Credit Union Insights

Credit Union Real Estate Decisions: Say What?!?

In our experience, credit union boards are often comprised of professionals with strong working knowledge of the industries that reflects their charters. i.e., Teachers sit on CU boards that support education. Hospitality professionals are on boards that support service workers. Engineers on those focused on manufacturing. You get the picture.

But what we rarely see are board members who are familiar with the technicalities – much less the lingo – of commercial real estate. Yet real estate is one of the most important – and costly – aspects of running a credit union.

To that end, this post has a simple purpose: To (hopefully) un-jargon some of the most common commercial real estate terms — that often apply to both headquarters and branches – in order to make future discussions about real estate less lingo and more logical.

With the following common terms listed alphabetically, here we go. *

Adaptive Reuse –

A building converted to a different use from its original intent in order to meet market demand. Examples range from a warehouse converted to a retail center or an office building converted to a school. Fun fact: Industrial buildings converted to office uses are commonly called “creative space.”

Available Space –

The total amount of space currently being marketed for lease or sale. This includes vacant space or space that is currently occupied but will be available in the near future.

Asking Rent –

The amount asked by landlords for space, expressed in dollars per square foot per year in most parts of the country. i.e., $3 per square foot per month X 12 months = $36 per square foot. (In California, rates are quoted monthly, presumably to reduce sticker shock).

Blend and Extend – 

A Blend and Extend lease transaction is a type of renewal that allows tenants to “blend” their existing lease into a new and longer one. If a tenant is paying above current market rents, this arrangement will reduce their rate. The tenant benefits by an immediate cost reduction and the landlord benefits by securing the tenant for a longer term.

Build-to-Suit – 

A building designed for a specific tenant, often because the tenant has specific requirements but, for some reason, does not want to build or own the property. The build-to-suit project is usually contracted with a 3rd party developer who owns and operates the completed facility occupied by the tenant. Generally, a build-to-suit property becomes a single-tenant building upon completion. Build-to-suit agreements tend to be ten years or longer.

Capital Expenses or “Cap Ex” – 

Improvements — as opposed to repairs — that increase the value or useful life of an existing property. A capital expenditure (Cap Ex) is typically amortized or depreciated over the life of the asset, as opposed to a repair, which is expensed in the year incurred and should be categorized separately from routine maintenance. Lots of tax benefits related to capital expense decisions.

Capitalization Rate or “Cap Rate” – 

One of the major metrics for determining the price of a potential property investment. Capitalization Rates (Cap Rates) enable investors to compare potential returns among available properties. For example, a property’s cap rate is ten percent if it is purchased for $10 million and produces $1 million in Net Operating Income (NOI) during one year. While wonky, this term gets used in EVERY real estate investment transaction.

Concessions – 

To secure a tenant when vacancy is high, a landlord may need to grant concessions in the lease. Concessions often take the form of “free rent” for several months and may also include moving allowances and above-market tenant improvement allowances. (Known as TI’s). In these days of COVID, landlords are offering more concessions to sign and retain “Zooming” tenants.

Competitive Set – 

A sub-set of total property inventory in a market that enables prospective tenants to compare buildings with similar characteristics. For example, a broker preparing to show available space to a tenant may identify five properties on the basis of similar quality, square footage, asking rent, proximity to amenities, etc.

Contiguous Block(s) –

  Multiple suites or spaces on either the same or adjoining floor(s) in the same building that can be combined. Contiguous space is far more efficient for office users occupying more than one floor in the same building.

Contract Rent – 

The rental rate stipulated in a lease agreement. Typically, contract rent is based on the first year rate as opposed to the average rate over the term of the lease. This is because it is common for leases to escalate by a small percentage – called “bumps” — each year. The contract rent also does not account for rent abatement or other rent reduction methods.

Creditworthy Tenant- 

A tenant with a business that has been in existence for numerous years and has strong financial statements. Typically, the more creditworthy a tenant is, the greater concessions likely to be awarded by the landlord.

Effective Rent –  

Expressed in dollars per square foot, a measurement of the cost or value of the lease when all the concessions, plus annual escalations (bumps), are included.

Floor Plate –

The square footage of each floor in a multi-story building. Individual floor plate sizes may vary according to the building’s design.

Gross Absorption –  

The total amount of space occupied over a given period of time, without subtracting the amount of space vacated. This is useful in determining the overall demand within a market. (Synonym: Leasing Activity)

Ground Lease – 

A lease agreement in which the landowner (lessor) agrees to lease a parcel of land for a set period of time to a third party (lessee). Depending on the agreement, the lessor can stipulate what the lessee can or cannot do or build on the property. Ground leases are typically twenty years or more, but many extend to 99 years. This is a transaction type considered by the banking industry and will be featured in a future post. (Spoiler alert: For HQ’s, we’re not big fans).

Inline Space –

Term used for side-by-side storefront spaces within an outdoor retail center.  Inline spaces are bookended in a shopping center by “end cap” spaces. Inline spaces typically have lower rents than end caps spaces.
Letter of Intent (LOI) – An agreement between two or more parties before an actual agreement, such as a lease, is finalized. The intent is to protect both parties in the transaction until the final transaction is fully negotiated and executed.

