Commercial Real Estate Terminology
A triple net lease is a lease agreement that assigns the tenant as being solely responsible for all the costs relating to the leased property, in addition to the rent fee applied under the lease. This type of lease requires the tenant to pay the net amount for three types of costs, including net real estate taxes, net building insurance, and net common area maintenance. A triple net lease is common in commercial real estate, as it mitigates rising property costs, such as taxes or insurance for the landlord.
It is an acronym typically found in a triple net lease. TICAM stands for Taxes, Insurance, and Common Area Maintenance (such as trash pickup, janitorial services, landscaping, snow removal, property management, etc.).
In this type of lease agreement, the tenant’s rent or lease amount is a comprehensive, all-inclusive payment. The landlord assumes financial liability for all or most of the cost associated with the property, including real estate taxes, insurance, utilities, janitorial services, and common area maintenance.
This type of net lease states that the tenant agrees to pay a monthly lump sum base rent as well as the property taxes, the property insurance, and the maintenance. This typically occurs with high-credit companies, where the tenant is responsible for any and all for all property related risks, including roof and structural repairs.
The Capitalization Rate is the percentage return an investor receives on an unleveraged piece of real estate. To calculate a capitalization rate, take the property’s Net Operating Income (NOI), divide by the acquisition or sale price, then convert to a percentage. For example, if a property has an $85,000 annual NOI and was sold for $1,300,000 then the capitalization rate would be 6.5% or $85,000 / $1,300,000 * 100 = 6.5%.
The Net Operating Income (NOI) is a calculation used to analyze real estate investments that generate income. Net operating income equals all revenue from the property minus all reasonably necessary operating expenses before taxes, and thus excluding the principal and interest payments on loans, capital expenditures, depreciation, and amortization. You can calculate NOI via the following formulas:
Potential Gross Income (PGI) – Vacancy and Collection (VC) = Effective Gross Income (EGI)
Effective Gross Income (EGI – Operating Expenses (OE) = Net Operating Income (NOI)
PGI – VC = EGI
EGI – OE = NOI
A Letter of Intent (LOI) is typically used during a negotiation to communicate the general terms of a sale or lease of a given property. Once both parties agree upon an LOI, the document converts to a legally binding agreement.
Tenant Improvements (TI) are simply changes to a premise. Both parties typically negotiate TI within the lease and specifically outline what can be done and who is financially responsible for specific amendments. Sometimes, a landlord will offer incentives to improve a space, often called Tenant Improvement Allowances (TIA). In these scenarios, the tenant allowances are paid via a reimbursement, so tenants will need to allocate and manage cash flow accordingly.
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