Commercial Property Investment Terms Explained

1. Asset

Definition: An asset is something valuable that you own and that can make you money in the future.
Example: A rental property in Brisbane is an asset because it can generate rental income and may increase in value over time.

2. Capital Gain

Definition: This is the profit you make when you sell an investment for more than what you paid for it.
Example: You bought shares in Telstra for $1,000 and sold them later for $1,500. The $500 profit is your capital gain.

3. Capital Gains Tax (CGT)

Definition: This is the tax you pay on your capital gains.
Example: If you made a $500 profit from selling those Telstra shares, a portion of that gain may be taxed when you lodge your income tax return in Australia.

4. Dividend

Definition: A dividend is money paid by a company to its shareholders, usually from its profits.
Example: You own shares in the Commonwealth Bank, and every six months they pay you a dividend of $2 per share.

5. Franked Dividend

Definition: This is a dividend where the company has already paid tax on the profit. The franking credit can reduce the tax you pay.
Example: You receive a $70 dividend that is 100% franked. You may get a tax credit for the tax the company already paid on that profit.

6. Managed Fund

Definition: A managed fund pools money from many investors, and a professional manager invests it in a mix of assets like shares, property, or bonds.
Example: You invest $5,000 in a managed fund that includes Australian shares, global shares, and property trusts.

7. Exchange-Traded Fund (ETF)

Definition: An ETF is similar to a managed fund but is traded on the stock exchange like a share.
Example: You buy an ETF that tracks the top 200 companies on the ASX (Australian Securities Exchange). The value goes up and down depending on those companies’ performance.

8. Superannuation (Super)

Definition: Superannuation is money saved for your retirement. Employers must pay at least 11% of your wages into your super fund.
Example: You earn $80,000 per year, and your employer contributes $8,800 into your superannuation account annually.

9. Negative Gearing

Definition: This happens when the cost of owning an investment (like a rental property) is more than the income it earns. The loss may reduce your taxable income.
Example: Your rental property costs $25,000 per year to maintain, but it only earns $20,000 in rent. You can claim the $5,000 loss to reduce your income tax.

10. Positive Gearing

Definition: When your investment earns more than it costs to own, it is positively geared.
Example: You receive $30,000 in rent from a property, but the total expenses (mortgage, maintenance, etc.) are only $20,000. You keep the $10,000 profit.

11. Portfolio

Definition: A portfolio is a collection of all your investments.
Example: Your portfolio might include shares in BHP, a Brisbane apartment, an ETF, and a term deposit.

12. Diversification

Definition: This means spreading your investments across different assets to reduce risk.
Example: Instead of putting all your money into one company’s shares, you invest in shares, property, and a managed fund.

13. Return on Investment (ROI)

Definition: ROI is a measure of how much money you earn compared to how much you invested.
Example: If you invest $10,000 in shares and earn $1,000 profit, your ROI is 10%.

14. Shares (or Stocks)

Definition: Shares represent ownership in a company. If you own shares, you own a part of that company.
Example: If you own 100 shares in Woolworths, you are one of the owners of the company and may receive dividends.

15. Bond

Definition: A bond is a loan you give to a company or government. In return, they pay you interest over time and return your money at the end.
Example: You buy a $10,000 government bond paying 4% per year. You receive $400 every year until the bond matures.

16. Risk Profile

Definition: Your risk profile is how much risk you are comfortable with when investing.
Example: If you are young and can handle ups and downs, you might be a high-risk investor. If you are retired, you may prefer lower-risk options like term deposits.

17. Liquidity

Definition: Liquidity is how quickly you can access your money from an investment.
Example: Shares are usually liquid because you can sell them on the ASX quickly. Property is less liquid because it takes time to sell.

18. Blue Chip Stocks

Definition: These are shares in large, reliable, and financially strong companies with a history of steady performance.
Example: Companies like CSL, BHP, or Westpac are often considered blue-chip stocks in Australia.

19. Property Trust (REIT – Real Estate Investment Trust)

Definition: This is a type of fund that owns income-producing property. Investors earn a share of the rental income.
Example: You invest in a listed property trust that owns shopping centres and earns rental income from tenants like Coles and JB Hi-Fi.

