From investment to operations, there are a lot of facets to the commercial real estate (CRE) industry. In this blog, we’ll break down 20 key commercial real estate terms to know when it comes to understanding your CRE investments.
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20 Commercial Real Estate Terms to Know
Capital Expenditure (CapEx) – Payments made for goods or services that are recorded or capitalized on a company’s balance sheet instead of expensed on the income statement. Examples include the purchase of land, vehicles, buildings, or heavy machinery.
Capitalization Rate (cap rate) – Indicates the rate of return that is expected to be generated on an investment property. It is calculated by dividing a property’s NOI by the Current Market Value. The ratio, expressed as a percentage, is an estimation of an investor’s potential return on investment.
Cash Flow – The income stream, before income taxes, generated on an annual basis after deducting Debt Service and Capital Expenditures from the NOI.
Cash On Cash Return – This is also known as your return on investment (ROI). It’s calculated based on the cash income earned on the cash invested in the property. To determine your ROI take your annual cash flow (before taxes) divided by total cash invested.
Current Market Value – The approximate current resale value for a financial instrument. It offers interested parties a price for which they can enter into a transaction.
Controllable Expenses – Costs that a company has full authority over. Examples include repairs & maintenance, management fees, and interest.
Debt Service – The amount of interest and sinking fund payments due annually on long-term debt.
Effective Gross Income (EGI) – The current income of a property.
Gross Operating Income – Also referred to as “effective gross income,” Gross Operating Income measures a property’s Gross Potential Income minus any lost lease income from when the property is vacant or credit loss from when tenants aren’t paying rent. It is calculated by subtracting losses from Gross Potential Income.
Gross Potential Income (GPI) – The total maximum income a property can produce if it were 100% leased at market rates.
Gross Profit – Also referred to as “gross income,” Gross Profit represents the income or profit remaining after the production costs have been subtracted from revenue. Gross Profit helps investors to determine how much profit a company earns from the production and sale of its goods and services.
Net Income Before Taxes (NIBT) – Calculated by subtracting Total Expenses from Total Revenue.
Net Income Multiplier (NIM) – The inverse of the cap rate, this ratio measures the NOI against the price paid for the property. It is calculated by taking the property’s purchase price and dividing it by NOI.
Net Operating Income (NOI) – An operating profit metric used to understand the economic value of a property. It is calculated by subtracting Operating Expenses from the Total Revenue generated by a commercial property.
Net Profit – Also referred to as “net income,” Net Profit is the profit that remains after all expenses and costs have been subtracted from revenue. Net Profit helps investors determine a company’s overall profitability and reflects how effectively a company has been managed.
Non-Cash Expenses – An expense that does not involve a cash payment. Examples include depreciation, amortization, depletion, stock-based compensation, and asset impairments.
Non-Controllable Expenses – Costs that a company cannot change. Examples include property taxes, utilities, and insurance.
Operating Expenses – An expense a business incurs through its normal operations. Examples include rent, equipment, inventory costs, marketing, payroll, insurance.
Total Expenses – All out-of-pocket costs and expenses incurred throughout a specific period.
Total Revenue – Total sales and other revenue throughout a specific period.
Other Terms to Know in Commercial Real Estate
Browse more content to learn other key terms to know in commercial real estate:
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- Sustainability for CRE Buildings 101: What is Virtual Engineering for HVAC?
- What is a Net Zero Energy Commercial Building – And Why Should It Be on Your Radar?
- Understand Your HVAC—Air Handling Units (AHU)
- Understand Your HVAC—Packaged Rooftop Unit (RTU)
- Understand Your HVAC—The Refrigeration Cycle
- Understand Your HVAC—Superheat and Subcooling
How to Increase NOI in Real Estate
To increase NOI in real estate, you need to reduce operating costs and drive more revenue into your properties. One of the quickest ways to increase NOI is through harnessing the latest proptech for building operations. This technology not only increases efficiency for your property teams but also helps capture new revenue opportunities.
To continue learning about NOI in real estate, check out our free eBook, “The CRE Tech Guide to Boosting NOI.”