August 23, 2022

Cut Through the Jargon: Commercial Real Estate 101

If you’re looking to buy, lease or sell a commercial property, then you’re going to have to liaise with many seasoned professionals – from real estate agents and property managers to lenders and solicitors. So, you’ll need to know your stuff.  

Every industry has its jargon – some more than others. And commercial real estate, well, it’s up there!  

Below is an alphabetical listing of some standard commercial property terms you’re likely to come across and what they mean. The more you educate yourself, the easier it will be for you to cut through the commercial jargon jungle!

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Here are a list of common terms:

Absorption: This is the measurement of the net change in the supply of commercial space from period to period. It helps measure the uptake of space in the market for a specific period.  

Active listing: A property that is available for sale or lease.  

Adaptive re-use: The process of repurposing an old site or building so that it can be used in a way other than what was initially designed.  

Amenities: Facilities within a commercial property that provide personal comfort or enjoyment rather than business use. For example, toilets, kitchen or parking facilities.  

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

Asking rent: This is the rent that a landlord is advertising. It is quoted as the dollars per square metre per annum and may differ from the rent agreed on when the space is leased.  

Assignment of lease: The lease transfer in commercial property from one tenant to another.

Base Year: The base year is a method used to estimate your share of a building’s operating expenses, which include repairs, general maintenance, taxes, utilities and more. When you sign a lease, the landlord will pay the operating costs incurred during your contract’s first calendar year – base year. Any operating expenses incurred in the first year become an annual cap on what the landlord will have to contribute to operating expenses in the future.  

Buyer’s market: A market where there are more sellers than there are buyers. That can reduce property selling prices and lease charges.  

Capital gains: The money made (profit) from the sale of a commercial property or other investment  

Commercial property: Any property used for commercial reasons (i.e., business purposes) such as office buildings, industrial premises like factories and warehouses, or retail space.  

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

Conveyancing: The legal process of transferring property between a buyer and a seller, including written documentation. Nowadays, Convayancing is becoming more and more popular.  

Covenant: A contract condition that restricts how you can use a property or land.  

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

Due diligence: Researching, analysing and gathering information about a property before signing a contract to buy or lease it.

Effective Rent: The rental rate averaged over the lease includes rent-free periods or concessions. It can also be referred to as ‘Net Effective Rent’.  

Equilibrium point: When the property market has equal demand and supply for commercial property. Equilibrium is maintained by raising or lowering prices to respond to the change in supply or demand.  

Façade: The exterior of a building.  

Fit-out: Preparing a leased space for occupation by the tenant may include installing things like floor coverings, partitions and signage. Fit-outs are usually a tenant’s expense (but you can sometimes negotiate this) and will need to be agreed upon by the landlord, but they are essential to keep up appearances.  

Fit-out contribution: Also known as a landlord contribution, this is a cash payment or reimbursement that the landlord makes to the tenant to help them improve the space. Fit-out contributions are often provided as a lease incentive to entice a prospective tenant to take the space.  

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

Floor space: A measurement in square metres of the horizontal floor space of a building. The amount of floor space you will need will vary depending on how many staff you employ and how you like to work.  

Floor space ratio (or FSR): This is the ratio of a building’s floor area to its site area. It is a measurement used to help one specify the size of a building and how the land it sits on can be developed.  

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Gross lease: A tenant only pays a base rent amount and is not required to contribute to outgoings or other property expenses. The base rent charged to the tenant may consider the cost of market rent, outgoings and additional fees, but the total is charged to the tenant as one payment.  

Highest and best use: The reasonable, probable and legal use of a building or land, which is possible, allowed, and financially workable, resulting in the highest value.

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

Leasehold: A lease with the freeholder (aka the landlord) to use a property for several years.  

Lessee: The tenant of a leased commercial property.  

Lessor: The owner of a leased commercial property.  

Letter of intent: A letter sent to the property owner to alert them that you are genuinely interested in buying or leasing their property. Note that it is not a binding contract.  

Maintenance: The expenditure required to keep a commercial property in good condition.  

Make good: A commercial real estate lease provision requires a tenant to return premises to the same condition it was at the start of the lease before handing back the keys.  

NABERS rating: A six-star rating system that measures the environmental performance of a property.  

Negative gearing: The technique of investing borrowed money in a way that results in a loss that can be claimed as a tax deduction.  

Net lease: Unlike a gross lease, the tenant must pay a base rent amount plus their contribution to the payment of property outgoings or expenses.  

Net lettable area (or NLA): This is the sum of the floor space that a tenant can occupy. Measurements exclude common areas such as stairwells, toilets and shared lobbies.  

Outgoings: The expenses associated with running and maintaining a building. They typically include rates, fees, insurance, maintenance and repairs, and cleaning. These types of costs are usually passed onto the tenant.  

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Property management: A management service that can be provided on behalf of a commercial property owner. For example, sourcing tenants, collecting rent and maintaining the property.  

Public liability insurance: Insurance coverage against any person suffering an injury or death on the commercial property premises.  

REIT: Short for a Real Estate Investment Trust, a company that owns, operates or finances income-producing real estate.  

Return on investment (ROI): A measure of the profit or loss that comes from an investment relative to the money invested.  

Sale – Lease Back: A transaction where a property owner sells their property and then leases it back from the person or company who bought it.  

Seller’s market: A market situation with more buyers than sellers. This can increase property selling prices and lease charges.  

Settlement: The date when the ownership of commercial property transfers from the seller to the buyer.  

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Stamp duty: A government tax levied on the sale of properties paid by the buyer. Stamp duty rates vary between Australian States and Territories.  

Strata title: A subdivided building, each part can be sold or leased separately.  

Subdivision: The division of land by council into separate building lots.  

Sublease: An agreement whereby a property tenant leases part or all of their space to a third party for a portion of their remaining lease contract.

Tenant’s market: A market that has a relatively high supply of stock for lease. That means tenants can pick and choose between different options and often have higher bargaining power.  

Title: The legal ownership of a property reflected in the documentation.  

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).  

Unencumbered property: One that has no existing mortgages or leases.  

Vacancy rate: The number (usually expressed as a percentage) of commercial rental properties that are vacant or empty.  

Valuation: An estimate of the market value of a property.  

Vendor: The term often describes the owner when they are selling or leasing a property.  

Warm shell: A space/building with an unfinished interior that has air-conditioning, drop ceilings, plumbing, and interior lighting installed.  

Wear and tear: The depreciation of a property due to everyday usage.  

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

Zoning: Local council regulations that control how land in a specific area can be used both now and in the future.

If you are looking for a great investment opportunity in commercial real estate, do get in touch or 1300 458 800

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