Commercial Term Glossary

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Common Commercial Real Estate Terms & Phrases

Navigating any complex real estate transaction can be daunting even to the most experienced investor. Being equipped with regularly used terms and phrases associated with passive investment real estate transactions can be useful in creating productive dialogues. Like in any profession, knowing the language is important. The below terms and phrases are commonly used real estate transactional terms.

WHAT IS STNL?

STNL stands for Single Tenant Net Lease and refers to a commercial real estate property that is leased to one single tenant, in which the tenant pays the rent as well as additional costs associated with the property. Net Leased properties commonly have minimal landlord responsibilities, where the tenant is responsible for some or all of the following, Real Estate Taxes, Insurance, Maintenance or Repairs of the building / property, depending on that the lease terms are

WHAT ARE CAP RATES?

The Capitalization Rate, or Cap Rate, is the rate of return on a real estate investment property based on the income that the property is expected to generate. Cap rates are calculated by dividing the Net Operating Income (rent) by the value of the asset (purchase price).

Cap rates act as a snapshot in time to provide insight into the real estate market at the time of a sale. A higher cap rate provides a larger return, and a lower cap rate provides a smaller return. Properties with strong guarantees, longer lease terms, less landlord responsibilities, and locations with larger demographics and visibility are usually sold at lower cap rates, as they are a more secure investment.

WHAT IS AN NNN / NN / MODIFIED NNN LEASE?

The most common net leased property type is the NNN (triple-net) lease. A NNN lease agreement states that the tenant or lessee is responsible for paying all the expenses of the property, including real estate taxes, building insurance, and maintenance. These are the three main areas of expense, hence the three N’s.

When any one of these items is covered by the landlord, the roof for example, it becomes a NN lease. However, if the landlord is responsible for the costs of repairing the roof, but the roof is brand new with a transferable warranty, this might be referred to as a Modified NNN. Because of the minimal, or in some cases zero, landlord obligations, net leased properties are referred to a “passive” or “sleep-at-night” investments.

WHAT IS FEE SIMPLE / GROUND LEASE / LEASEHOLD?

Fee Simple is a legal term used in real estate to mean the complete ownership of a property, including land and any buildings on that land. This is the most common type of real estate. A Ground Leased property refers to the ownership of the land, but not the buildings on that land. The tenant (or other 3rd party) owns the structure and leases the “ground” from the landlord. At the expiration of a ground lease, any structures on that land revert to the owner of the ground lease. This is the most hands-off net lease investment and cap rates tend to be lower.

A leasehold property refers to the purchasing of a building, which has a lease in place, without any ownership of the land it sits on. This type of investment often sees higher cap rates and can be a good option for someone in a trade that wishes to keep their capital in real estate and receive higher returns.

WHAT IS A 1031-EXCHANGE?

A 1031 exchange is the exchange of one real estate investment property for another like-kind property in order to defer capital gains taxes. The term comes from section 1031 in the Internal Revenue Code and is a tax break often used by real estate investors to grow capital. During a 1031 exchange, the money from a real estate sale (this property is called the “downleg”) is held in escrow by a 1031 accommodator, until such time that it is put directly towards the purchase of another (this property is called the “upleg”).

From the day the original property closes, the “exchange” or “trade” buyer must identify any replacement properties within 45 days and must close on it within 180 days.

WHAT IS CASH ON CASH RETURN?

A cash-on-cash return is a rate of return often used in real estate transactions that calculates the cash income earned on the cash invested in a property. Put simply, cash-on-cash return measures the annual return the investor made on the property in relation to the amount of mortgage paid during the same year.

WHAT IS RETURN ON INVESTMENT (ROI)?

Return on investment (ROI), also called rate of return or yield, is a measure of the performance and efficiency of an investment. ROI is represented as a percentage of profit yielded by an amount of capital after costs and expenses over a certain period of time.

WHAT IS A LETTER OF INTENT (LOI)?

The LOI, or Letter of Intent, is the initial offer presented to the seller, and acts as the blueprint for the purchase and sale agreement. This vital step is where the main aspects of the sale are outlined and hashed out in advance of drafting a contract, such as purchase price and contingency periods.

WHAT ARE CONTINGENCIES?

A contingency is an agreed upon clause of a PSA (Purchase and Sale Agreement) or contract, which specifies an action or requirement that must be met in order for the contract to be binding. Common types of contingencies include Inspection or Financing, where the purchaser is given a set amount of time to inspect the property, review due diligence materials, or secure a loan if needed. A contingency period is the allotted time frame the purchaser has to meet said requirement. Once the contingency period (s) ends, or is otherwise removed, the purchaser’s EMD (earnest money deposit) is no longer refundable, and all parties move towards closing escrow within the specified time frame.

WHAT IS AN ESTOPPEL?

An Estoppel is a document, sometimes referred to as an Estoppel Certificate or Letter, signed by a tenant and verifies the terms, conditions, and status of the lease they have signed off on. This ensures that that tenant provides the new landlord with the same terms as the previous landlord. The tenant is confirming that the lease will remain the same from one property owner to another. An estoppel provides proof or a promise of cash flow, holding each party to the truth. This is commonly required by a purchaser in order to close escrow. An estoppel is also the tenant’s report of the Landlord, that neither party is in default of the terms of the lease.

WHAT IS AN SNDA?

An SNDA, or subordination, non-disturbance, and attornment agreement, is an agreement between the lender providing financing and the tenant of a leased property. This is can be a required document by lenders to ensure that the tenant and lender contractually recognize each other’s rights regarding the property. The lease is a contract between the tenant and landlord, the loan documents contain the contract between the landlord and lender, and the SNDA serves as the contract between the lender and tenant, which is designed to protect the lender from both the tenant and the landlord in the event of default on the mortgage. The lender would remain in first position as a creditor.

WHAT IS CASUALTY / CONDEMNATION?

Casualty and Condemnation language is often written into commercial leases and serves to specify which party is financially responsible should a building experience a casualty or become condemned. In real estate, casualty is defined as damage, destruction, or loss of property due to an event that is sudden, unexpected, or unusual, such as an unforeseen accident or disaster. Condemnation is when a third party, such as the government, takes over the property for a public purpose, such as a public health or safety issue. When purchasing commercial real estate, it is important to know who is held responsible in any possible scenario.