There’s no escaping it. Every industry is filled with jargon and commercial real estate is no exception.
Whether you’re an aspiring real estate agent or just curious about the industry, we’ve selected the most common commercial real estate terms you’re likely to encounter:
1. Adjustable Rate Mortgage (ARM)
When you take out a mortgage, you can either select a fixed rate or an adjustable rate mortgage. With an ARM, the interest rate can change over the duration of your loan. So, this type of loan is often viewed as risky if you plan to keep a property in your portfolio for more than a few years. With a fixed-rate mortgage, the interest rate stays the same throughout the lifetime of the loan.
Amortization is the process of spreading out payments or expenses over time, depending on whether the amortization is calculated for either a loan or an asset. So, instead of simply paying off interest at the start, amortization allows you to build more equity in your property early on.
3. Capitalization Rate (CAP Rate)
This is a measure of the return on investment. This allows real estate investors to place a value on income-producing properties and helps real estate agents estimate what similar properties should sell for. To calculate the capitalization rate, you need to use the following formula:
(Expected Income from the Property – Fixed Costs – Variable Costs) / Property Value
4. Common Area Maintenance
Common Area Maintenace (CAM) is a figure that tells landlords the expenses they are responsible for paying to maintain a property.
5. Fannie Mae (FNMA) and Freddie Mac (FHLMC)
This pair may sound quite odd, but they’re important commercial real estate terms.
The Federal National Mortgage Association (FNMA) also goes by the nickname of Fannie Mae. The Federal Home Loan Mortgage Corporation (FHLMC) is known as Freddie Mac. The purpose of both entities is to create a secondary market for the sale and purchase of mortgages.
In fact, Fannie Mae and Freddie Mac are the largest purchases of mortgages on the secondary market and are both government-sponsored enterprises created by Congress.
6. Fixed Costs and Variable Costs
Fixed costs do not change when the number of outputs changes. So, a fixed cost is never zero, even if your production rate is zero. For example, your insurance premiums, rent or loan value is a fixed cost. As such, fixed costs can create economies of scale.
Variable costs change with the amount of output. In other words, they rise when production expands and fall when it contracts. Examples include packaging, raw materials, and labor.
7. High-Ratio Loan
These typically have higher interest rates compared to other loans because they are deemed riskier. For example, if the borrower defaults on a high-ratio loan, the property may not raise enough capital when sold for the bank to repay the loan. As a result, the borrower may need to take out mortgage insurance to balance this risk.
8. Interest Only Mortgage
You only pay the interest on the mortgage loan for a set period. This interest rate may be fixed or variable.
LIBOR is a benchmark interest rate that banks offer to lend funds to one another on the international banking market. It stands for the London InterBank Offered Rate and also helps the various bodies calculate interest rates on loans around the world.
10. Mortgage Broker
A mortgage broker will deal with all the aspects of a deal between borrowers and lenders. They may be an individual or a company.
11. Real Estate Agent
A real estate agent works under a real estate broker. They are licensed professionals who act as an intermediary between the buyer and seller during a sales transaction. In other words, they find buyers who want to buy and sellers who want to sell in specific locations. They will also negotiate a transaction between these two parties, document any transactions and represent both or either party at settlement. Agents who give real estate advice must have a real estate license.
12. Real Estate Broker
Real estate brokers have passed a broker’s license exam. Each state has its own education system and exam requirements for an individual to reach broker status. Generally, a prospective broker must have worked as a licensed agent for three years and met a minimum number of transactions before they can sit the broker’s exam. Once passed, they can work on their own and hire their own agents.
A Realtor is a real estate agent who is also a member of the National Association of Realtors (NAR) and has met the code of ethics and standards its members must adhere to. Realtors will work for real estate agencies affiliated with the NAR. Note that while NAR has copyrighted the capitalized term Realtor, the lowercase term applies to any real estate agent, regardless of NAR membership status.
14. Rentable Square Footage (RSF) and Usable Square Footage (USF)
USF is the amount of space available to be used in a property. It gives you an accurate estimation of how much working space you have in a building, aside from shared spaces such as stairways, bathrooms, and hallways.
RSF includes any shared space. This figure is primarily used by landlords to determine the rental amount for a commercial property.
15. Right of First Refusal
The Right of First Refusal (ROFR) gives a tenant the ability to accept or decline any additional and unused space that the landlord has available in a property. A ROFR clause in a lease means a landlord is contractually obliged to make this offer to the tenant, before offering spaces to the public.