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Some basic commercial real estate terminology that you may encounter in reference to properties and agreements entered into in property transactions.

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Easily understand some basic definitions of real estate terms

‘A’ GRADE

High quality, modern property usually not older than 15 years or recently renovated. Should also have quality infrastructure and be within an attractive environment.

AGENT

Person who acts and is allowed to act on behalf of another person, in real estate this can refer to an estate agent duly registered with the Estate Agents Affairs Board holding a mandate to market a specific property.

AGENTS COMMISSION

Disclosed fee payable by the seller/landlord once agreement becomes non suspensive and all conditions have been met.

AMORTIZATION

The division of the cost of asset including capital and interest payments into divided payments over a set period of time

AREA

The surface area of land or of a building normally measure in square meters (m²)

ASKING PRICE

The price of a specific property as marketed or advertised which may be subject to change after negotiations with a prospective purchaser

APPRAISAL

The estimated market value of a property calculated by and justified by a registered valuer/appraiser

‘B’ GRADE

Older buildings but have been well maintained from time to time to an acceptable level

BENEFICIAL OCCUPATION

Typically a grace free period for a new tenant to occupy a building in order to prepare the building for official occupation and lease commencement.

BOND CANCELLATOIN COST

The costs involved in cancelling a mortgage bond registered over a property and include attorney fees, deeds office costs and VAT

BREACH

A party is said to be in breach when they fail to perform as required to by a legal contract without justifiable legal reason.

CANCELLATION CLAUSE

Provision in a legal contract whereby either party can enforce the cancellation of the agreement in the event of certain circumstances.

CAPITAL GAINS TAX

A government fee/tax imposed by SARS on the profit of a sale of certain assets including investments and property.

CAPITALISATION RATE

The cap rate, also referred to as yield, in real estate is the expected rate of return that is expected to be generated by the property expressed as a percentage.

CAVEAT

A note attached to a property in the deeds office that a specific party may an interest or right over the property.

CLAUSE

A particular stipulation as found in a contract.

CERTIFICATE OF OCCUPANCY

A document issued by a municipality stating that a particular property complies with various building bylaws/requirements and is suitable for occupation.

CLEARANCE CERTIFICATE

Certificate issued by the relevant council confirming that the municipal rates have been paid up to date and in advance to ensure compliance on date of registration of transfer.

COMMON AREA

This is the area of a property that is usable by all occupants of the property and not limited to a specific user. These areas can include corridors, stairwells, bathrooms, swimming pools, foyers etc.

COMPOUND INTEREST

The interest associated with a loan that is calculated on the initial loan amount as well as the interest accrued over time, the interest accrues exponentially.

COVERAGE

The maximum amount of area that a building is allowed to cover a piece of ground as seen from directly above the relevant property. Expressed as a percentage.

DATE OF REGISTRATION

The specific date In which title to a property was transferred and registered in the deeds office.

DEED OF SALE

A written legal document in which the registered owner of a property transfers ownership of the property to another party.

DEEDS OFFICE

Transfer of ownership of a property only occurs officially when it is recorded in the relevant Deeds Office and a title deed is issued.

DENSITY

Refers to the occupational density allowed on a specific property and is usually expressed as the number of dwellings per hectare (10 000 m²) of land.

DOMICILIUM CITANDI ET EXECUTANDI

Latin phrase referring to a person’s address where they normally physically reside and where they agree to accept formal written communication including legal documents like summonses. It must be a physical address and not a PO box address.

DOUBLE NET RENTAL

Tenant agrees to pay rental as well as rates and taxes and insurance whilst landlord agrees to pay for structural maintenance and upkeep of common areas.

DUE DILIGENCE

The request for gathering of information or investigation as requested by a prospective purchaser in order for them to reach a level of comfort before committing to a purchase.

EIA

An Environmental Impact Analysis is a formal process as per the National Environmental Management Act required to determine the environmental, social, and economic impact of a project.

ELECTRICAL COMPLIANCE CERTIFICATE

Required before registration of the property, the electrical compliance certificate must be issued by a registered electrician confirming that the electrical installation complies with the relevant by laws. Normally for the cost of the seller.

ERF NUMBER

Refers to the unique number used to identify a particular property within a township.

ESCALATION

The escalation rate refers to the annual increase in rental on the anniversary of a lease commencement date as stipulated in a lease agreement and expressed as a percentage.

EVICTION

The court ordered removal of a tenant from a property which they are occupying. This is generally a last resort after a formal eviction process has been followed.

EXPROPRIATION

The act by government to reclaim a piece of land privately owned for purposes of the general benefit of the public.

FICA

Abbreviation for Financial Intelligence Centre Act, introduced to help combat money laundering and the financing of criminal activities by requiring specific identification documents of the parties involved in a transaction.

FLOOR AREA RATIO (FAR)

Expressed as a numeric factor to determine the gross floor area that can be erected on a subject property as per a land scheme when multiplied by the size of the stand size. Also referred to as bulk.

