Professional Knowledge - Nomenclature of the Real Estate Industry
If you seldom deal with larger investment properties - and it is not part of your business to sell the old commercial building - the terms used tend to confuse rather than clarify.
Information such as Core, Assets , Developer, Value Add, WALT, etc., is usually used and understood only by real estate professionals who deal with investment properties.
In almost every industry, a more or less unique terminology has developed, for example among doctors, bankers, lawyers, craftsmen, etc.. As it makes sense to "speak the same language" in daily business, it is sometimes confusing for those who have to deal with it for the first time.
We have therefore compiled the most important abbreviations and anglicisms for you, which are often used in the purchase profiles and search criteria of larger investors.
Do you want to sell your property but do not want to delve deeper into this subject yourself? Then please get in touch with us. You can expect from us competence and marketing as best as possible.
ABBREVIATIONS AND DEFINITIONS
The term asset includes a lot of investments from shares and shipping containers to investment properties. In larger real estate investment companies today, however, one usually no longer speaks of real estate, but only of assets. There are asset managers, asset classes, trophyassets, assets to manage, etc ... Everything becomes an asset - but a property still remains a property.
The real estate assets, suitable as fixed assets or capital investments, can be divided into different classes. Some investors buy interesting properties in all asset classes, while others specialise in individual areas.
- Multi-family houses: residential house with several tenants, mostly 6 to 20 residential units
- Residential and commercial buildings: apartment building with a commercial share, mostly shop/restaurant area or office, commercial < 50 %
- housing estates: special form of apartment house, with 20 - 50, partly also several hundred, housing units
- Portfolios: a package of multiple apartment buildings, residential or mixed residential/commercial complexes
- Micro-apartment complexes: micro-apartments in an urban location, innovative furnishing solutions. Trendy living concept, high demand
- Student Apartments: mixes in the meantime with the market of micro apartments. 1-2 room apartments, partly furnished.
- Office building: usually for office and administrative purposes of service providers and public authorities. Ideal condition: new buildings with pre-letting, modern existing buildings, old buildings with historical charm (Art Nouveau, ...). Condition as good as possible, several tenants, (very) good downtown location or typical office location. High room flexibility, modern building and communication technology, parking possibilities.
- Commercial buildings: use for retail trade or gastronomy. Additionally office, living, hotel, parking, cinema, fitness possible. Ideal condition: commercial area with large shop windows, modern office surfaces, high-quality to exclusive units for residential use, high pedestrian frequency, very good district or city center situation.
- Supermarkets: retail space for food, 400 m² - 800 m² (small markets), ideal 800 - 1.500 m² retail space e.g. ALDI, LIDL, Netto, Plus, Denn´s, etc.
- Consumer markets: large retail area for food, consumer goods and consumer goods in self-service, from 1,500 m² to 5,000 m² sales area, e.g. Edeka, Rewe, Famila, Eurospar, etc
- Hypermarkets: similar to supermarkets with additional extensive non-food departments (clothing, sports, electronics) from 5.000 m² sales area, e.g. Kaufland, Globus, Real, Marktkauf, etc.
- Specialty stores: price aggressive specialty store (clothing, technology, toys, do-it-yourselfers, etc.) on a large sales area from 1,000 m² to 5,000 m², partly over 10,000 m². Operators are e.g., Mediamarkt, Deichmann, Roller, Obi, etc.
- Specialty shopping centres: at least 5 specialty shops on one site, sometimes with centre management, mostly on the outskirts of the town or in a district
- Shopping centres: retail space from 10,000 m², in small retail units rentable to all branches of the food and non-food retail trade as well as (system) gastronomy, success highly dependent on centre management
- Factory Outlet: managed center with small retail spaces, mostly non-food manufacturers and restaurants, from 3.000 m² - 15.000 m²
Depending on location, concept and size, there are several investors in the German-speaking euro zone who are looking for investment opportunities in this special market. The possibilities range from a classic purchase to variants as sale-and-lease-back procedures, in which the previous owner remains the operator, but with a greatly improved liquidity or considerable financial relief.
