When reading online you may come across a plethora of acronyms and real estate terms that sound familiar, but you don’t know what they mean.
Here are some Common Commercial Real Estate Terms:
Commercial Leasing Related Terms:
NNN: This is referred to as ‘Triple Net.’ This is a commercial leasing term that refers to leases in which the Lessee (tenant) pays the operating expenses of the property. In a full Triple Net lease, all of the operating expenses will be paid by the tenants, including, but not limited to, real property taxes, property maintenance (including the parking lot) and even the cost of the management company managing the property for the Lessor (Owner). Thus, in a NNN lease, the tenant pays a fixed Base Rent, and then pays additional NNN fees to cover the operating expenses. The total opposite of a NNN lease is a Full Gross Lease. A Triple Net lease is common in the retail and office markets, as they are an ideal set up for an Investment Group to purchase the property and receive a known return, which is based on the Total Base Rent collected.
CAM Charges: Stands for Common Area Maintenance. This is a cost to cover the maintenance expenses on the shared and common areas of a commercial properties, such as the parking lot, landscaping, roof etc. NNN charges and bills are often referred to a CAM charges.
Gross Lease: This is a lease in which the Lessee (tenant) does not pay any extra fees for the operating expenses of the property. This is a rare type of lease in the retail commercial space. Overall, this is still an uncommon type of lease, though more often found in the industrial commercial market.
Second Generation Space: This would be a commercial space that has been previously occupied and has the leasehold improvements still intact. This means that the Tenant Improvements are still in place, which could consist of plumbing, partition walls, electrical wiring, compressed air lines, hood and grill, etc. These types of spaces come on the market in great numbers during recesssions. These spaces offer a great advantage in cost and time savings. Also, during recessions, the lease rates on the spaces are often significantly lower than the prior to the start of the recession, so there is an opportunity to lock in a long term lease at a favorable rate.
Condemnation Clause: An important, and often overlooked aspect of a commercial real estate lease. It covers lessee and lessor responsibilities and rights in situations in which the property is seized or acquired by a governmental or redevelopment agency.
Accounts Receivable (A/R): This is the amount of outstanding money owed to the business by its customers on any given day. This would accrue when customers are offered payments terms, and are not required to pay cash upon, or prior to, delivery of the service or product. Typically, the terms are referred to as ‘Net 30,’ where 30 means the number of days the customer has to pay the amount owed.
Accounts Payable (A/P): This is the amount owed by a business to its vendors on any given day. This would accrue when vendors offer payment terms and allow its customers to pay in a set amount of time after the delivery of product or service to the customer business.
Income Statement: This is a term for a statement of Income and Expenses for a given period. This is also referred to as a Profit and Loss Statement (P&L). This is broken down into Top Line Gross Revenues, Cost of Good Sold (COG and/or COGS) and General & Administrative (G&A) Operating Expenses. After subtracting the COG nad G&A from the Gross Revenues, the difference should be the profit of the business for the given period of the statement. There are two basic types of accounting for Income Statements, which are ‘Cash’ and ‘Accrual’
Cash Method of Accounting: The Cash method accounting recognizes income at the time it is received, and also treats expenses in the same fashion, i.e. when payments are made to vendors. This is a common method of accounting for retail oriented businesses.
Accrual Method of Accounting: The Accrual method recognizes income as soon as it delivered or performed, not when payment is received. This means that a product delivered or service performed on December 31st of a year, but paid for in the following year is still recorded in the year it was performed or delivered. This is typical in business with a long lead time to develop products, which includes manufacturing businesses.
Balance Sheet: This is a statement that lists Assets and Liabilities of a business along with ownership equity. This is a statement that is a single date snapshot, meaning that it would the standing of all these items on a particular date.
FF&E: Which stands for Furniture, Fixtures & Equipment. These are the tangible items in a business that are necessary for the operation of the business. In most cases there is sales tax due on the FF&E upon the Bulk Sale of the business to a buyer.
Bulk Sale: When selling a business, Bulk Sale refers to the ‘Bulk Selling of the Business Assets” that comprise the business. In California, there is Bulk Sale Code, which dictates legal requirements for the sale of a business, which include a Bulk Sale Escrow and a Notice to Creditors:
Notice to Creditors: This is notice published in a local publication that is for the benefit of the creditors of a business. This is typically required when there is an Asset Sale Purchase of a Business. It is also advisable in a stock sale situation to ascertain and verify the creditors of a business.
Asset Sale: In the realm of Small Business Asset Sale means two things. #1. It means the sale of a business as an ongoing concern without the transfer of the ownership of stock. This kind of sale most often necessitates following the Bulk Sale Code in California. #2. It is commonly used to refer to a distress sale situation of a small business, where there are is no expectation of the seller to make an representations nor provide typical Due Diligence Material. This is akin to Buying something in ‘As-is” condition.
