Terms You Need to Know to Navigate Commercial Real Estate
Have you ever felt swimming upstream when purchasing or leasing commercial real estate? Most people feel they face a tough battle dealing with the commercial real estate industry. That’s why you should know these standard terms in commercial real estate before navigating the industry.
What Is Commercial Real Estate, and How Can Terms Help
Commercial real estate is the term for land, buildings, and other structures used for business purposes. Commercial real estate includes everything from office buildings to warehouses to retail space. It’s one of the most significant sectors in the U.S. economy and one of the most complex when it comes to buying and selling property.
Understanding the terms of commercial real estate can make a big difference in your ability to navigate the market. You will also avoid the cons of being a novice in the industry. Here are some of the most common terms you’ll encounter when looking for commercial real estate:
Broker
A broker acts as a middleman who helps you find and negotiate the purchase of the commercial real estate. Brokers may work for themselves or as employees of a company specializing in selling commercial real estate. Some brokers are generalists who can help you find anything from an apartment to an office building. In contrast, others specialize in specific types of properties like office buildings or retail stores.
Cash on Cash Return (CoC)
Cash on Cash Return (CoC) is a metric that measures the cash flow generated by an investment in commercial real estate. It calculates how much cash you could pull out of your investment after paying off all expenses.
The CoC ratio is calculated by dividing the annual net operating income (NOI) by the total equity investment in the property.
A low CoC ratio means you’re not getting a lot of money back from your investments, while a high CoC ratio means you’re making more money than you put into them.
Net Operating Income (NOI)
Net Operating Income (NOI) is a metric used to determine the value of a commercial property. It’s calculated by taking the property’s gross income, subtracting operating expenses, and then dividing that number by the total square footage of the building.
For example, if you have a building that brings in $20,000 in annual rent but costs $8,000 per year in taxes, insurance, and utilities, your NOI would be $12,000.
Capitalization Rate
Capitalization Rate measures the return on investment in real estate property. It’s calculated by dividing the net operating income by the total appraised value of a property.
So, if your office building has an annual net operating income of $100,000 and you sell it for $500,000, your capitalization rate is 20%.
Interest Rate
Interest rates are a percentage of the amount borrowed that is charged by the lender as compensation for using its money. It is the cost of borrowing the money you need to buy your commercial property.
Per Square Foot (PSF)
Per square foot (PSF) is a common term in commercial real estate to mean rent. It refers to the selling price of a property per square foot of space. For example, if you have a 1,000-square-foot office space for rent, and the rent for that space is $20 PSF, your monthly rent will be $20000.
Building Classifications
To understand commercial real estate, you must first know the different building classifications. Here are the most common building types:
- Class A: Usually the most expensive, and the buildings are generally newer. These buildings are in excellent condition, with no visible signs of wear and tear. They have great amenities and are a pleasure to work in.
- Class B: These buildings are just a step down from Class A but still have plenty of value for tenants. You’ll typically find these on the city’s outskirts or in older areas that have been revitalized. If you’re looking for something that’s more affordable than Class A, this is where you want to be looking.
- Class C: Although these buildings may be more affordable than those listed above, they still have some valuable features. This class usually consists of older buildings, 20 years plus, that have been renovated over time. So they’ll come with upgrades like new windows, flooring, and granite countertops. They’re also likely to feature less expensive utilities like electricity.
Nashville Commercial Real Estate From Southeast Venture
Commercial real estate is a big, complicated industry. It’s hard to know what you’re getting into and even harder to know how to navigate the space once you’ve gotten there. To help make sense of it all, our Southeast Venture commercial real estate experts will take you through every facet of the real estate industry.
Contact us today to get started on your next investment in real estate.