FREEHOLD

Refers to outright ownership of a specific property. As opposed to leasehold.

GEARING

The ratio of a company’s debt to equity ratio. A property that is highly geared has a lot of debt on the property as opposed to equity in the property.

GROSS LETTABLE AREA

Also referred to as ‘rentable area’ and refers to the space specified in m² by a landlord/property owner when determining expenses and charges relating to a specific commercial property.

GROSS RENTAL

Gross rental refers to the total rental including net rental and operating costs associated with the property but excluding VAT and municipal utilities.

GUARANTEE

A formal instruction in writing issued by a bank committing to the transferring attorney to pay the purchase price or full amount owing once the property is registered in a purchaser’s name

HECTARE

A unit of measurement commonly referred to when measuring land size and being equivalent to 10 000 m²

HEIGHT RESTRICTION

The maximum height a building is allowed to be, measured in storeys or metres.

HURDLE RATE

The minimum rate of return required by an investor in order for them to commit to an investment.

IMMOVBALE PROPERTY

Refers to a land and all the permanent improvements found on it.

IMPROVEMENT

Buildings or structures on a piece of land.

INDUSTRIAL PROPERTY

Property used for industrial applications, including manufacturing and storage.

INTEREST

The cost of borrowing money.

INTEREST RATE

The rate at which interest is added to a principal loan amount, expressed as a percentage and calculated on an annual basis

INITIAL YIELD

The annualised rental income of a property divided by eh property value and expressed as a percentage.

TENANT INSTALLATION

The contribution amount from a landlord to a tenant once the tenant has entered into an acceptable lease agreement with the landlord. Used for fitting out the premises to suit the tenant’s specific requirements. I.e., carpets, ceilings, dry wall partitioning etc. Can be calculated as a lump sum amount or an amount per m² of space being leased.

JOINT VENTURE

A business entity formed by at least two parties with shared ownership, risk and return. Generally each party will add a specific set of skills or capital to a project in order for the parties to benefit from each other’s input.

LANDLORD

The owner of a property as per the title deed.

LANDLORDS LIEN

The right of a landlord to retain a tenant’s possessions as security for outstanding rental owned by the tenant to the landlord.

LEASE AGREEMENT

Written agreement between landlord and tenant defining all the terms and conditions, as well as rights and obligations, of both the tenant and landlord.

LEASE WITH OPTION TO PURCHASE

Agreement between landlord and tenant whereby the tenant agrees to rent a specific property for a certain period of time, at the end of which the tenant can opt to purchase the property.

LEASEHOLD

Way of owning fixed property but not the land that it is built on, the land is leased on a long term basis and will ultimately revert to the freeholder with the improvements on it.

LESSEE

Also referred to as the tenant or person renting a specific property from the landlord/lessor.

LESSOR

Landlord or property owner who rents a property to a tenant/lessor.

LETTER OF INTENT

Letter from a purchaser confirming their interest and intent to enter into negotiations to acquire a specific property.

LEVY

The owner of a sectional title unit is liable for their proportionate costs in an estate or complex in the form of a levy

LIQUIDATION

The process whereby a company’s assets are converted to cash in order to settle its obligations.

LODGEMENT

When all transfer documents, bond cancellation documents, and bond registration documents are presented simultaneously at the Deeds Office for registration of a property.

MAINTENANCE COSTS

The associated costs of keeping a property in a good state of repair.

MANDATE

An instruction to an estate agent to perform services for a property owner.

MARKET PRICE

The amount, or consideration paid for a property by a willing buyer to a willing seller in a legitimate, arm’s length transaction.

MARKET VALUE

The most likely sales price that a property is able to achieve in a fair, open market by a willing buyer and seller.

MORTGAGE/BOND

A legal document registered against a property whereby the owner pledges the asset to the lending bank as security for the amount loaned.

MUNICIPAL RATES

Tax imposed by the municipality to a property owner.

NATURAL PERSON

A human being, not a legal person which is a collected group as in a company or close corporation.

NET INCOME

The income achieved after all relevant costs are deducted.

NET LEASE

A contract entered into whereby the tenant/lessor pays all, or part of, the associated costs in addition to the rental.

NOI (NET OPERATING INCOME)

A calculation used to determine the profitability of an income earning property before taxes.

OCCUPATION

The date on which a tenant/lessee physically moves into a property.

OCCUPATION RENTAL

Rental paid by a purchaser wanting to move into a property before the date of registration of the property into his/her name.

OFFER TO LEASE

Agreement entered into by a prospective tenant wanting to commence and finalise negotiations with a landlord in order to secure a property.

OFFER TO PURCHASE

Agreement entered into by a prospective purchaser wanting to commence and finalise negotiations with a seller in order to secure a property.

OPERATING COSTS

The costs associated with maintaining and operating a property.