Stock Sale: In the realm of Small Business, a Stock Sale is when the buyer is acquiring the Corporate or other legal entity, such as an LLC, that is the legal owner of the Business Assets. Following Bulk Sale laws is not required in Stock Sales, but highly recommended nonetheless.
Due Diligence: The process of analyzing business opportunities to determine suitability for investment. More than just analyzing the numbers, it involves analyzing how you and your partners’ skills fit with getting the most of a business opportunity.
Exit Strategy: Having a plan in place for transferring the business when you are no longer going to be the owner. This is useful to implement to increase the value of the business, to minimize taxation issues, to make for a smooth transition, and to prepare for the many what-if scenarios that could arise.
CAGR: Compound Annual Growth Rate, a measure of Year over Year growth rate of an investment
IRR: Internal Rate of Return, is used frequently in assessing the Return on Investment on Capital Expenditures.
Capital Expenditures: Cash outlay for upgrades in FF&E and other business assets vital to the on-going viability of the business or project.
Inventory Turn: The theoretical rate at which a product or category of inventory is completely sold off and needs to be replenished. The faster the inventory turns over, the better for the cash flow of the business, as the money is not tied up in inventory for longer periods.
COG & COGS: Cost of Goods and Cost of Good Sold. This is an important metric to determine the Gross Profit of the business. COG would be the direct cost of the finished product that is sold to the customers. This would include the costs for the Raw Material and often the cost for the labor as well, though not in all industries. In the Food business, COG is often referred to as the Food Cost.
Express Loans: Loan amounts that are considered on the smaller end of the spectrum. They are mainly based on credit, and given for expansion or upgrade purposes. Typical loan amounts are $35,000 to $75,000. Can go up to $250,000. An established banking relationship is important in securing an Express. When choosing banks for your business, ask if they have an active portfolio in the types of loans you will apply for in the future.
Franchising Related Terms:
UFOC: Uniform Franchise Offering Circular. This is a document in which a Franchisor is required to disclose key aspects of its operations, business model and unit performance. It is required that a prospective franchisee thoroughly review the document and acknowledge such prior to acquiring a franchise unit.
UFDD: Uniform Franchise Disclosure Document. Another term to describe a UFOC.
Franchisor: The Corporate Parent entity that owns the brand and all of the associated intellectual property of the brand. Some Franchisor’s operate units, and some don’t. Do your homework to make the Franchise you are considering has a Franchisor that is looking out for the best interests of all parties involved, which are the franchisees and the franchisor.
Royalties: A percentage based fee paid to the Parent Franchisor by franchisees for the right to use the trade name and other intellectual property of the franchise brand. Typically based on a flat percentage fee of monthly sales. The amount of the royalties needs be to carefully considered by a prospective franchisee to make sure that the venture is profitable enough to realize a significant enough return on the investment of capital (in start up costs) and time invested.
Advertising Fund Fees: Frequently a percentage based fee paid by franchisees that is used in marketing campaigns coordinated by the Franchisor. Sometimes there are local area ad fund fees in addition to the base ad fund fee charged by the franchisor.
Area Developer: This is franchisee who has been given exclusive rights to geographic territory and is responsible for developing a predetermined amount of units in the territory within the specified amount of time.
Master Franchising: This is the process in which is franchisee is designated as the master franchisee for a particular territory. The master franchisee is responsible for some administration responsibilities in the territory on behalf of the franchisor. Master Franchisee also typically receive a portion of the royalties paid by franchisees in the territory. Also, they are typically responsible for the administering a local advertising campaign based on the additional local advertising fund fee collected. Master franchisees offer the franchisor a local territory manager, and offer the franchisees a local voice to lobby on their behalf with the franchisor.
CCIM: Certified Commercial Investment Member. This is designation offered to Commercial Real Estate Brokers who have completed the CCIM Institute’s educational program and testing. The CCIM Institute is headquartered in Chicago.
ICSC: The International Council of Shopping Centers. This is a world wide trade organization for the Retail Shopping Center Industry. The organization hosts many events at which Retail Commercial professionals can network and learn about the industry and trends in the market.
RIAOC: Realty Investment Association of California. This is commercial real estate organization based in North Orange County. It has a long history in the area and serves as a networking and educational group for commercial real estate agents. Regular meetings are held Tuesday mornings at 8:30 AM.
CABB: The California Association of Business Brokers. This is trade association that is comprised of Business Brokers that represent Business Brokers before the State of California and other organizations. CABB provides Business Broker certification, which is the CBB designation.