Commercial Real Estate Investing 101

Break into CRE Academy

Commercial property layouts

Made up of suites or units and common areas; typically measure based on square footage

Gross building area (GBA)

Total interior floor area of the building including all suite interiors, shared common areas, stairwells, hallways or mechanical rooms

Net leasable area (NLA)

Total floor area the can be rented to tenants for their exclusive use; generally excludes common areas, mechanical rooms, etc. It is basically the actually sq footage used by the tenant

Floor area ratio (FAR)

Total gross building area divided by land area;

GBA= 20,000 SF

Land area= 4,000 SF

FAR= 5

Stacking plan

Shows leasing info by floor in a multi story building; typically includes tenant names, base rent, lease terms, and suite size

Pro rata share

Percentage of net leasable area occupied by each tenant

CRE leases

Contractual terms that drive income generated by the property. Main economics include:

Lease term

Base rent

operating expense reimbursement

tenant improvement allowances

Lease term

• Typically 3-10+ years for commercial properties; larger footprint longer the lease

• Often options to renew at predetermined terms

• Typically exclusive to the tenant at a predetermined rent for an exact $ amount

• Fair market value (FMV): no less than (X%) increase over prior year; Amount usually decided by a 3rd party

Escalation schedules

Shows starting base rent, when rent will change and by how much

Regular fixed % increases: Annual 3% increases

Irregular fixed % increases: 15% increases every 5 years

Increase tied to consumer price index (CPI): Base rent to keep up with/ inflation

Rent abatement

Period of time over which base rent will not be owed (free rent period) usually in the beginning of the lease; tenants typically required to reimburse landlord for operating expenses during that time

Operating expense reimbursement

Tenant reimburses property owner for a % of operating expenses incurred based on pro rata share

Tenant improvement allowances

Landlord reimburses up to a maximum allowable amount to build out their suite to help tenant get up and running; Typically expressed per sq ft ($20 SF)'; Generally paid up front as a one time cost before lease begins

Gross potential rent (GPR)

Total rent income that could be generated at a property if all suites/units were leased at current market rates

Loss to lease

Difference between market rent and actual lease rents

Market rent - actual rent =

Gain to lease

Exists when market rents have fallen below actual lease rents

Physical vacancy

Measures actual space that’s currently not physically occupied

100 unit property

5 vacant units

5% physical vacancy

Economic vacancy

Incorporates model units and rent abatement

100 unit property

5 units vacant

2 model units

7% economic vacancy

Triple net (NNN)

tenants responsible for reimbursing their pro rata share of all operating expenses with the property

Full service gross (FSG)

landlord’s responsible for all operating expenses at the property

Modified gross (MG)

Tenants responsible for reimbursing their pro rata share of only a select operating expenses associated with the property; % of agreed upon items

Base year stop (BYS)

tenants responsible for reimbursing their pro rata share of the overage above one other more “base year” rent

Controllable expenses

operating expenses that a property owner can directly influence/control

Repairs/maintenance, admin costs, payroll, marketing/advertising, contract services

Non controllable expenses

operating expenses a property owner has little to no control over

Property taxes, insurance, utilities

Property management fee

Provides day to day operational oversight, communication w/ onsite staff/contractors, property level bookkeeping and accounting services

Fees are typically calculated as a % of effective gross revenue (EGR); typically 3-5%

Effective gross revenue

Base rent + other income + operating expense reimbursement

Utilities

generally paid by tenants directly, at some older buildings utilities are not separately metered

requires a RUBS billing system

Ratio utility billing system (RUBS)

Reimbursement to properrty owner for each tenants pro rata share of utility costs

Net operating income (NOI)

operating revenue - operating expenses

Used for property valuation and loan sizing