15 Corporate Real Estate Terms You Need To Know
Every industry has its own special vernacular with unique abbreviations and jargon. And corporate real estate (CRE) is no different.
As new technology is introduced and new corporate real estate trends come to the forefront, it can be challenging to keep up with the industry lingo.
To help make it easier, we’ve put together a list of 15 of the most essential corporate real estate terms.
1. Absolute Net Lease
An absolute net lease agreement is one in which the tenant is responsible for all expenses, including taxes, insurance, repairs and structural maintenance. An absolute net lease is usually a long-term agreement that landlords enter into with credit tenants. Credit tenants are lessees who have been determined to be investment grade, which means they can be relied upon to pay rent even during an economic downturn.
Why It Matters: With the new FASB lease accounting standards set to go into effect soon, it’s in a CRE leader’s best interest to re-evaluate their leasing strategy. And having eligibility to lease as a credit tenant can benefit their organization. Lenders will often offer better financing terms to credit tenants since there is a lower risk of default.
2. Accrued Depreciation
Unlike accounting depreciation, which is the difference between the original cost of a property and its current value, accrued depreciation applies only to improvements made to the property. It’s the difference between the cost of making improvements and the market value of those improvements as of the appraisal date.
Depreciation is caused by physical deterioration (wear and tear), functional obsolescence (property no longer meets the needs of the average tenant) and economic obsolescence (factors outside the property, such as environmental changes).
Why It Matters: CRE leaders need to be aware of what can affect the value of office buildings and other property so they don’t lose money on investments. Having up-to-date asset tracking and maintenance records can help.
3. Beacon Technology
Beacons use Bluetooth technology to capture data about how employees are using a space. Unlike Internet of Things (IoT) sensors that collect data passively, beacons require employees to actively interact with them via a mobile app. However, beacon technology is still extremely useful for CRE leaders as it offers them insight into space utilization and occupancy levels.
Why It Matters: Beacon technology can help CRE leaders identify opportunities to consolidate space and save on real estate expenses.
4. Capitalization Rate
Capitalization rate is the anticipated return on a real estate investment. Also referred to as “cap rate”, it is based on the estimated income the property is expected to generate. Capitalization rate is calculated by dividing net operating income by current market value.
Why It Matters: Capitalization rate is important for CRE leaders who are comparing multiple investment properties. It’s not the only factor they should consider, but it is a good starting point for determining which property would best suit the organization’s long-term finances.
5. Corporate Social Responsibility (CSR)
According to Financial Times, corporate social responsibility (CSR) is a business approach that contributes to sustainable development by delivering economic, social and environmental benefits for all stakeholders. CSR is also called corporate citizenship, corporate conscience and corporate sustainability. It’s a strategy large organizations use to positively impact their community as well as boost their public image.
Why It Matters: A company’s real estate strategy has a big influence on its corporate social responsibility. CRE leaders need to take CSR into account when making portfolio management decisions.
6. Direct Vacancy Rate
Vacancy rate is the ratio of the total amount of vacant space to the total amount of inventory. The value can apply to an individual building or the entire real estate portfolio. Direct vacancy rate uses the same calculation as vacancy rate but excludes subtenant space.
Why It Matters: Monitoring direct vacancy rate allows CRE leaders to have a more accurate view of the lease portfolio and, more specifically, space availability and occupancy.
7. Discounted Cash Flow Analysis
Discounted cash flow (DCF) analysis is used to determine the profitability of a potential real estate investment. The approach involves examining anticipated future revenue (cash flow) from the investment and then discounting that cash flow to calculate the net present value, or NPV. There are several factors that need to be considered, including initial cost, financing costs, projected maintenance and repair expenses, property taxes and estimated profit from the property sale.
Why It Matters: A DCF analysis is another tool CRE leaders can use to determine if it makes financial sense to invest in a particular property or to make changes to the real estate the organization already has.
8. Effective Gross Income Multiplier (EGIM)
Effective gross income (EGI) is the anticipated income of a real estate investment, minus vacancy and collection losses. The effective gross income multiplier (EGIM) is the ratio of EGI to the value of a property. It is calculated by dividing the sale price of a property by the EGI.
