Commercial real estate is one of those industries that has a lot of technical terms, abbreviations, and other jargon you might not be familiar with.
This can make investing seem a bit daunting.
However, getting up to speed now will make your life a whole lot easier later on. It would be unwise to rush into any sort of investment without first doing your research, after all.
With all that said, here are some key commercial real estate terms you should know.
COMMERCIAL REAL ESTATE BASICS & PROPERTY TYPES
#1: Commercial real estate
Let’s start with the basics.
Commercial real estate is a pretty broad term, generally denoting any property that’s used for business purposes.
These types of investment properties usually fall into one of the following categories: multifamily rental, office buildings, industrial, retail, hotels/hospitality, mixed-use, land (like Altoona’s Hubbell Ave & 34th Ave property), and special purpose. You can learn more about these categories here.
Who buys, sells, owns, occupies, and oversees these properties, though?
THE PEOPLE INVOLVED IN COMMERCIAL REAL ESTATE
A landlord is someone who owns a commercial property, which they lease to one or more tenants. Landlords are responsible for things like building code compliance, repairs, maintenance, ensuring energy efficiency standards, etc.
Tenants are people, businesses, or groups paying to rent a landlord’s commercial property. How much they pay and how costs are determined vary by lease type, which we’ll cover shortly.
A broker is someone who acts as the “middleman” in a leasing or property-buying process. They help by finding commercial real estate for lease that best suits tenants’ needs and/or by soliciting ideal tenants for landlords, usually in exchange for a small percentage of the rent costs.
#5: Property Managers
Commercial real estate property managers are individuals who oversee the day-to-day operations of commercial buildings. They are responsible for planning and executing maintenance, collecting and processing rent payments, ensuring proper staff size, etc.
COMMERCIAL REAL ESTATE LEASING OPTIONS
All of the parties listed above are connected by one important aspect of commercial real estate: leasing. Let’s learn about the different types of commercial real estate leases and why they’re beneficial.
#6: Gross (Full-Service) Lease
A gross or full-service lease is a lease where the landlord directly pays for most (or all) of the property’s operating expenses, which are incorporated into the tenant’s rent.
This type of commercial real estate lease offers predictable costs for tenants and a high degree of control for landlords.
#7: Net Lease
Unlike gross leases, net leases require tenants to pay some or all of a property’s operating expenses. Tenants’ costs can fluctuate greatly from month to month as a result, but usually with a lower base rent.
They tend to provide more flexibility for tenants, while simultaneously reducing risk levels for landlords.
#8: Modified Gross Lease
A modified gross lease is sort of a hybrid between a gross lease and a net lease. First, tenants and landlords will negotiate who will be responsible for covering which operating expenses. They’ll then use these agreed-upon terms to establish base rent.
The biggest benefit of this type of lease is the overall flexibility for everyone involved.
FINANCING TERMS & PERFORMANCE METRICS
The following terms are especially important for commercial property owners, as they provide key information about performance metrics and real estate investment strategies.
#9: Net Operating Income (NOI)
Your net operating income is the difference between your rental income and your property expenses, usually excluding mortgage payments or depreciation. NOI is important because it’s directly tied to the value of your property. As your NOI increases, so does your property value, and vice versa.
#10: Return on Investment (ROI)
ROI is a performance metric that tells you how quickly you’re making back your money after investing it. It’s calculated by taking your annual cash flow (the positive or negative difference between your income and expenses) and dividing it by your down payment. Though this figure gives you a good idea of your property’s profitability, it doesn’t account for the time value of your money or your built-up equity.
#11: Capitalization Rate (Cap Rate)
Used to measure “natural value”, your property’s capitalization rate (cap rate) is essentially your ROI if you paid for the building in all cash. It’s calculated by diving the ROI of your property by its market value, with the resulting figure giving you an idea of how long it would take to recover your initial investment. For example, if your property had a cap rate of 10%, it would take roughly 10 years to make back the money you spent on it.
FIND COMMERCIAL REAL ESTATE IN IOWA
If you’re a business owner looking to find a commercial property for lease in Iowa, or an investor seeking out a commercial property for sale in Iowa, you should begin your search in the City of Altoona!
Just minutes east of Des Moines, Altoona features an abundance of commercial buildings and commercial real estate development properties that are suitable for businesses of all sizes. With over 4 million visitors and $677 million in taxable retail sales in 2021, the City of Altoona is a leader in economic development.
Search our commercial property database or request additional information to learn more.