concept of real estate

Official Definitions for Commercial Real Estate

Communication is key in commercial real estate. But successful communication requires being on the same page so each person can understand what the terms being used mean. If two parties don’t agree what a term means, it’s more difficult to negotiate and carry out a transaction.

In 2004, the NAIOP Research Foundation commissioned a team to help bring more clarity to the world of CRE by publishing a glossary of crucial terms and definitions. The publication was updated in 2012.

But the world doesn’t stand still. Just as dictionary writers are always adding words to the English language, CRE professionals are frequently adding terms to real estate language. To keep up, the Research Foundation is releasing an updated glossary titled “Commercial Real Estate Terms and Definitions.”

The 2017 version of the glossary is written by Maria Sicola, CEO of Integrity Data Solutions. It explains foundational CRE concepts, such as “Cap Rate” and “Core Area.”

But technology is driving big changes in the world of CRE. In 2004, The Economist reported that U.S. e-commerce sales reached $120 billion. In 2017, the National Retail Federation (NRF) expects that could top $430 billion, and it’s projected to keep growing. NRF expects online retail to grow by 8 to 12 percent this year, while traditional retail sales are expected to increase just 2.8 percent. To keep up with the changing landscape, the latest version of the glossary adds completely new sections explaining retail terms and investment terms that are coming up more often.

For example, one of the hottest product types in CRE is the fulfillment center. It wasn’t mentioned in 2012, but the updated Terms and Definitions defines it as: “An industrial property type that enables goods to be efficiently moved or transported from a warehouse directly to a consumer.”

There’s also the introduction of what may be the biggest idea in retail today: Experiential Retail. The new glossary explains it as: “The notion that people buy goods online but pursue experiences at brick-and-mortar locations (i.e., do yoga, eat at restaurants, visit flagship stores for experience and entertainment, etc.).”

Some other retail terms are also defined for the first time in this version:

  • Omnichannel (also called “Multichannel”) Retail

 The merging of online and brick-and-mortar retail operations so customers can purchase and return items via more than one “channel.” For example, they can buy online and return in store (BORIS), buy online and pick up in store (BOPIS), buy online and pick up at a locker, etc.

  • Pop-up Retail

 A retail store, restaurant or kiosk intentionally designed to be in a location for a finite amount of time (i.e., a restaurant that opens for six months so it can test a market, or a store that operates in a location during the holiday season only).

In all, there are dozens of newer terms. This version includes almost twice as many definitions as the 2012 version did. On the investment front, new definitions include:

  • 1031 Exchange, or Like-kind Exchange

 U.S. Internal Revenue Code Section 1031 permits the deferral of capital gains taxes on the sale of property held for investment or productive use in a trade or a business. With a 1031 exchange, property owners can sell their real estate and then reinvest the proceeds in ownership of a like-kind property or several like-kind properties, thus deferring the capital gains taxes. The like-kind exchange under Section 1031 is tax-deferred, not tax-free. When the replacement property is ultimately sold (not as part of another exchange), the original deferred gain, plus any additional gain realized since the purchase of the replacement property, is subject to tax.

  • Commercial Mortgage-backed Securities (CMBS)

CMBS are a type of bond that is commonly issued in U.S. securities markets and is backed by the cash flow from a pool of mortgages on commercial properties. The CMBS are often arranged into groups or “tranches” according to geography, property type or underlying credit rating.

As Congress and the Trump administration discuss potential tax reform and draft a 2018 budget, they may introduce new terms that will prove relevant for CRE professionals or investors. That’s just something else to watch for in the always-changing world of commercial real estate.

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