Commercial Real Estate Terminology Simplified

Wednesday 24 April 2019

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If you are looking to buy, lease or sell commercial / industrial property then you’re going to have to liaise with many industry professionals such as agents, accountants, lenders, solicitors and property managers.

Below is a list some of the common commercial real estate terms that you’re likely to come across and what they mean. The more you learn, the easier it will be for you to cut through the overwhelming commercial jargon!

Amenities: The features and benefits of a property that create value. Tangible amenities could include onsite parking; intangible amenities might be proximity to local transport or retail outlets.

Anchor tenant: The main tenant in a leased commercial property who generally attracts other tenants and/or people to the property.

Appraisal: An informal estimate of the price of a property, usually provided by a real estate agent. An appraisal is not the same as a formal valuation.

Annual Percentage Rate (APR): The annual rate charged for borrowing (or made as a result of investing) expressed as a single percentage value. This represents the actual yearly cost of funds (or income from investing) over the term of a loan.

Arrears: Overdue payments on a debt or liability. When one or more payments have been missed on an account that requires regular recurring payments – like a mortgage, rental agreement, utility bill or any type of loan.  

Asset Management: Activities or services designed to maintain and increase the market value of any asset so the owner can benefit from returns. In real estate, asset management focuses on maximising property value and ongoing returns from the property, usually in the form of rental income.

Asking Rent: The amount of rent that a landlord is advertising for a space. Quoted as the dollars per square foot per year

Building Code of Australia (BCA): Written regulations created and maintained by the Australian Building Codes Board, setting the minimum standards of health, safety, amenity and sustainability for the construction industry. The BCA details technical requirements for the design and construction of buildings in Australia.

Capital: In general, this refers to financial resources available for use. Capital can be used to generate wealth when it is invested or used to produce goods and services. It can also be combined with labour to produce a return, while capital in the form of property can be rented out to generate income.

Conveyancing: The process of transferring property between a buyer and a seller. In real estate, conveyancing involves drawing up and carrying out a written contract that sets out the agreed purchase price and the date of transfer, as well as the obligations and responsibilities of both parties.

Contingencies: These are items that have to be met, changed, or remedied in order for a deal to close 

Contiguous space: Two commercial spaces that are adjacent to each other, either on the same floor of a building, or that sit directly above or below one another.

Counter offer: A new offer made by a seller or buyer on a property in response to an unacceptable offer by either party.

Covenant: A condition in a real property deed or title that limits or prevents someone from using a property for certain purposes.

Consumer Price Index (CPI): The average change over time in how much households pay for a fixed basket of goods and services. In Australia, the Australian Bureau of Statistics publishes CPI figures. The CPI can indicate changes in economic inflation and variations in the cost of living.

Depreciation: The reduction in value of a tangible asset over time. With respect to real estate, depreciation can also mean a drop in the value of property assets due to poor market conditions.

Due diligence: Investigating a potential investment or purchase to confirm all material facts. When someone is preparing to purchase a property, there are many different aspects of due diligence involved. The buyer needs to examine, among other things, the contract of sale, and the planning controls in place that will affect how the land and/or buildings are used.

Effective rent: The actual amount of rent paid on average per year

Fit-out: Preparing a leased space for occupation by the tenant and may include the installation of things like floor coverings, partitions and signage. Fit-outs are usually a tenant’s expense (but this can sometimes be negotiated).

Fixtures: Fixed parts of a commercial property included in a sale. For example, light fittings and carpet, as opposed to loose items like furniture, often excluded.

Gross area: The total floor area of a building, usually measured from its outside walls.

Gross Lease: Tenant pays base rent and increases in operating expenses over an expense stop or base year.

Gross Leasable Area (GLA): The floor area that can be used by Tenants. Generally measured from the center of the joint partitions to outside wall surfaces.

HOA: Heads of Agreement is the agreement with a prospective tenant before the lease is signed. 

Land Tax: An annual tax on the value of a piece of land. In Australia, land tax is administered by the state and territory governments.

Lease: A document that outlines the terms and conditions for a tenant to occupy a commercial property for a set period.

Leasehold: that there is a lease in place with freeholder (a.k.a the landlord) to use a property for a number of years.

Lessee: The tenant of a leased commercial property.

Lessor: The owner of a leased commercial property.

Minimum divisible: The smallest area allowed in the division of a property.

Mortgage insurance: An insurance policy that the lender or borrower can purchase to protect themselves against mortgage default. In Australia, Lenders Mortgage Insurance (LMI) is usually required for mortgages greater than 80 per cent of the property value. In most cases, the borrower pays the insurance premium for LMI.

National Australian Built Environment Rating System (NABERS): A national rating system that measures the environmental performance of buildings in Australia. NABERS analyses 12 months of performance data relating to a building or tenancy’s energy or water bills – or conducts a waste audit – and provides a star rating. This rating is scaled relative to the performance of other similar buildings in the same location.

Negative gearing: Borrowing money to buy an asset and receiving income (other than funds used to cover the loan interest and maintenance costs) from the investment. In Australia, the shortfall between income earned and interest due can be deducted from an individual’s tax liability. Negative gearing becomes profitable when the property is sold, assuming that property values are rising and a capital gain can be made. Investors considering negative gearing must have the finances to fund their ongoing interest and maintenance costs until the property is sold.

Net Leasable Area (NLA): In a building or project, floor space that may be rented to tenants. The area upon which rental payments are based. Generally excludes common areas and space devoted to the heating, cooling and other equipment of a building.

Real Estate Investment Trust (REIT): An investment vehicle for real estate, whereby investors can buy a stake in property assets (including buildings and mortgages) without tying up their capital in the long term. REITs can be traded, like stocks, on major exchanges. They give investors exposure to large-scale real estate assets, including warehouses, hospitals, shopping malls and apartment buildings.

Sale and Leaseback: When a company sells their building to an investor and then signs a long-term lease for the space, providing income for the investor

Stamp duty: A tax on legal documents that relate to the transfer of assets or property. Property sales and acquisitions throughout Australia are subject to stamp duty, although rates vary in each state and territory.

Strata title: A form of ownership created for multi-level apartment blocks, and horizontal subdivisions with shared areas such as car parks and swimming pools. Strata title properties consist of individual lots and common property. 

Sublease:  A lease or rental agreement between a tenant who already holds a lease to a commercial space or property and another party—called the sublessee or subtenant—who wants to use part or all of that space.

Tenants in common: The co-owners of an undivided interest in the same property. Each has an equal right to the possession and use of the property. Each owner can bequeath their interest to beneficiaries through their will, whereas in a joint tenancy, if one party dies their share passes automatically to the remaining owner or owners.

Term deposit: A deposit held at a financial institution for a fixed term that may range anywhere from a month to a few years. The conditions of a term deposit are that the money can only be withdrawn after the term has ended or by the borrower giving an agreed number of days’ notice. Typically, a longer term will offer a higher interest rate, and if the cash is withdrawn early, a penalty may be charged.

Torrens Title Property: A property where the owner holds the title to the building and the land it is on. A Torrens Title document will list all details and interests affecting a property and its land, including easements, caveats, mortgages, covenants and past changes in ownership.

Trust account: A bank account set up by one person on behalf of another (e.g. an agent for an owner to collect a commercial property buyer’s deposit).

Valuation: A formal process of establishing the value of a property from an objective and independent point of view. In most Australian states and territories, a formal valuation can only be provided by a qualified valuer who has the necessary qualifications and training.

Yield: The rent that a commercial property currently generates for the owner expressed as a percentage of the market value of the property.

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