Why It Matters: Like capitalization rate and DCF analysis, CRE leaders can use EGIM to compare multiple properties and identify which will yield the highest return on investment.
9. Effective Rental Rate
Effective rental rate is the mean amount a tenant will pay each year (or month, depending on payment schedule), averaged over the lease term. Effective rental rate takes into account rent-free periods as well as any concessions.
Why It Matters: Since every property has different lease rates, expenses and allowances, it can be difficult to make an apples-to-apples comparison. The effective rental rate makes it easier for CRE leaders to see how each property stacks up against the other.
10. Financial Accounting Standards Board (FASB) Lease Accounting Standards
The Financial Accounting Standards Board (FASB) lease accounting standards update changed the way organizations record lease information on quarterly financial statements. As a result of the update, companies are now required to report on leases with terms over 12 months—as long as the company didn’t intend to purchase the property.
Why It Matters: For CRE leaders, the lease accounting standards update created a need to have on-demand access to details for every lease in the organization’s portfolio. In other words, asset management software is crucial. Without this insight, organizations run the risk of being non-compliant.
11. Generally Accepted Accounting Principles (GAAP)
The generally accepted accounting principles (GAAP) is a set of rules and standards issued by the FASB that organizations must follow when preparing financial statements. Due to the FASB lease accounting standards update, companies must now report all leases—both real estate and equipment—on their balance sheets.
Why It Matters: GAAP supports consistency in a company’s financial statements. Consequently, CRE leaders can more easily collaborate with other departments to identify opportunities to improve operations and reduce spend across the organization.
12. Gross Leasable Area (GLA)
Gross leasable area is the total space available for rent in a commercial building. More precisely, it is the area designed for the exclusive use of tenants, including basements, mezzanines and upper floors. GLA is measured from the center of interior joint partitions to exterior wall faces. It’s different from rentable square footage in that it also includes common areas like elevators, shared bathrooms and stairs.
Why It Matters: Gross leasable area is an important facility management metric. Knowing the total GLA enables CRE leaders to more accurately estimate how much renting a specific property will cost the organization. And because building area can be measured in several different ways, knowing GLA helps CRE leaders ensure they’re evaluating properties using the correct criteria.
13. Indirect Costs
Indirect costs, also known as “soft costs”, are construction expenses not related to labor or materials. While necessary for building and development, indirect costs aren’t usually included as part of a construction contract. Examples of indirect costs include administrative fees, financing costs, taxes and insurance.
Why It Matters: It’s important for CRE leaders to take into account all expenses when making property decisions—including indirect costs. It’s especially important to keep track of costs that don’t automatically become part of a contract.
14. Property Lifecycle
The property lifecycle is the period of time an organization owns or leases a piece of real estate. The property lifecycle usually includes three phases:
- Acquisition, either when the property is purchased or at the start of the lease
- Occupation, when the company moves in employees and assets
- Disposal, when the lease ends or the property is sold to another company
Why It Matters: Property lifecycle management is an important duty for the CRE leader. They must ensure each decision, from entering into a contract to making any changes to the space, is aligned with the organization’s overall goals. CRE leaders must also know how to adjust to market fluctuations and changes in the company.
15. Lifecycle Costing
Lifecycle costing is a method for calculating the total cost of ownership for a piece of real estate over the property’s entire lifecycle. A lifecycle cost analysis considers all expenses associated with acquiring, occupying and disposing of a property. This includes initial expenditures, operational expenses, maintenance and repair costs, and design and construction expenses.
Why It Matters: A lifecycle cost analysis helps CRE leaders choose a property that will have the lowest cost of ownership while still meeting the needs of the workforce.
While there are many other corporate real estate terms you’re likely to encounter, this list is a helpful “cheat sheet” of some of the most common ones. We hope it’s helpful to you, whether you’re a new corporate real estate leader or a longtime veteran trying to advance your career.
What did we miss? Let us know what terms you find yourself using often on the job or terms that confused you when you first started.