Whether you are looking to buy, sell, or lease, there are some common commercial real estate terms you should become familiar with. If you are entering the world of commercial real estate (CRE) for the first time, there are key terms that we encourage our clients to become familiar with before signing on the dotted line.
The agent refers to the person representing either the buyer/renter or the seller in the CRE transaction. You may also hear the agent referred to as the buyer’s, seller’s, tenant’s or landlord’s “rep.” The agent is responsible for helping their client (an individual or corporate entity) locate a property, locate a buyer or renter, and negotiate the sale or lease among other things. The agent should be licensed by the Bahamas Real Estate Association and work under a registered and licensed real estate brokerage.
#2: Building Classifications
You may have heard an office building referred to as a Class A building. Commercial real estate property is assigned a rating of A through D. Class A buildings are considered top of the line, new or very well maintained high-quality construction with attractive amenities, built in a desirable area. These buildings are usually maintained by reputable property management companies and have low vacancy rates. Class B, C, D get progressively older and less desirable. It is important to remember that the classification is somewhat subjective. It’s based on many factors and is used by a real estate agent to establish a value for the lease or sale of the building based on market demand.
A build-to-suit property is constructed to a tenant or buyer’s specifications. Typically a developer owns the land and the plans for the building are in place. The buyer/tenant enters into a contract with the developer who will customize the building to the client’s specs. Build-to-suit properties are increasingly common in CRE, and increasingly in-demand options, especially suited to larger corporate entities looking to relocate or expand.
#4: Capital Improvements
A capital improvement, or capital addition, is an addition of a permanent structure or additional asset added to a piece of real estate that enhances the overall value of the property. Unlike a repair, which maintains the life of a property, a capital improvement increases it or adapts it for new use.
#5: Capitalization Rate (CAP Rate)
The capitalization rate, commonly abbreviated to CAP rate, is the ratio between a property’s net operating income (NOI) and the property sales price. This number determines how quickly an investor stands to regain their initial investment in a commercial property.
#6: Common Area Maintenance (CAM) Fees
Common Area Maintenance (CAM) fees are fees paid by tenants to landlords to help cover costs associated with overhead and operating expenses for common areas such as lobbies, corridors, and parking lots. Building insurance and Real Property Tax are also often included in the CAM rate.
A concession is an offer made by a landlord to draw in tenant’s seeking a commercial real estate property. This is commonly a rent concession – a reduction in the rent in order to bring in a desirable tenant.
#8: Gross Lease
With this type of commercial lease, the landlord is responsible for all of the charges associated with the property, including insurance, maintenance, and utilities. The tenant is solely responsible for their monthly rent.
#9: Net Lease
Under a net lease, the tenant is responsible for their monthly rent, as well as additional expenses such as maintenance, insurance, repairs, and utilities or CAM (common area maintenance).
#10: Net Operating Income
The net operating income (NOI) is determined by taking all of the revenue generated by a property (such as rental income, parking, or service fees) and subtracting any operating expenses to determine how much overall income a commercial real estate property might generate.
#11: Parking Ratio
Total rentable square footage of a property divided by the number of parking spaces; typically expressed as a ratio of spaces per 1,000 square feet. For example, a 30,000 sq. ft. building with 60 parking spaces would have a parking ratio of 2 (60/30).
#12: Option to Buy
An agreement in which the tenant had a lease with an option to purchase and is now exercising that option. The agreement includes a fixed price and a fixed date within which the option may be exercised.
#13: Rentable Square Footage
Rentable square footage is defined as usable square footage plus a portion of the building’s common areas.
#14: Tenant Improvements
Tenant Improvements are renovations to a leased commercial space to make it suitable for the tenant’s business. The landlord may provide a tenant improvement allowance to help pay for the improvements. Unless specified in the contract, any improvements to the space become the property of the landlord. This may include machinery, flooring and built-in shelving.
Looking for Commercial Real Estate Solutions in The Bahamas?
While commercial real estate investing can be intimidating, working with a skilled commercial real estate advisor will help to simplify the process from start to finish. Bahamas Realty’s commercial division NAI Bahamas Realty Commercial can assist you with all aspects of the transaction. We pride ourselves on ensuring our clients have the knowledge and understanding needed to make the best investment decisions. We are a full-service real estate company offering assistance with the sale, lease and purchase of commercial property, as well as internationally recognized valuation services and asset/property management solutions.