Commercial Real Estate and Office Building Fundamentals

Flashcards covering office building classifications, industrial property types, financial metrics, and commercial leasing/financing terms from the lecture notes.

Class A Office Building

The newest and highest quality buildings in their market, typically no older than 1990, that attract high-quality tenants and command the highest rents.

Class B Office Building

Properties usually built between the 1960s and 1990s (or older rehabilitated buildings) that have good quality management and are often targeted for renovation to return to Class A status.

Class C Office Building

Older buildings in less desirable areas requiring extensive renovation, offering the lowest rental rates and often targeted for redevelopment or conversion to affordable housing.

Medical Buildings

Buildings strictly zoned for medical use; they are expensive to construct due to heavy power requirements, specialized plumbing, lab spaces, and wider hallways/elevators for gurneys.

Warehouse

Large, one-story industrial buildings with high ceilings ($18 - 40\,ft$ clear on average, up to $60\,ft$ for newer products) and multiple dock highs or ground level entrances.

Flex Building

Buildings designed with a mix of office, assembly, and warehousing space, typically featuring a $4:1$ parking ratio per $1000\,sf$ and ceiling heights of $14 - 24\,ft$.

R&D Building

Research and development spaces consisting of a mix of labs, testing areas, and warehouse space, usually requiring higher power and commanding larger rents due to TI complexity.

Owner/User Building

A property acquired for the buyer's own business use, often financed through SBA 7A or 504b programs allowing for as little as a $10\%$ down payment.

Leaseback

A transaction where the owner of a property sells it to a buyer and simultaneously becomes a tenant for a specified period, usually between $3 - 20$ years.

CAP Rate

A derivation of value or return on investment calculated as $\frac{\text{NOI}}{\text{Price}} = \text{CAP}$.

Fully Stabilized

A property status defined by having less than $10\%$ vacancy; Fannie Mae and Freddie Mac require a $90\%$ stabilization rate to issue a loan.

Vacancy Factor

The amount of gross revenue lost because of vacant space, calculated as an allowance item on pro-forma income statements.

Usable Square Footage

The actual square footage contained within the four walls of a tenant's occupied space.

Rentable Square Footage

The usable square footage plus a tenant's proportionate share of the building's common areas like lobbies and hallways.

Gross Rentable SQFT

The total square footage of a building from the outside finish inward, including the core and elevator shafts, typically used for sales transactions.

Core Factor

A percentage representing common areas, calculated by dividing the rentable square footage by the usable square footage.

Argus Run

A specialized analysis software program used for complex financial modeling and vacancy factor calculations in real estate.

Gross Potential Income (GPI)

The total gross revenue a property would generate if it were fully leased without any operating costs subtracted.

Tenant Improvement (TI)

Interior improvements made to a space to meet the specific needs of a user, which may be subsidized by the owner or amortized into the rent.

Net Absorption

The net change in occupied office stock within a specific timeframe, expressed as a percentage of available leasable space.

Commercial Mortgage Backed Securities (CMBS)

Large commercial loans ($20MM$ to $\$100MM$) that are securitized and sold to investors, governed by a Pooling and Servicing Agreement (PSA).

Defeasance Penalty

A large prepayment penalty associated with CMBS loans, often costing upwards of $20\%+$ of the loan if paid before maturity.

Yield Maintenance

A prepayment penalty common in insurance loans that is based on the interest that would have been earned if the loan were held to maturity.

SOFR

Secured Overnight Financing Rate; a broad measure of the cost of capital collateralized by securities that replaced LIBOR.

Debt Coverage Ratio (DCR)

A financial metric calculated as $\frac{\text{NOI}}{\text{Annual debt service}}$; it must be greater than $1$ for positive returns.

Phase 1 Report

An environmental inspection process taking $12 - 41$ days to identify potential contamination issues on a property.

Probable Maximum Loss (PML)

A report determining seismic movement risk; a score of $20\%$ requires earthquake insurance, and $30\%$ typically prevents lender financing.

Modified Gross Lease

A lease type where the tenant pays base rent plus a proportional share of specific costs like utilities and janitorial, falling between a Gross and Net lease.

Triple Net Rent (NNN)

A lease where the tenant pays all pro-rata costs of property operating expenses, including taxes, insurance, and maintenance.

Floor Area Ratio (FAR)

The ratio derived by dividing the square footage of the building by the square footage of the land use: $\frac{\text{SF building}}{\text{sf land}}$.

Chiller

A construction component that circulates water at $50$ degrees through cold or hot pipes for building temperature control.