7 Commercial Real Estate Jargons You Must Know

Kriti Chawla
Jun 11, 2022
3 min read

Real Estate that isn't residential or unoccupied property is classified as Commercial Real Estate. Commercial Real Estate consists of factories, warehouses, retail stores, and offices and are divided into retail, industrial, and office. Retail assets include restaurants and stores, whereas industrial properties involve factories and warehouses.

Here are 7 jargons you must know if you're currently in or are planning to get into Commercial Real Estate!

1. NOI: Net Operating Income

NOI (Net Operating Income) can be used to determine how profitable your commercial real estate is. Aside from rent, parking and service fees, such as vending machines, may create cash for your business property. A capitalization rate (or cap rate) of 8% to 12% is regarded as excellent for a rental property in most locations. The expenditures of managing and maintaining the commercial real estate are included in operating expenses.

2. DCR: Debt Coverage Ratio

The Debt Coverage Ratio (DCR) indicates to investors and lenders if a real estate's income covers its operational expenditures and debt obligations. The lenders will check the DCR to see if the transaction is lendable. By the way, they usually look for a debt coverage ratio of 1.2 or higher. If it equals 1.0, you don't have any extra cash flow; in other words, your NOI is equal to your mortgage. When it exceeds 1.0, it indicates that you have cash flow.

3. Indirect Investment

There are alternative investing possibilities for those who are intrigued by commercial real estate but are concerned about the money commitment, knowledge required, and hazards. The average contingency budget in commercial real estate is 5% to 15%. However, this varies based on the asset or not that is underperforming. Investors must still conduct due diligence on the instruments, including reviewing historical performance and prospectuses.

4. Tenants

Although business leases are often longer than residential, vacancy rates can be a concern. It might take months to locate a tenant for a commercial property, so be sure you have adequate cash reserves to cover your mortgage if somehow the property is vacant for an extended length of time. The industry guideline is 30%, which means that one should spend no more than 30% of a tenant's gross income on rent. Housing-cost burdened individuals spend over 30% of their total income on rent.

5. Commercial Real Estate Investment

Every CRE investment is unique to the location in which it is made. Local excess or undersupply has an impact on its value. Due diligence is critical for any purchase, but it may be more costly in the case of commercial real estate. Maintaining reserve money for these scenarios is a CRE recommended practice. This might be 3-5% of rental money placed away before counting profits, depending on the property.

6. On-Demand Warehouse

The increase of On-Demand Warehouses is because online merchants require 1.2 million square feet of distribution space per billions of dollars in online sales; three times the area needed by traditional retailers. In summary, merchants want supply chain methods that keep warehouse shelves stocked while satisfying the growing service demands of e-commerce while being cost-effective.

7. COC: Cash-on-Cash

When comparing the first-year performance of rival properties, commercial real estate investors that rely on financing frequently use the cash-on-cash calculation. Cash-on-cash accounts for the fact that the investor in issue does not require 100% cash to purchase the property and that the investor will not keep the entire NOI because some of it will be used to make mortgage payments.