Commercial Property Terms Simplified

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When it comes to commercial property, many investors, first-time or well-established, are sceptical of investing for various reasons. By simplifying common commercial property terms (often the course of intimidation for potentil investors) you will hopefully feel more confident in investing in this rewarding investment vehicle.

Yield

When making an investment, no matter what the yield, a fundamental question on any investor’s mind is, “What will my return on investment be?” That question sums up what yield is – your return on investment. In order to determine your yield, you can use the simple formula below.

(A-B)/C x 100=Return on investment %

A= Gross annual income

B= Annual building expenses (rates, levies, insurance etc.)

C= Purchase price

e.g. (319,844-94,877)/2,500,000 x 100=9%

Sale-and-leaseback

This is a transaction where the seller (usually a corporation who also occupies the property), sells their property to a buyer (such as an institutional investor or a real estate investment trust) and immediately rents the property back from the buyer. That is, the seller no longer owns the property but continues to lease the property for the duration of the lease agreement. By selling and leasing back property, companies can boost selling, reduce debt, and create a better environment for doing business. Buyers also benefit from sale- leasebacks as they are guaranteed an income from the rental agreement.

Escalation clause

This is a clause in the lease which permits the landlord to increase the rent in the future to reflect the changes in expenses paid by the landlord. Landlords and tenants could structure rental escalation in a number of ways. These methods include increasing rent by: (1) fixed periodic increases; (2) the percentage increase in either consumer price index (CPI) or another inflationary index; (3) an increase tied to the landlord’s operating, maintenance, and insurance expenses and real estate taxes.

Due Diligence

One of the keys to becoming a successful investor is doing thorough research on your investment before making the leap. When it comes to investing in commercial property, one of the best ways to do this is by performing adequate due diligence (DD). DD is an investigation of the property conducted by the buyer to ensure that they are satisfied with it prior to finalising purchase. Some of the key points to include in your DD checklist include: building inspection, zoning environmental inspection, existing leases etc.

Operating costs

These are charges paid by the tenant for the maintenance of common areas of the property shared by all tenants. Typical areas designated for use and benefit of all tenants that would fall under operating costs include; landscaping, parking lot maintenance, security, insurance and property tax.

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