03 Aug Real Estate Vocabulary 101 with Kees Janeway – Part 1
The more time an individual devotes to their craft, the greater the need to expand their vocabulary around it. The same way children learn language, often a process of trial and error is used to gain understanding around a certain subject matter. Unfortunately, within real estate, when you step into the ring with sophisticated professionals the vocabulary can be intimidating, if not confusing. My hope today, is to de-mystify many of the terms you might encounter while discussing real estate with peers, investors, bankers’ brokers and the like. If the terms and examples below aren’t crystal clear, I encourage you to reach out to ICONIC and let us help you understand on a deeper level.
Kees Janeway – Managing Partner, ICONIC Real Estate
Term – When we discuss a commercial lease, the term is the actual time from start to finish of the lease. In office space the term can vary from 1 month, think WeWork, to 1 year, to 3 years and beyond. In retail, we typically look at 3 years and beyond. In somewhat more rare instances we may see a 100-year ground lease.
Trade Area – A trade area is defined by the geographic range that a business or retailer can pull customers from. A retailer such as IKEA has a massive trade area, pulling people from hundreds of miles to their location, where a Starbuck’s in Manhattan may only pull from a 1-2 block radius.
T12 – The “T” stands for Trailing, and the number can actually be anything. The purpose of asking for a Trailing # is referring to months and is used to gain the most current financial information obtainable on a subject property. Most typically asked for when discussing Multi-family investments, to understand the cash flow.
CAP Rate (Capitalization Rate) – The Capitalization Rate has many functions within evaluating commercial real estate. The formula for getting the CAP rate Net Operating Income (NOI) and dividing buy the sale or asking price for a property. The rate is expressed as a percentage, what is important to understand is the percentage also typically represents risk. The lower the CAP rate, the less risky the investment, however this does not necessarily make it a “good buy”. Many real estate investors look for properties that they can add value to, so if the CAP rate is low, there is also less opportunity to add value.
LOD (Letter of Description) – The letter of description can have several names, but ultimately it comes down to defining the space for lease in a clear and concise effort. At the minimum there is a dimensional drawing, yet often it will go on detailed specification of all of the conditions that will be met prior to the Tenant taking delivery.
LOI (Letter of Intent) –This is the term sheet that outlines all of the key business points within the Lease or Purchase agreement. One of the key purposes of this document is to clarify the business terms before engaging attorneys to protect the legal interests of the parties. Having a clear understanding of the terms is essential to crafting a lease or purchase agreement that both parties are willing and able to execute on.
Interested in learning more real estate vocabulary? Join us again as this is part one of a three part series.