Real Estate Investor Magazine South Africa September 2015 | Page 53

STRATEGIES

Commercial Property

Terms Simplified
Making sense of technical jargon

BY FRANCOIS STAPLES

W

hen it comes to commercial property, many
investors, first-time or well-established, are
sceptical of investing for various reasons.
By simplifying common commercial property terms (
often the cause of intimidation for potential investors)
you will hopefully feel more confident in investing in
this rewarding investment vehicle.
1.Yield
When making an investment, no matter what the
field, a fundamental question on any investor’s mind
is, “What will my return on investment be?” That
questions sums up what yield is – your return on
investment. In order to determine your yield, you can
use the simple formula below.
(A-B) / C x 100 = Return on investment %
A = Gross annual income
B = Annual building expenses (rates, levies, insurance etc.)
C = Purchase price
e.g. (319,844 – 94,877) / 2,500,000 x 100 = 9%

2.Sale-and-leaseback
This is a transaction where the seller (usually a
corporation who also occupies the property), sells their
property to a buyer (such as an institutional investor or
a real estate investment trust) and immediately rents
the property back from the buyer. That is, the seller no
longer owns the property but continues to lease the
property for the duration of the lease agreement. By
selling and leasing back property, companies can boost
liquidity, reduce debt, and create a better environment
for doing business. Buyers also benefit from salewww.reimag.co.za

leasebacks as they are guaranteed an income from the
rental agreement.
3.Escalation clause
This is a clause in the lease which permits the landlord
to increase the rent in the future to reflect changes in
expenses paid by the landlord. Landlords and tenants
could structure rental escalation in a number of ways.
These methods include increasing rent by: (1) fixed
periodic increases; (2) the percentage increase in either
consumer price index (CPI) or another inflationary
index; (3) an increase tied to the landlord’s operating,
maintenance, and insurance expenses and real estate
taxes.
4.Due diligence
One of the keys to becoming a successful investor is
doing thorough research on your investment before
making the leap. When it comes to investing in
commercial property, one of the best ways to do this is
by performing adequate due diligence (DD). DD is an
investigation of the property conducted by the buyer to
ensure that they are satisfied with it prior to finalising
purchase. Some of the key points to include in your
DD checklist include: building inspection, zoning,
environmental inspection, existing leases etc.
5.Operating costs
These are charges paid by the tenant for the
maintenance of common areas of the property shared
by all tenants. Typical areas designated for use and
benefit of all tenants that would fall under operating
costs include: landscaping, parking lot maintenance,
security, insurance and property tax.

RESOURCES
Te Galetti Knight Frank los Group
SEPTEMBER 2015 SA Real Estate Investor

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