Blog - Commercial
CUT THROUGH THE JARGON: COMMERCIAL REAL ESTATE 101
If you’re looking to buy, lease or sell 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 common commercial property terms that 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!
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 it was initially designed.
Amenities: Facilities within a commercial property that provide personal comfort or enjoyment rather than business use. For example, toilet, kitchen or parking facilities.
Anchor tenant: The main tenant in a leased commercial property who generally attracts other tenants and/or people to the property.
Assignment of lease: The transfer of the lease in a 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 things like repairs, general maintenance, taxes, utilities and more). When you sign a lease, the landlord will pay the operating expenses incurred during the first calendar year (or base year) of your contract. Any operating expenses incurred in the first year then 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 that are 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, eConvayancing is becoming more and more popular.
Covenant: A condition in a contract that restricts how a property or land can be used.
Counter offer: 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 out over the whole lease that includes rent-free periods or other concessions. It can also be referred to as ‘Net Effective Rent’.
Equilibrium point: When the property market has an equal amount of 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 and may include the installation of things like floor coverings, partitions and signage. Fit-outs are usually a tenant’s expense (but this can sometimes be negotiated) and will need to be agreed upon by the landlord, but are important in order to keep up appearances.
Fixtures: Fixed parts of a commercial property included in a sale. For example, light fittings and carpet, as opposed to loose items like furniture, 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.
Gross lease: where 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 other 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, financially workable, and that results 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: that there is a lease in place with freeholder (a.k.a the landlord) to use a property for a number of years.
Lessee: The tenant of a leased commercial property.
Lessor: The owner of a leased commercial property.
Letter of intent: A letter that is sent to the property owner to alert them of the fact that you are genuinely interested in buying or leasing their property. Note, it is not a binding contract.
Maintenance: The expenditure required to keep a commercial property in good condition.
Make good: A provision in a commercial real estate lease that requires a tenant to return a 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 is able to be claimed as a tax deduction.
Net lease: Unlike a gross lease, the tenant is required to pay a base rent amount plus their contribution to the payment of property outgoings or expenses.
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: REIT is short for a real estate investment trust, which is a company that owns, operates or finances income-producing real estate.
Return on investment (ROI): A measure of the profit or loss that comes out of 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 where there are 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.
Stamp duty: A government tax levied on the sale of properties that is paid by the buyer. Stamp duty rates vary between Australian States and Territories.
Strata title: A building that is subdivided and each part can be sold or leased separately.
Subdivision: The division of land by council into separate building lots.
Sublease: An agreement whereby a tenant of a property leases part or all of their space to a third party for a portion of or 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 that is 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 used to describe the owner when they are selling or leasing a property.
Warm shell: A space/building with an unfinished interior but that has airconditioning, drop ceilings, plumbing, and interior lighting installed.
Wear and tear: The depreciation of a property due to normal everyday usage.
Yield: The rent that a commercial property currently generates for the owner expressed as a percentage of the market value of the property.
Zoning: Local council regulations that control how land in a specific area can be used both now and in the future.