Whether you’re new to the commercial real estate industry or a seasoned veteran, there’s always an opportunity to learn something new (or refresh your knowledge!). When dealing with commercial real estate, you’re going to encounter some terminology that you may not be familiar with, even if you’ve dealt with residential property management. From different types of commercial buildings and lease structures to a multitude of financial terms, you must have a solid grasp of the most important commercial real estate slang.
To ensure you’re equipped with the knowledge and know-how required to navigate the world of commercial real estate investing, Price Commercial Properties has put together a commercial real estate terminology sheet that includes all the lingo every investor should know.
Types of Commercial Properties
When it comes to commercial real estate terms and definitions, it’s important to start with the basics. As a CRE investor, you need to be aware of the different types of building classification, which describe the property’s location, amenities, finishes, and potential risk. All commercial real estate assets fall within one of four classes, including Class A, Class B, Class C, and Class D.
Think back to your days in school. The best grade you could get was an A. Class A refers to commercial assets that boost overall quality, prime locations, high-end finishes, and higher rent prices. In many instances, Class A buildings are home to many sought-after rental properties, meaning they are low risk for investors. Class A properties are ideal for commercial real estate investors that value cash flow stability over price appreciation.
Building classifications are on a tiered scale, indicating that Class B assets are still favorable investments, but may be older or more dated than Class A properties. Because these buildings aren’t as flashy, they’re more likely to attract tenants with average credit. Commercial real estate investors focusing on Class B properties can expect their returns to appreciate from a mix of income and price appreciation.
If you’re considering investing in a Class C commercial property, it’s important to note that buildings are often outdated. They may require moderate to major renovations or repairs. Although the investment risk is greater than that of a Class A building, Class C assets provide investors with the opportunity to reap the rewards from a high degree of price appreciation.
Of the four building classifications, Class D properties pose the largest risk for commercial real estate investors. Oftentimes they will have an unfavorable location. It may be located far away from a major metro area or in an unsafe area. Class D properties will also likely be outdated and require major repairs or work to meet the market standard.
Common Leasing Phrases
When you invest in commercial real estate, your goal is likely to rent out your property to a commercial tenant. To do this, you’ll have them agree to a lease that you negotiate together. But not all leases are created equal! In fact, rarely, two leases are ever exactly the same. Here are a few commercial real estate investment terms related to leasing that all investors should be aware of.
One of the most common types of commercial lease agreements is a net lease, and more specifically, a triple net lease. With a triple net lease agreement, the tenant is required to pay for property taxes, insurance, and most building maintenance costs as part of their monthly rent payments.
Similarly, there is also a double net lease where the tenant pays insurance and taxes but not building maintenance. Lastly, a tenant may opt into a single net lease. This would require them to only pay taxes as part of their lease. For commercial real estate investors seeking passive income, the most effective lease choice is a triple net lease since any rising expenses fall under their responsibility.
If you’re used to the residential real estate market, you’ve likely come across a gross lease before. While these aren’t as common for commercial leases, they still pop up every now and then. With a gross lease, the commercial tenant is required to pay rent and utilities. But the landlord is responsible for property taxes, insurance, and building maintenance.
A full-service lease is similar to a gross lease, however, the tenant pays a flat rate each month. The landlord is responsible for paying any operating expenses such as insurance, taxes, repairs, janitorial expenses, and utilities. In many cases, tenants prefer this lease option but it results in the investor taking on the burden of increasing operating expenses.
Additional Commercial Real Estate Terms
Along with the building classifications and lease terminology mentioned above, there are a few other real estate investing terms to know if you plan on making a dent in the CRE market.
Depending on the type of lease that is negotiated with the tenant, their lease terms may specify a base rent. This base rent refers to how much the tenant is required to pay specifically for rent each month, factoring out any additional expenses that may be included in their lease terms and a requirement for them to pay.
Net Operating Income
The goal of any investor is to make money off of their commercial real estate investment. A commercial property’s net operating income refers to the gross rental revenue minus any building operating expenses.
To increase your profits as a CRE investor, you must be mindful of cash flow which refers to the amount of income the investment property generates after factoring out all operating expenses and mortgage payments.
Successfully Navigate the World of Commercial Real Estate with Price Commercial Properties
Sometimes commercial real estate investment sounds like a foreign language. Luckily, you can have a Price Commercial Properties realtor/broker by your side to interpret and walk you through the process. We can help you learn and understand the important aspects of commercial real estate as we search for your ideal property to invest in.
We support investors of all sizes and experiences. This opportunity is an important part of your plan to secure your financial future. We can provide you with the information you need to make the best decision. Ready to get the inside scoop on investing? Contact us today!