Over the past few years, we have gone through various topics covering a matter of topics from “Essential Checklist: Buying or Leasing Industrial & Commercial Property” to “The Ultimate Guide to Auctions: Going, Going, Gone!”. So for this blog, we thought that we should take it back to some of the real estate basics and discuss some of the fundamental jargon used in everyday real estate.
Definitions for common real estate terms:
Real Estate
Real estate is the land along with any permanent improvements attached to the land, whether natural or man-made—including water, trees, minerals, buildings, homes, fences, and bridges. Real estate is a form of real property.
Commercial Real Estate / Commercial Property
Commercial real estate (CRE) is property that is used exclusively for business-related purposes or to provide a workspace rather than as a living space which includes industrial properties/units, warehouses, offices, retail spaces, etc.
Real Estate Agent
A person(s) authorised to act for another in the selling, buying, renting or management of a property.
Property Manager
Manages collection of rent and outgoings, provides professional industry related advice, administration of a lease and the maintenance of a property to ensure the property and tenant are well cared for on behalf of the owner.
Demised Premises
Generally refers to premises that have been transferred by lease, as opposed to the ‘retained parts’ which are not transferred but are retained by the landlord.
Strata Title
Strata refers to an existing building or buildings on a freehold lot that have been subdivided into two or more strata lots. There is usually a strata levy payable by all owners to cover general maintenance and management of common areas.
Torrens Title
‘Torrens’ refers to a land title system, where the owner of the property owns the land, the building and improvements on it.
Lease
A commercial lease is a document that sets out the rights and obligations of the owner of a commercial property (known as the landlord or lessor) and another party that has agreed to occupy the property (known as the tenant or lessee).
Lease Term
This usually means the length of time agreed between parties for the initial term of the lease (eg: Three (3) years), but sometimes may be used by parties to mean the whole term of the lease, being the initial term and option term (eg: three (3) years + three (3) years).
Option Term
An option clause is a term in a commercial or retail lease that permits a tenant to renew their lease at the end of the initial lease period. However, they must meet certain conditions. For example, a three-year lease may also have one three-year option, making it six years if the tenant chooses to exercise the option.
Lessor
A lessor refers to a person or an entity that grants a lease. When a lease is granted for the use of real property, the term most commonly used for “lessor” is “landlord”. In commercial real estate, the lessor grants use of a commercial space, under a lease agreement.
Lessee
A lessee (tenant) is a person who rents land or property from a lessor/landlord.
Contract for Sale
A contract for sale of land is a contract whereby the seller tranfers or agrees to transfer the property to the buyer for a price. A contract for sale may be conditional or unconditional. It includes both a sale and an agreement to sell.
Vendor
Vendor means any person or legal entity including, but not limited to, an individual, a limited liability company, corporation, partnership or any form of association providing goods, property (real estate) or a business for sale.
Purchaser
Purchaser means any person or legal entity including, but not limited to, an individual, a limited liability company, corporation, partnership or any form of association that buys a property.
Joint Tenants
This is where the ownership of the same property by two or more people is held jointly and equally – you cannot hold this tenancy in any other capacity other than equally.
Tenants in Common
This is an arrangement whereby two or more people co-own the same property, but with no right of survivorship to the other. The portion held under a tenancy in common is “willable” by you to a beneficiary under your will or certain persons where you have not made a will.
Easement
Easement is a legal right that allows the holder of the easement to use property that he/she does not own or possess for a specific limited purpose. A commercial easement is also known as a normal easement by many, the exception is it’s given for commercial purposes. For example, an easement can allow work trucks of one business to pass through the property of another business, for the purposes of delivering goods and products.
Covenant
A loan covenant is a condition in a commercial loan or bond issue that requires the borrower to fulfil certain conditions or which forbids the borrower from undertaking certain actions, or which possibly restricts certain activities to circumstances when other conditions are met.
