In the world of commercial real estate, the stakes are higher and the contracts longer than in residential real estate (not to mention more complex!). That's why it's so important to have a thorough understanding of terms and acronyms before signing on any dotted line.
According to Forbes, the following are the top eight must-know terms for dealing in commercial real estate.
Capitalization Rate (CAP Rate)
Often considered the 'holy grail' by commercial real estate investors, the cap rate helps determine the relative attractiveness of a commercial property based on its net income and purchase price (basically, is what you put in going to be worth what you get back). The actual formula is to divide the net operating income (NOI) by the fair market value of the property. While there are many others factors to consider before making a commercial real estate purchase, the CAP rate will give you a general idea of what your return on investment will be and whether or not the property deserves further inspection.
Useable Square Footage
In contrast to the total amount of square footage, the useable square footage tells someone leasing or buying how much actual space will be available to them, which is the total square footage minus any "unuseable" space such as washrooms and hallways.
Rentable Square Footage
The rentable square footage is the total amount of space available. Rentable square footage includes useable square footage along with any unuseable or shared space.
Common Area Maintenance (CAM)
Much like a residential renter may be responsible for certain utilities, CAM indicates the amount of general building expenses that the tenant will be responsible for. There is no standard calculation for CAM, so be sure to check with your landlord to understand how your CAM will be calculated.
Right of First Refusal
The Right of First Refusal is a right given to the tenant to accept or decline any new available space the landlord has to rent. Only after the tenant refuses can the landlord offer any new space to other potential tenants.
A sublease clause offers tenants the right to rent their space to another tenant should they so choose.
An assignment clause is similar to a sublease clause except for one key difference: in a sublease clause, the tenant reassumes responsibility for the space once the sublease term is up; in an assignment clause, the tenant assigns all responsibility for the space over to the new tenant.
The escalation clause will let the tenant know how much the rent will increase yearly.