Understand common real estate terminology
The preamble to the Realtor Code of Ethics starts simply but powerfully with, “Under all is the land.” From there, real estate can get complicated and confusing. Here's a primer on some of the most commonly confused real estate terms:
Deed vs. title
On the most basic level, a deed is a piece of paper and a title is not. There are several types of deeds (quitclaim, warranty, etc.) that I won't delve into here. Each, in some form, transfers ownership of real estate from one party to another. Deeds typically include the grantor (seller) and grantee (buyer), a description of the property and a signature delivered to the grantee by the grantor (usually at a closing). The executed and delivered deed then becomes part of the chain of title. This is simply a chronological history of ownership. Mortgages and liens on a property might follow. A title search is customary to most real estate transactions and includes a study of public records. Ideally, the search will conclude that an owner has “free and clear” title (no outstanding loans, liens, etc.), which enables them to transfer ownership via a new deed or clearable title once the liens are paid off.
Right-of-way vs. easement
These terms get crossed-up all the time. A right-of-way is a type of easement. As the name implies, it gives one owner a right to make way over another owner's property. It comes in many shapes, sizes and purposes. Commercially, I often see a right-of-way established for vehicular traffic flows and for utility access. But, it is important to understand that not all easements are considered a right-of-way or will even apply to what you would typically consider real estate. Air and light easements, for example, can restrict abutting land owners from building something that would obstruct natural light and/or air.
Appraised value vs. assessed value
Every piece of real estate on a municipal tax roll has an assessed value that the town or city calculates via an internal valuation process. The higher your building is valued, the higher your taxes will be. However, it is reasonable to scrutinize the value in a down market because it is possible the assessed value is an inflated number assigned during a market peak. You can challenge an assessed value and request a tax abatement by presenting proof of current market value with an appraisal. The appraised value is conducted by an independent third party and, in theory, will give you the most accurate and timely valuation of your property.
CAM vs. Triple Net
CAMs are mistakenly called Triple Nets and vice-versa in the commercial leasing world. CAM (Common Area Maintenance) fees are a part of your Triple Net expenses, along with real estate taxes and property insurance. Those CAMs are where you will see expenses for landscaping, snow removal, accounting/legal expenses, repairs and maintenance, security and janitorial services. Triple Net expenses vary from building to building but, on average, they will range from $3-$5 per square foot (industrial buildings can be as low as $1 per square foot and Class-A office buildings can be as high as $6 per square foot).
Cap rate vs. IRR
The capitalization rate on a property serves as a snapshot of a given market and sector to help gauge value based on the net income the subject property produces. Brokers and market professionals assign the cap rate based on things like location, lease lengths, credit worthiness of the tenants, etc. The cap rate is determined independently of who the buyer is, how much a deal is leveraged and financing terms. The Internal Rate-of-Return (IRR) is a much more thorough financial tool that takes into account acquisition costs, annual debt, overall income and expenses, increasing rental streams and more. It will calculate what each dollar invested will earn over a given period.
Land is under all of us and supports one of man's most basic needs — shelter. Society introduced many important laws that govern our land and real estate transactions. Basic knowledge of these terms is easily attainable. For a more in-depth understanding, it's best to consult a real estate professional.
Justin Lamontagne, a commercial broker with NAI Dunham Group, can be reached at justin@dunham-group.com.
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