- Senior residence
- Assisted living
- Medical centers
- Retirement and nursing homes
- Private and special clinics
- Research buildings
- Staff quarters
Corporate Real Estate (for Revitalization)
- Production real estate: usually individual halls of different equipment and size, moderate height, often with office space
- Storage and distribution real estate: usually less than 10,000 sqm hall space, older year of construction with simpler equipment, urban (outlying) location
- Transformation property: often "Red-Brick" character, revitalised commercial properties, also for work/living, (inner)urban location
Project Developments / Properties
Undeveloped land or land with demolition properties, suitable for residential or commercial construction. For all the above asset classes, we have specific prospective buyers reserved. The property can be already developed (incl. project development) or also be offered with architect connection. The purchase price volume in the search criteria of our interested parties is usually between 10 and 50 million €, depending on the property - for the completed construction project including the plot. However, individual investors also acquire properties well into the 3-digit million range - it ultimately depends on the location and the project.
Asset Risk Classes
- Throphy Asset: outstanding properties (KaDeWe/Adlon Berlin, EZB-Tower Frankfurt, Allianzarena Munich), AAA tenants, only the very best locations
- Core: only top tenants, long MV runtime, first-class condition, very good to very best locations
- Core Plus: shorter lease terms, a certain amount of renovation work is accepted, good to very good locations
- Value Add: short leases or partial vacancy, also major renovation work, good to very good locations
- Opportunistic: developmentable portfolio properties with vacancies, high renovation or conversion costs, also medium locations
Today, the former property manager is often called an asset manager. Of course, the wording is exaggerated - and this is wrong for capable asset managers - but in principle this already describes the development of the last few years. Not only billing and value retention, but also value creation from the existing stock and the (hidden) resources of a property are part of it today. The demands have risen and professional (global) players have emerged who no longer only manage real estate, but also take care of optimum management throughout the entire investment cycle. This includes the guarantee of a permanently undisturbed operation of the properties, but also the revitalization after long-term tenancies or changes in location in the direct or immediate environment. Furthermore, vacancy management with letting of vacant spaces and consideration of tenant (conversion) wishes, the purchase of further properties corresponding to the investment strategy and the sale of properties that no longer fit into the overall portfolio. Specialised companies are mostly active throughout Germany and manage real estate portfolios of several billion euros in some cases.
Asset Deals (mostly preferred) and Share Deals
As part of an asset deal, the direct ownership of a property can be taken over (A buys a house from B). Alternatively, a property can also be acquired through a share purchase by a company that owns the property (A buys into an owner company with B or acquires the company completely. The house belongs to the company). Depending on the number of shares acquired, the buyer - as a shareholder - gains disposal and control over "his" property.
Although the risk is rated higher with the takeover of a company - nothing else is ultimately the share deal - than with the direct acquisition of the property, there can be an advantage in saving the real estate transfer tax, which is not applicable with an acquisition of less than 95% of the company, under certain circumstances (cf. § 1 Paragraph 2a and 3 GrEStG, Stand 11/2016). However, this always depends on the details of an individual case, which generally requires legal and tax advice.
The abbreviation CBD means Central Business District. Such a situation description or the specification in a purchase profile ultimately means nothing else than "very best business location". In the case of office buildings, this is usually the location within the city ring up to the city centre; in the case of commercial buildings, only a prime location in the pedestrian zone can be considered. The typical American CBD does not exist in Germany (quarter with only office use, no apartments), whereby the banking quarter in Frankfurt a.M. comes very close to the definition.
Due Diligence (DD)
Literally means the careful review of a (real estate) investment, in economic, technical, legal, tax and financial terms. Particularly in the case of larger projects, specialised advisors are commissioned by the buyer, often for each relevant area of examination, in order to ensure the best possible security for the planned purchase.
