Commercial Real Estate Terms Explained Plainly

Nearly everything except the word "closing." A home is valued by comparing it to similar homes nearby. Commercial property is valued primarily on the income it produces, so two buildings that look identical can be worth very different amounts depending on who occupies them and on what terms. Residential contracts are largely standardized forms; commercial contracts are negotiated documents where the terms genuinely differ deal to deal. Due diligence is far more extensive, financing works differently, and there is no public listing system covering everything available — a significant share of commercial property trades without ever being publicly marketed.

A residential lender is mainly underwriting you — your income, your credit, your debt load. A commercial lender underwrites the property first and you second, because the property's income is what repays the loan. That means examining leases, tenant quality, operating expenses and whether the net income comfortably covers the debt payment. Commercial loans also tend to carry shorter terms than their amortization schedules, so the loan often comes due and requires refinancing well before it's paid off, and personal guaranties are common. Expect a larger down payment than on a house.

They describe two different things, which is why the terms get confused. "Broker" is a license level. In Texas, an agent holds a sales agent license and must work under a sponsoring broker; a broker has met higher experience and education requirements and can operate independently and sponsor others. "Realtor" is not a license at all — it's a membership designation for real estate professionals who belong to the National Association of Realtors and agree to its code of ethics. A person can be one, the other, or both. Brian Novy is a licensed Texas Real Estate Broker, license #255097.

The appraisal district uses different methods. Homes are valued mainly by comparing recent sales of similar homes. Commercial property is typically valued on the income it generates — rents, occupancy and operating expenses — which is why the assessed value can move even when nothing about the building has changed. Texas is also a non-disclosure state, meaning sale prices aren't public record, so appraisal districts work from the data they can gather. The practical result is that assessed value and market value on commercial property frequently diverge, in either direction, and an assessed figure should never be mistaken for what a property is worth or what it's being offered at.

Base rent is the rent on the space itself, quoted per square foot per year, before operating expenses. In many cases a tenant pays base rent plus operating expenses, so the quoted rate is not what you'll write a check for. For example — base rent of $25 per square foot annually, plus $10 per square foot in NNN operating expenses:

Depending on the type of facility you may also pay electricity and janitorial separately on top of that. Industrial space typically runs at much lower rates than office or medical.

It's a way of splitting operating expenses in a lease that isn't fully triple net. The property owner covers operating expenses up to the level they reached in an agreed baseline year — the "stop." The tenant pays their proportionate share of any increases above that baseline in later years. Two things determine whether the arrangement favors you: which year is used as the base, and whether that year's expenses were normal or artificially low. A base year set during a period of unusually low expenses passes more cost to the tenant later, so it's worth understanding what's actually in the number.

A Letter of Intent is a written summary of the deal terms, exchanged before anyone drafts a lease or purchase contract. It sets out the business points — rent or price, term, free rent, improvement allowance, options, deposit, timing, and who pays for what. It is generally non-binding, but it is where the deal is really made: once both sides have signed off on the LOI, the attorneys are documenting decisions rather than making them. Terms that get overlooked at the LOI stage are considerably harder to negotiate afterward.

It's an investigation into whether a property carries environmental contamination risk. A Phase I assessment is the standard starting point and involves no sampling — it reviews historical records, aerial photography, regulatory databases and prior uses, and includes a site inspection and interviews. If that turns up concerns, a Phase II follows with actual soil or groundwater testing. Lenders commonly require a Phase I on commercial property, and beyond satisfying the lender it protects the buyer, since liability for contamination can attach to whoever owns the land rather than whoever caused it. Sites with industrial, automotive, dry cleaning or fuel storage history warrant particular attention.

Because there's no income and no certainty. An existing building has a rent roll, a known use, and utilities already connected — a lender can underwrite it and you can see what you're getting. Raw land has none of that, so financing typically requires a substantially larger down payment on shorter terms, and lenders scrutinize the project rather than the dirt. Then there's the risk that the land can't do what you want it to. Zoning may not permit your use, utilities may lack the capacity to serve you or cost a great deal to extend, floodplain or environmental conditions may limit the buildable area, and approvals may take far longer than a schedule allows. That's why land contracts carry much longer feasibility periods — you're buying time to answer questions that an existing building has already answered.