Understanding Terms and Conditions for Invoice Sample for Real Estate

Terms and conditions for invoice sample for Real Estate

during your search for commercial space i'm sure you've come across a lot of commercial real estate jargon but don't worry you don't have to know everything all at once in this video we will go through some common commercial real estate terms that will give you a good foundation to build on [Music] i'm tyler cobble i'm a commercial real estate broker developer and investor and today i'm with biggerpockets to give you some commercial real estate investing tips and strategies based on my many years in the business you can find me on instagram at commercial in nashville and don't forget to like comment and subscribe so bigger pockets can keep bringing you this awesome real estate content so as i said in this video i'm going to explain general commercial real estate terms lease terms including lease structures and causes and common delivery conditions of commercial leases commercial real estate seemingly has its own language brokers investors and developers will be throwing out terms and acronyms that you've never seen or heard before so it's important to study them as much as you can when getting started so that you don't miss any important information let's dive on in up first our general commercial real estate terms the following terms and calculations are some of the most commonly used in commercial real estate dealings net operating income or noi you may be familiar with this term from your residential investing experience noi is equal to your gross rental income minus your operating expenses note that these expenses do not include any mortgage payments or depreciation as your noi increases property value also increases and vice versa noi is an important term to know as it determines your current and future property value how you make an offer and any future potential cash flow debt service coverage ratio the debt service coverage ratio or dscr is a term used often when dealing with lenders and financing dscr is equal to your noi divided by your annual debt the debt service coverage ratio can determine the amount of cash flow you have to pay your mortgage and hopefully make a profit commercial winners want you to be able to pay the mortgage and have plenty of room for something left after this is an important number that lenders check first to see if a deal is lendable and is the first number that we check when underwriting a commercial real estate investment now let's explain this calculation a bit more the debt service coverage ratio equals your noi divided by your annual debt if it calculates to 1.0 or less then you have no excess cash flow essentially your noi is equal or less than your mortgage if it is higher than 1.0 that means the property should have cash flow lenders typically look for a debt service coverage ratio of at least 1.2 if not 1.25 or more capitalization rate capitalization rate or cap rate for short is a calculation used by just about every single investor in the commercial real estate industry cap rate is equal to the noi divided by the sales price cap rate is used to measure a building's performance without considering the financing on the building thus a cap rate is essentially equal to your return on an investment if you paid all cash for the property cap rates can vary significantly depending on the age of the building location property type lease terms and more now let's talk about high and low cap rates for a second a high cap rate such as 10 or 12 percent usually signifies a high risk investment with a lower sales price high cap rate investments are usually located in lower income neighborhoods have higher vacancy lower future potential or just require more work a low cap rate such as four to six percent typically indicates a lower risk investment with a higher sales price low cap rates are usually found in upper middle class or upper class neighborhoods and come with national credit tenants and longer term leases return on investment return on investment or roi is basically your annual cash flow divided by your down payment the actual cash out of pocket roi is measuring how fast your money is coming back out of the property which is very important for you to know as an investor after all you want to know how soon you will make your money back and be able to compare different investment opportunities now i think it's very important that you set an roi target and stick to it i won't invest in a deal where i won't get at least a 15 percent cash on cash return on my investment every deal you do could take cash and time away from another opportunity commercial cash out refinance a commercial cash out refinance is basically buying a commercial property then increasing the net operating income through rent increases and expense reductions and finally refinancing the loan to pull out the original down payment or your investors down payment while maintaining ownership of the property now you likely know this more commonly as the bur method buy rehab rent refinance and repeat made famous here bigger pockets by brandon turner price per square foot and price per unit you may have heard these next terms before if you have a background in real estate price per unit this calculation helps buyers and sellers determine a property's value it varies depending on the neighborhood or what submarket in which the property is located price per unit is a calculation usually used for apartments and is calculated by dividing the price of the property by the number of units so if you have a million dollar apartment building and you have 10 units in it that's 100 000 per unit comparing your price per unit in your market with your properties price per unit can give you a quick snapshot of the potential of a deal and help you ensure your offer price and the seller's asking price are both within reason price per square foot to determine the price per square foot you use the same calculation as price per unit but instead you divide that price by the square footage of the building so let's say the building is a million dollars and it's ten thousand square feet that would be one hundred dollars per square foot we use this calculation for offices retail centers and industrial buildings and it's actually the method that i use to buy my first building building classification commercial buildings are separated into three separate classes based on their characteristics class a buildings class a buildings are the newest and highest quality with the best location and highest rents they're in great neighborhoods and attract top tier tenants so they're typically downtown and may have commercial on the main level with office hotels or residential units on top class a buildings are not typically for new investors since prices are high and the market is competitive season buyers and funds can pay all cash and they're just fine with the lower returns these properties bring class b buildings class b buildings are often older than class a buildings but they are still good quality and attract average to above average tenants they're relatively stable properties that are oftentimes targeted by value-add investors since there is room to make improvements and raise rents class c buildings class c is the lowest official classification and the buildings are older and likely in need of renovations they have the lowest rents and usually low to mid-tier tenants apartment investors often target class c buildings because the ratio between the price per unit and the rents are still good and can allow for some of the highest returns there will always be demand for these buildings since more properties are becoming class c every day but this building stock does require a lot of maintenance and management skills now let's cover typical commercial lease terms commercial leases can be structured in a variety of ways depending on the type of property type of business