Leased Space –

Space under contract between a landlord and a tenant, or between a tenant and a sub-tenant. (aka, sub-lease).

Lease Types Matrix

Loan-to-Value Ratio (LTV) –

The ratio between a mortgage loan and the value of the property pledged as security, usually expressed as a percentage.

Net Absorption – 

The net change in occupied space over a specified period of time. The change is measured in square feet at the building, submarket, or market levels. This figure reflects the amount of space occupied, as well as the amount vacated. Net absorption can be either positive or negative and reflects increases and decreases in inventory levels.

New Space – 

Space delivered to the market that was never previously leased or occupied by a tenant. Think new v. used car – but sometimes that used car is awesome!

Net Operating Income (NOI) – 

The income generated by a property after deducting operating expenses but before deducting taxes and financing expenses. You don’t need to know all the calculations – but this is important.

Pre-leased Space –  

Space that has been leased in a new building prior to completion.

Re-let Space –

Sometimes called “second-generation space,” refers to existing space that was previously occupied by a tenant.

Rentable Building Area (RBA)

The total square footage of a building that can be occupied by a tenant for the purpose of determining a tenant’s total rental obligation. Generally, RBA includes common areas including hallways, lobbies, bathrooms and phone/data closets. Not very sexy, but always part of a lease negotiation. This calculation is commonly known as a property’s load factor (the difference between the usable and rentable square footage. (Synonym: Gross Building Area).

Parking Ratio 

A parking ratio is a statistic that takes the number of available parking spaces, and divides it by the property’s entire gross leasable area (GLA). This ratio is most commonly expressed per every 1,000 square feet of property. i.e. a 20,000 square foot building with 100 spaces would have a parking ratio of 5, meaning five spaces per 1,000 square feet. In real estate lingo, this ratio is typically expressed as 5-to-1. Go figure.

Real Estate Owned (REO) 

A sale in which a lender, either institutional or private, sells a property that the lender has taken back through foreclosure. A bad economy = more REO’s.

Recapitalization 

A term used when owners liquidate a portion of their ownership position in an asset by selling some, or most, of their equity position.

Renewal Option 

The right of a tenant to extend the lease term for a specified period of time at a pre-defined rental rate or a Fair Market Value (“FMV”). Often, there is a date by which this option must be executed; otherwise, the option expires. Options are big in lease negotiations.

Sale or Leaseback 

An owner-occupied property that is sold to a third-party investor. The previous owner then becomes the tenant and now pays rent to the new owner. This tactic allows property owners to convert their ownership equity into cash while continuing to occupy the property. Sale leasebacks can also be short term in nature providing the seller of the property time to relocate. For headquarters space, we often advocate for this option for our credit union clients.

Shell Space

Space within a property that is currently not completed. (No drywall, ceilings, carpet, or fixtures). Shell space can range from a “cold dark shell” to a “warm shell” depending on how much work is left to be completed.

Short Sale

When the sale price of an asset is less than the amount owed to the lender and when the lender accepts this amount as full payment for the loan.

Sublet Space

Space offered for lease indirectly by a tenant rather than directly by a landlord. In many cases, the landlord must approve the tenant’s desire to provide a portion of their space for sub-lease. Per COVID-19, plenty of sublet space is still currently on the market nationally especially in the office arena.

Submarket

Submarkets are divisions of larger markets. They are defined by geographic boundaries with property types are competitive with one another.

Tenant Improvement Allowance (TI’s)

An amount a landlord agrees to provide to a tenant at the beginning or renewal of a lease. The amount is a concession that the landlord provides to be competitive with other properties. TI’s are typically offered as a rate per square foot. Most TI’s go toward paint, carpet or other upgrades of the tenant’s choosing.

Transit Oriented Development (TOD)

Real estate projects that are built around transit to maximize access to shared transportation modes. Typically, the TOD project is dense, walkable and includes a mix of uses such as residential, office, retail, hospitality. TOD is becoming a larger consideration for many employers.

Vacancy Rate

A percentage of the total amount of vacant space divided by the total inventory. This measurement is typically applied to a building, submarket or market. i.e., a 10,000 square foot building of which 8,000 square feet is leased has a Vacancy Rate of 20%. When negotiating a lease everyone wants to know this.

Value-Add Investment

An investment in a property with existing cash flow and value that can be increased by raising occupancy, rents or both. Owners typically “add value” by improving a building’s operational systems, parking, finishes and amenities.

We hope you find some of this is helpful the next time real estate is on the agenda. (Trust us, the list could have been FAR longer). 

* Our thanks to NAIOP Research Foundation for their work in originally compiling much of this list.

Corey A. Waite is a leading commercial real estate advisor to the financial services industry. As Founder and CEO of Rubicon Concierge Real Estate Services, Corey works directly with senior executives coast-to-coast to deliver strategic plans and transactional services focused on optimizing the needs of employees, clients and members.

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