Forward Funding Structures for the Purchase of (Larger) Project Developments
The investor pays the purchase price in instalments according to the progress of construction, whereby a combination of purchase contract and general transfer agreement is agreed and the investor's need for security can be fixed by the possibility of entry into the construction (trades) contracts.
Rental Contracts Double Net (only in the Commercial Sector)
With such a Double Net rental agreement, the landlord is responsible for the roof and compartment and bears the maintenance and repair costs for the building substance (floor slab, ceilings, walls, roof). In addition to the operating costs including taxes, the tenant also bears all levies and insurance costs.
Triple Net Rental Agreements (only in the Commercial Sector)
If the tenant is additionally charged the costs for the roof and the compartment, i.e. the maintenance and repair costs also for the building substance, this is referred to as a Triple Net rental agreement. This contractual constellation is legally questionable and requires at least a detailed individual agreement. Legal support during contract negotiations is advisable.
Property with several tenants, which reduces the risk of loss of rent for an investor. The slightly higher administrative expense is usually more than compensated by the lower risk of loss of rent.
Red Brick Charakter
Corporate real estate or administrative buildings in a good urban location, built between the 19th and mid-20th centuries, in visible brick construction. Old factory buildings or production halls, entrepreneur villas or also a historical railway station building, which can be converted and marketed today revitalized as lofts and/or offices.
This is a special form of sale, which is predominantly chosen for operator properties or owner-occupied company properties. The previous owner remains the operator even after the sale of the property (hotel, nursing home, supermarket, other companies), but with a greatly improved liquidity or considerable financial relief (hidden reserves become liquidity). A purchase contract and a rental (leasing) contract are notarised.
A further advantage for buyer and seller is that both can concentrate on their respective core competencies. The seller can concentrate on managing the business (without having to manage his property(s)) and the buyer on his competence as a financial partner or asset manager.
Disadvantages of sale-and-lease-back for sellers are that the liquidity effect in the amount of the sales price was one-off and in future leasing instalments (rent) must be paid, which increases operating expenses. A repurchase option is often agreed, which can then usually be exercised at market value (usually based on a market value appraisal). Even if the previous owner cannot profit from any increases in value during the rental period if the market situation is good, the current liquidity gain is usually of much greater importance, as to solve problems of imbalances or to be able to finance investments more easily and more cheaply due to the improved equity ratio and thus higher creditworthiness
Single Tenant Property
Property with one tenant, which greatly increases the risk of loss of rent for an investor. Especially in the case of large properties with only one tenant, third party usability is an important test criterion in the run-up to an investment.
Value-Add-Assets with Manage to Core Approach
Properties with optimisation possibilities are sought, which means that properties with certain deficits are to be developed in order to sell them again after a few years. Such properties must meet the location criteria of a Core or CorePlus property right from the start. Typically, these are properties that are described in the industry as "bad properties in good locations".
WALT or also WARLT
This is the abbreviation for "weighted average (realestate) lease term" , which is of interest for properties with several rental spaces (multi-tenant properties). There are investment profiles in which even a certain minimum WALT is prescribed.
WALT is a benchmark with which property(s) can be optimised. The higher the WALT, the more long-term the rental commitments are, the lower the risk of loss of rental income, the more stable the (mostly indexed) returns are and the more likely an investor is to accept a purchase price at the upper end of the possible price range. A high WALT is always also a basis for maintaining the value of a property over the long term, provided, of course, that you receive rents that are customary in the area.
In the case of neglected real estate or poorly managed tenancies and thus lower rental income, however, short WALTs are sought to revitalise the property after expiry of the rental agreements and/or to negotiate the rental agreements to a good level customary in the industry, whereby the value of the property can be increased again (see "Value-Add-Assets with manage to core approach").
Do you want to sell your property, but don't want to delve deeper into this subject yourself? Then please contact us.