and the number of tenants here are a few of the most common structures that you'll see triple net a triple net lease or a net lease is one of the most common lease structures it requires the tenant to pay base rent along with the three nets property taxes building insurance and common area maintenance or cam for short with triple net leases the tenant incurs all expenses related to the property but the landlord's not off the hook they are still responsible for maintaining the structural components such as the structural walls foundation and roof of the building the only time the landlord is completely free of responsibilities is when the tenant has an absolute triple net lease where the tenant is responsible for the structural components of the building as well to calculate rent for a triple net lease you take the estimated annual expenses and add that number to the price per square foot multiplied by the rentable square footage of the space full service gross or fsg a full-service gross lease or sometimes referred to as full service lease requires the tenant to pay a base rate while the landlord incurs all expenses related to the property this lease structure can be great considering that the tenant knows exactly what they are paying each month but it can also be a double-edged sword the property owner will probably significantly increase the base rent of the space with a full-service gross lease as a means of risk mitigation for themselves they want to be as monetarily insulated as possible from any unexpected expenses to calculate the rent for a full service gross lease you simply multiply the price per square foot by the square footage of the space modified gross lease a modified gross lease or mg requires the tenant to pay base rent along with only some of the operating expenses for example a group wants to open an art gallery in a space that you have for lease you know that the electric bill will be pretty high so you create a modified gross lease where the group pays monthly rent along with their electric bill calculating the rent for an mg lease is almost the same calculation for finding full service gross rent you multiply the price per square foot by the square footage of the space and add this number to the amount of the expense or expenses that you will incur in addition to rent lease clauses there are a myriad of causes in commercial leases while it is important that you have your lawyer review your lease you should also understand the terms on your own as well here are a few important causes to keep in mind sublease clause subleasing is where a tenant leases unused space and their lease agreement to another tenant the tenant's lease agreement with the sub-tenant is independent of the lease agreement between the tenant and the landlord often referred as the right to sublet clause the sublease clause states that the tenant does not have permission to lease a portion of the space in their lease agreement to another tenant unless consent is given by the landlord now as always with all of these commercial real estate terms i highly recommend you have your attorney review or put together your leases this clause is important because any additional space that you do not use but is included in your lease could provide you with additional income the exclusive right the exclusive right clause or exclusivity clause is often found in retail leases but can be seen in any industry and it gives the tenant the right to be the only business that sells a certain product or provides a specific service for example if you decide to open a nail salon in a prominent strip mall you would not want another nail salon to be in that strip mall why because they are a competing business and have the potential to take some of your customers so go for that exclusive right clause now also as a landlord you probably don't want multiple businesses in the same industry within your property because one of them is likely going to go out so definitely something to keep in mind for the landlords as well rent escalation when leasing a space your rent can increase on a yearly basis or during any renewal options this is what the rent escalation clause covers a rent escalation clause explains how much of an increase in rent a tenant will be subject to for example a landlord may state that there will be a two percent annual increase in rent or a landlord may state that the rent will increase by five percent every two years every lease is different the rent escalation clause is one of the most important causes because in the long run an annual two percent increase can greatly affect the overall cost of tenancy delivery conditions commercial spaces can be delivered in a variety of different conditions sometimes you may lease a space that is basically move-in ready and sometimes you may lease a space that is nothing more than a skeleton of the building let's dive into a few of the most common delivery conditions for commercial leases the vanilla shell a vanilla shell lease or white box can be one of the sweetest deals you get as a tenant build out costs for vanilla leases are what makes them so desirable you spend the least amount if any as a tenant during the build out of a vanilla shell lease compared to any other delivery condition your costs for build out mostly reflect the cost of your tenant specific amenities and this condition is good for landlords because it also helps you lease the spaces faster cold dark shell i know this name is very creative but cold dark shells are exactly what they sound like you can expect the spaces to be down to these studs of the building it's essentially a skeleton now why would you want a cold dark shell lease aren't the build-out costs going to be high well yes cold dark shell build up costs are higher than any other delivery conditions for the tenants obviously cheaper for the landlords but there is an incentive landlords generally offer a lower rent and a higher tenant improvement allowance since the build out costs will be high for the tenants as a landlord that can be pretty attractive when you're finding tenants because it's more affordable on a monthly basis and with the incoming tenants spending so much money on the space you know that they're committed to staying there for at least a while second generation space second generation spaces are the hand-me-downs of commercial real estate now what makes them so attractive is that it could require little to no build up costs depending on the previous business and tenant if you're looking to open a restaurant a second generation space where the previous tenant was a restaurant may be ideal for you why because this space is likely to be outfitted with the proper ventilation system grease traps and more that you'll need in a kitchen you may find that the lease includes commercial stoves refrigerators walk-ins any number of items it's not uncommon for the new tenant of a second generation space to slap some paint on the walls lay new flooring and open for business as a landlord you'll definitely want to target businesses that could take over these second generation spaces a lot faster than any other tenant because you want to make sure that you keep that vacancy low now one downside of a second generation lease is that it's going to reflect the previous tenant also if the space was previously leased to a long-term tenant you may need to make sure the space is up to date so by now you know a few general commercial real estate terms some common lease terms and the common delivery conditions of commercial spaces but there's still a ton to learn especially if you're a first-time commercial real estate investor i hope this overview provided you with some helpful information let me know in the comments what terms you'd like to know more about and if you're interested in learning more hit that like button subscribe to bigger pockets and stay tuned for more commercial real estate videos [Music] [Music] you