OPTION TO PURCHASE

Clause inserted into a lease agreement giving the tenant the right to purchase the leased property upon fulfilment of specific terms and conditions laid out in the contract.

PARTICIPATION QUOTA

Calculated by dividing the area of an owners section by the total area of a scheme in a sectional title scheme for purposes of calculating levy amounts.

PATENT DEFECT

Defects in a property which are easily recognisable or identifiable by inspection.

PRO RATA

Latin for ‘in proportion’, a portion of an overall value.

PURCHASE PRICE

The exact consideration payable, or paid for, a specific property.

RATE OF RETURN

The annual income received from an investment as a percentage of the outlay, also referred to as yield.

RATES AND TAXES

See ‘rates and taxes’.

REAL RIGHT

A right attached to a property and registered on the title deed.

REGISTRATION DATE

The date on which a property is transferred into an owner’s name in the relevant Deeds Office.

REGISTRATION OF TRANSFER

The process whereby ownership of a property passes from seller to the purchase via a deed of transfer.

RENT FREE PERIOD

A specific period of time at the onset, or just before the onset, of a lease agreement whereby the tenant can take occupation of the premises and no rental is payable. The tenant may still be liable for the operating costs though.

REZONING

Occurs when the specific application assigned to the use of a property is adjusted to accommodate a different use after the rezoning application has been approved by the relevant Council.

RIGHT OF FIRST REFUSAL

Mechanism in a lease agreement that affords the tenant the opportunity to buy the property should the landlord wish to sell it. The owner is not bound to a specific price and the tenant is not obliged to purchase the property. If the landlord receives an offer to purchase from a third party then the tenant will have the opportunity to meet or beat that offer but the landlord can accept the third party’s offer if the tenant is unable to match it.

ROUWKOOP

An amount payable by a contracting party wanting to withdraw from their obligations in a contract. More commonly used in association with deposits whereby the parties agree that should the purchaser wishes to withdraw then they agree that the deposit shall eb retained by the seller.

SALE AND LEASEBACK

The owner of a commercial property agrees to sell the property to a purchaser and in turn to lease the property from the new owner on a long term lease.

SAPOA

South African Property Owners Association

SECTIONAL TITLE

An entire complex divided into separate individual units and sold individually after opening a sectional title register.

SECURITY

Property that is pledged as security for a loan to the person/institution offering the loan.

SERVITUDE

The right over an immovable property, or piece of the property, entitling the holder of the right to use of that particular section of property.

SOLE MANDATE

The mandate to market a specific property is given to one agency for a specific time frame, must be in writing.

SUBLEASE

When a lease exists between a tenant and landlord and the tenant enters into a lease agreement with a third party/subtenant to lease the same premises for the same or shorter period of time as the initial lease. Permission from the landlord is normally required.

SURETY

Organisation or person accepting responsibility for the debt or obligations of a contracted party who defaults on payment. In a lease agreement it is quite common for a director to sign personal surety for their company should the company default.

SUSPENSIVE CONDITION

A specific clause in an agreement relating to an event that needs to occur or a condition that needs to be fulfilled in order for the entire agreement to take effect and be in force.

TENANT

Person/lessee occupying a property owned by another party (landlord/lessee) and in return pays the lessor rental in return.

TENANT INSTALLATION

An allowance/subsidy given to a tenant for improving or personalising the leased space. Normally a total amount or amount per square metre is allocated, used as an incentive in order to attract long term tenants.

TITLE DEED

Legal document providing proof of ownership of a specific property containing all the necessary legal information and specifications relating to the property.

TRANSFER DATE

Date of registration of transfer of a property from seller to purchaser as recorded in the Deeds Office

TRIPLE NET LEASE

Lease agreement whereby tenant agrees to pay rental as well as operating costs including rates and taxes, building insurance as well as maintenance.

TRUST ACCOUNT

A bank account as required by law for attorneys and estate agents to deposit funds for monies to be held in trust and paid out later. Accounts are audited and all monies need to be accounted for.

VALUATION

A written estimate of a property’s current market value as stipulated by a person formally qualified in real estate.

VALUE ADDED TAX

Indirect tax on consumption of goods and services in the economy as imposed by SARS. Either transfer duty or VAT is payable on the sale of a property unless zero rated if agreed to by SARS.

VOETSTOOTS

To buy a property ‘as is’ and as it stands in the condition that it is at the time of sale.

YIELD

See ‘rate of return’.

ZERO RATING

Commercial property sold as a ‘going concern’ whereby there is an existing lease is in place on the property and the transaction meets the requirements of SARS in order to qualify for the zero rating. In which case VAT is payable at zero percent.

ZONING

Refers to the specific land use of a property and the relevant building restrictions applicable in terms of coverage, FAR and height.

If you have any questions or need any advice with regard to any of these terms then please get in contact with us today.

Related Tags: Industrial Properties for Rent, Commercial Real Estate Agent, Commercial and Industrial Property

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