Wednesday, December 06, 2017 / by Sherry Kwintner
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Investing in Commercial Real Estate has been extremely lucrative for savvy individuals. Today, we’re going to discuss the seven key terms to know before you delve into the Commercial Real Estate Market.
1. Net Operating Income (NOI). Expressed as an annual sum, NOI is the product of all rents actually calculated, minus all operating expenses actually paid out.
2. Cash-On-Cash Return. A common investment measure (in percentage) showing the relationship between Year 1 Cash Flow Before Tax divided by the Initial Equity Investment.
3. Cap Rate. Also considered the Current Market Value; is determined by comparing your NOI versus the Sales Price. In other words, it is the rate of return on a real estate investment property based on the income the property is expected to generate.
4. Debt Coverage Ratio is used to in banking to determine a company’s ability to generate enough income in its operations to cover the expense of a debt. DCR equals NOI divided by the Debt Service.
5. Price per Unit or Square Foot. The purchase price of the property divided by the total number of units or square feet included in the sale. This is based on the location, the type of unit, and the size of the unit in square feet.
6. Building classifications. There are three types of Commercial Property classifications according to a combination of location and physical characteristics:
a. Class A: Most Prestigious Buildings, competing for premier office users with rents above average for the area. Buildings have higher quality finishes, state of the art systems, exceptional accessibility and a definite market presence.
b. Class B: Buildings competing for a wide range of users with rents in the average range for the area. Finishes are fair to good, systems are adequate, but the building does not compete with Class A at the same price.
c. Class C: Buildings competing for tenants requiring functional space at rents below the average for the area.
7. Leases. There are three types of leases:
a. A full-service lease is one in which the lessor is responsible for the building.
b. A triple net lease makes the lessee responsible for the building.
c. A gross lease means that the lessor and the lessee shall share the expenses of the building together.
If you decide to move forward in the commercial world of real estate, these are seven common terms you will absolutely need to know.
For any questions or if you’d like to go into more detail, give us a call or send an email. We’d love to set up an appointment to determine your goals and timeline!