Knowledge about an industry is an essential prerequisite to entering it, meaning you need to learn the basics about commercial real estate before you invest in it.

The best way to learn more about the industry is by learning the terminology that defines its key operations, rules, and dynamics. This blog will cover some common terms to help you familiarize yourself with the commercial real estate terms you will hear frequently.

Commercial Real Estate Terms and their Meanings

Following are some of the most common commercial real estate terms that you need to know about.

1. Usable Square Footage

Usable square footage refers to the area leased to tenants for residential or commercial activity. This area is the footage they will directly be entitled to, based on their agreement, and which will not come under shared usage.

The average annual effective rate

The average annual effective rate refers to the rent charged divided by the square footage of the area allotted to tenants in the commercial real estate property.

2. Rentable Square Footage

Rentable square footage is usable square footage and the common area that all tenants will use in the commercial real estate property. For example, reception, stairs, elevators, etc., are all common areas that all tenants can use if they have signed a lease agreement for an area in the building.

Average annual effective rent

The average annual effective rent refers to the rent per square footage of the usable plus common area.

3. Capitalization Rate

You can determine the capitalization rate by dividing a property’s net operating income by its current market value. The resultant amount is then used to compare similar commercial real estate properties to determine which ones have higher income per dollar of investment.

4. Appreciation Potential

Appreciation potential is the percentage of the potential increase in a commercial real estate property’s value while it remains in possession of a buyer/investor. This potential also factors into the overall ROI when calculating how lucrative property is.

The higher the appreciation potential, the better it is. However, appreciation potential is sensitive to market movements. If an investor does not plan on holding on to a property indefinitely, it is better to sell it if the market trends show signs of changing enough for the potential to reduce.

5. Tenant Improvements

Tenant improvement refers to the maintenance a commercial real estate owner arranges for on leased property. The owner is entitled to charge a portion of this cost to the tenants as they will directly benefit from the improvement.

6. Letter of Intent

A letter of intent acts as an official promise and reflects the potential tenant’s intention to lease the property from the owner. It includes details of negotiations, timelines, and concessions. However, LOI is not a lease agreement, and it is crucial to ensure that it is not rushed.

As your commercial real estate broker, the CHRE team will evaluate the potential tenant and how serious they are about leasing the property.

We will request LOI only after confirming that the person will follow through with the LOI and the conditions mentioned on it.

Wrapping Up

We hope you found this blog an informative read and feel more knowledgeable about commercial real estate. If you want to lease your property in Rio Grande Valley, please get in touch with us. We have years of experience working in the region and will offer you the best support possible.