Encroachment
Encroachment, also known as a structural encroachment, is a term used in the real estate industry when the owner of a property voluntarily or involuntarily builds something across the neighbour’s boundary lines, hence, breaching his or her neighbour’s property rights.
Yield
Yield is the annual cash flow amount expected from an investment. It’s expressed in percentage form and is a huge driver for many investing in commercial property. In short, the yield is the return on the money invested to buy the property.
Capitalisation Rate
In commercial real estate, a capitalization rate (“cap rate”) is a formula used to estimate the potential return an investor will make on a property. The cap rate is expressed as a percentage, usually somewhere between 3% and 10%. Cap rates generally have an inverse relationship to the property value.
Exchange
Exchanging contracts legally binds the parties in the property sale process. It means the seller has accepted the buyer’s offer on the property and both have signed the contract of sale.
Completion / Settlement
Settlement or completion is the time at which the property becomes yours. At this time the balance of the purchase price must be provided to the seller and the title for the property is transferred to the purchaser.
Consumer Price Index (CPI)
CPI stands for Consumer Price Index. Many leases indicate that rent prices will rise at the same rate as the CPI with adjustments made on an indicated basis. Some leases use other indexes instead of the CPI. Such as a fixed percent or fixed dollar amount.
Zoning
A local planning tool to permit and control the present and future development of land including residential, business and industrial uses.
Trust Account
An account that holds money received for a transaction and is held by an agent for or on behalf of another person e.g. vendors, purchaser, landlord or tenant.
Self-Managed-Super-Fund (SMSF)
A private superfund that is run individually existing with the sole purpose of funding the beneficiaries’ retirement.
Private Treaty Sale
This is the method of selling a property without a specified deadline to act, as compared to say a public auction (which would have a deadline/specific date).
Outgoings
The expenses incurred in generating income. In real estate, these expenses include, but are not necessarily limited to, property rates, insurance, repairs and maintenance and management fees. Read our blog for further details – Commercial Property Outgoings Explained
Gazumping:
Where the vendor agrees to sell a property but then sells it to another party (usually on more favourable terms). You can learn more about gazumping here.
Development Approval:
Approval from the relevant planning authority to construct, add, amend or change the structure or use of a property. Also known as a “D.A”.
Complying Development Certificate (CDC)
A complying development certificate (CDC) is issued by a private certifier rather than your local council as the certifying authority. The private certifier can issue a CDC when the proposed development complies with the set standards and provisions of the State Environmental Planning Policies (SEPP) (rather than complying with local planning instruments). This process is often a way to fast track your development approval rather than using the local council authority.
Net rate:
A net lease is an agreement in which the tenant pays the landlord a predetermined, fixed amount at the beginning of each rental period. This sum does not cover any additional expenses such as property taxes or utilities, meaning that the lessee must pay these separately on top of their fixed rate. This can include but is not limited to maintenance and repairs, real state taxes, insurance costs, and council and water rates.
Gross rent:
Under a gross lease, the tenant is not required to pay for anything beyond the total amount of the gross rent. This includes the property’s basic rate with the outgoings included in the total amount of rent.
Interest rates
Interest rates are a percentage of a loan that is charged as interest to the borrower, typically expressed as an annual percentage of the loan outstanding. You can learn more about interest rates here.
Appraisal
An appraisal is an estimate of value or worth. This is usually provided by a real estate agent and is not the same as a formal valuation.’
Negative gearing
Negative gearing is a term used in property investing. It occurs when an investor purchases an income-producing asset, such as a rental property, but the asset will not produce enough income to cover the cost of the asset. You can learn more about negative gearing here.
Get in touch For Commercial Property advice
These are some of the common real estate terms typically used that may be confusing or hard to grasp when hearing them for the first time. We hope some of these definitions help in clearing away any confusion. We also hope that now since these definitions are clear you will all be able to use them and understand them with greater ease.
If we can offer any guidance or assistance, you’re always welcome to contact us here or call our team on 02 4325 0208.
