In my last blog, we discussed commercial real estate terms related to investments, leases, contracts, and more. Read here : Vocab Time- Let’s Talk Key Commercial Real Estate Terms – McDaniel and Company
In this blog will cover some additional real estate terms.
Absorption
Absorption is the amount of square feet that has become occupied in particular asset class over a period of time.
Absorption is calculated my taking the beginning of the year (or period) square feet occupied and subtracting it from the end of the year (or period) square feet occupied.
The difference is the amount of square feet that has been absorbed.
For example:
In the beginning of 2022, 2,000,000 sq ft of industrial space was occupied.
At the end of 2022, 2,350,0000 sq ft of industrial space was occupied.
The difference, 350,000 sq ft, is the amount of square feet absorbed during 2022.
Build to Suit
In a build to suit, the building is constructed to meet the needs and specifications of a particular tenant.
There are different types of build to suit structures:
Developer/Investor
The developer will agree to construct a building to the tenant’s specifications. The developer owns the building, and the tenant leases the building from the developer.
Sale Lease Back
The tenant will identify and purchase the site and hire a contractor to construct the building. Upon completion, the building will be sold to an investor. The tenant will then lease the building from the investor.
Build to suits allow investors/developers to earn a return on their money. It allows the tenant to have a building that fits their specifications without having significant capital tied up in the real estate.
Delivery Date
The delivery date is the date the landlord will allow the tenant access to the space.
A delivery date may be set due to renovations or improvements being made to an existing building. A delivery date may be the date at which the space will be available in a new construction.
Exchange
A 1031 Exchange is one of the best tools in commercial real estate! In a 1031 Exchange, a property owner may sell a property and defer the capital gains tax if another like kind property is identified and purchased within a specified period of time. 1031 Exchanges are covered in my blog here Is Now the Time for You to Sell Your Property? Let’s Talk About Match Making in the Real Estate Market. – McDaniel and Company
Flex Space
Flex space is often used as an umbrella term to define a building that is some type of combination of warehouse and office (or retail) space.
A flex space is not determined by the size of the building but rather it’s multifunctional use between office/retail and warehouse space.
There are numerous types of users for flex space who need both an office and warehouse component.
An example would be a window company that leases a 10,000 square foot flex building with 2000 square feet of retail, 500 square feet of office, and 8500 square feet of warehouse. The windows are stored and loaded in the back warehouse, there is a retail/customer area in the front, and two employees share the office space.
Ground Lease
A ground lease is exactly what it sounds like: A piece of land owned by an individual that is leased to someone else.
After the lease expires, the owner of the property acquires what was developed on the property by the tenant.
Ground leases are typically for 50-99 years. This arrangement is beneficial when a tenant cannot afford to buy the land. The owner of the property benefits from the passive income and the building they will acquire at the end of the ground lease.
Conclusion
Commercial real estate is full of terms and acronyms. If you have any questions about this blog, anything related to commercial real estate, or if there are any terms that you would like for me to cover in the future, let’s connect!
Emma McDaniel
McDaniel and Company, VP
emma@mcdanielandco.com
