as the tenant is not in default.

TIC: Tenants in common. A way for small/self-directed IRA investors to own a fraction of high-value property as tenants in common.