Basic Vocabulary for Commercial Real Estate

If you are interested in investing in office, industrial, multifamily, retail or self-storage real estate, there are a few common terms that you should add to your vocabulary:

Cash-on-Cash Return (or Equity Dividend Rate) is one of the most common formats used in the real estate industry to describe an investor’s return on investment. It is a ratio that is derived by dividing pre-tax cash flow by the amount of equity initially invested.

Common Area Maintenance is the amount of additional rent charged to the tenant to maintain the common areas of the property. Typically, “CAM Charges” include costs associated with landscaping, exterior lighting, insurance, property tax and cleaning of common areas.

Escalation Clause means a clause in a space lease that allows the landlord to increase the rent in the future to account for inflation and reflect changes in expenses paid by the landlord such as real estate taxes and operating costs.

Gross Lease refers to a type of lease in which the tenant pays a flat sum for rent covering all landlord-paid expenses, including taxes, insurance, maintenance, and utilities. Conversely, a Net Lease requires the tenant to pay building operating costs, which for a small business owner can be a potentially large sum of money.

Letter of Intent means a preliminary agreement between the tenant and the landlord indicating their mutual intent to move forward with lease negotiations. Frequently, the parties involve legal counsel at this stage.

Usable Square Footage means the square footage rented and used exclusively by the tenant, including private rest rooms and storage closets.

Vacancy Rate means a numerical value calculated as the percentage of all available units in a rental property, such as a hotel or apartment complex, that are vacant or unoccupied at a particular time. It is the opposite of the Occupancy Rate, which is a calculation based on the percentage of units in a rental property that are occupied.

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