Key Commercial Real Estate Terms You Need to Know in Brevard County, Florida
Understanding key investment property terms is crucial when eyeing a commercial real estate purchase. Knowing these terms helps you assess whether a Brevard County property is a solid investment, but also gives you insight into potential earnings after selecting the right type of investment property.
Mastering these commercial real estate terms could be the key to making smarter, more profitable real estate decisions.
Financial Metrics & Investment Analysis
Capitalization Rate
The return on investment is calculated by dividing the property’s net operating income (NOI) by its current market value or purchase price. It helps investors gauge the potential profitability of a property. Think of this as the “return on investment” scorecard. It tells you if your commercial property is a winner or a “let’s just move on” situation. The higher the cap rate, the better the property makes you money...or at least, that's the dream.
Cash-on-Cash Return A metric used to evaluate the return on investment, calculated by dividing annual pre-tax cash flow by the total cash invested in the property. This is your real estate "show me the money" moment. It tells you how much cash you’re pulling in versus what you put in. If it’s high, congrats—your investment is working harder than you are.
1031 Exchange A 1031 exchange allows real estate investors to swap one property for another and defer capital gains taxes. It's a key strategy used by professionals familiar with Section 1031 of the Internal Revenue Code (IRC).
However, 1031 exchanges come with rules: the properties must be "like-kind," and there are limitations for vacation properties. Investors also need to navigate time constraints and tax implications, making it important to understand the process fully.
Leasing & Agreements
Gross Lease In a gross lease, tenants pay a fixed rent, and the landlord covers all expenses like taxes, insurance, utilities, and repairs. It’s a simple, one-price-fits-all deal, making it easier for tenants to budget with no surprise costs.
Net Lease A net lease shifts the financial responsibility from the landlord to the tenant. In a triple-net lease, the most common type, tenants cover taxes, utilities, and operating costs, in addition to paying rent for the space. While typically lower than a gross lease, a net lease includes these extra expenses.
Modified versions, like a net of electric lease, may only require tenants to cover specific costs, such as electricity.
Tenant Improvements (TI)
Customizations or upgrades are made to a rental space to fit the tenant’s needs. These can be negotiated as part of the lease agreement.
Tenant & Property Management
Tenant Mix The combination of businesses or tenants in a commercial property, especially in retail centers, which can influence the property's success.
Occupancy Rate The percentage of a building or complex that is leased or occupied. Higher occupancy rates are typically a sign of a well-managed and desirable property.
Common Area Maintenance
Costs tenants share for maintaining shared spaces like lobbies, parking lots, and landscaping.
Tenant & Property Management
Parking Ratio Adequate parking is crucial for commercial tenants, so landlords should prioritize ensuring enough parking spaces are available. The parking ratio helps determine this: divide the total rentable square footage by the number of parking spaces. This gives you the number of spaces per tenant.
Building Class A rating system (Class A, B, or C) that indicates the quality, location, and age of a commercial property.
Ingress and Egress
Terms referring to the ease of entering and exiting a property, critical for retail and commercial properties.
Economic Incentives
Opportunity Zones These areas are economically distressed communities designated by states and certified by the U.S. Treasury. Investments in these areas may qualify for special tax benefits, designed to spur economic growth and create jobs. The goal is simple: attract investors with tax incentives to help revitalize these underserved areas.
Enterprise Zones Designated areas where businesses may receive tax benefits and other incentives to encourage economic development.
Historic Tax Credits Incentives for restoring historic properties, often used for commercial real estate in revitalization projects.
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