20. Leverage

Definition: Leverage means borrowing money to invest, aiming to increase returns.
Example: You use a loan to buy an investment property worth $800,000. If the value rises to $900,000, your gain is much higher compared to only investing with your own money.

21. Gross Rental Income

Definition: This is the total income received from a commercial tenant before any expenses are taken out.
Example: A tenant pays you $60,000 per year in rent for your warehouse. That full $60,000 is your gross rental income.

22. Net Rental Income

Definition: This is the income you receive after expenses like rates, maintenance, and management fees have been deducted.
Example: From the $60,000 annual rent, you pay $5,000 in council rates and $2,000 in management fees. Your net income is $53,000.

23. Net Lettable Area (NLA)

Definition: This is the usable area of a commercial space that you can lease out to tenants.
Example: An office has 1,000 square metres of floor space, but 100 square metres are common areas like toilets and lifts. The NLA is 900 square metres.

24. Outgoings

Definition: These are the running costs of the property, often passed on to the tenant.
Example: Rates, insurance, water, cleaning of shared areas, and land tax can be classified as outgoings. A commercial tenant usually pays these on top of the rent.

25. Face Rent vs Effective Rent

Face Rent: The advertised rent without any incentives or discounts.
Effective Rent: The actual rent after incentives (such as rent-free periods) are factored in.
Example: You sign a lease at $500 per square metre per year (face rent), but offer six months rent-free in a five-year lease. The effective rent is lower when averaged over five years.

26. Capitalisation Rate (Cap Rate)

Definition: A rate used to estimate the value of an income-producing property. It is calculated as net income divided by property value.
Example: A building earning $100,000 in net rent per year with a cap rate of 5% is worth $2,000,000 ($100,000 ÷ 0.05).

27. Yield

Definition: Yield is the return you earn from a property, expressed as a percentage of the purchase price.
Example: You buy a small shop for $800,000 and it earns $56,000 net rent per year. Yield = 7% ($56,000 ÷ $800,000).

28. Lease Term

Definition: The length of time the tenant agrees to rent the property.
Example: A 5 + 5 year lease means five years initially, with the option to renew for another five.

29. CPI Increase (Consumer Price Index)

Definition: A lease clause where the rent increases in line with inflation, based on the CPI published by the ABS.
Example: If CPI rises by 3%, then rent increases by 3% that year.

30. Market Rent Review

Definition: This is when the rent is reviewed and adjusted to reflect current market conditions.
Example: Every five years, the lease allows the rent to be reviewed. If similar properties in the area are charging more, the rent may increase to match.

31. Fixed Annual Increase

Definition: A lease clause where rent increases by a fixed percentage each year.
Example: Rent increases by 4% each year, regardless of inflation or market conditions.

32. Make Good Clause

Definition: A condition in a commercial lease where the tenant must return the property to its original condition at the end of the lease.
Example: A café tenant must remove all fittings and repaint the walls before vacating the shop.

33. Vacancy Rate

Definition: The percentage of all available commercial properties that are unoccupied. It is used to understand demand and market health.
Example: If 3 out of 100 shops in a suburb are empty, the vacancy rate is 3%.

34. Incentives

Definition: Benefits given to attract tenants, such as rent-free periods or fit-out contributions.
Example: You offer three months’ free rent to a new tenant who signs a five-year lease.

35. Tenant Covenant

Definition: This refers to the financial strength and reliability of a tenant. A strong covenant means a tenant is likely to pay rent on time and stay for the full lease term.
Example: A government agency or national supermarket chain is usually considered a strong tenant covenant.

36. Strata Title

Definition: This means you own a commercial unit (such as an office suite or a shop) within a larger complex, and share responsibility for common areas.
Example: You buy a 100 square metre office in a mixed-use building with shared lifts and bathrooms. You pay strata fees for maintenance of these shared areas.

37. Freehold vs Leasehold

Freehold: You own the land and building outright.
Leasehold: You lease the land from another party (like the government) for a set time.
Example: Many petrol stations in Australia operate on leasehold land, while a standalone retail shop may be freehold.

38. Heads of Agreement (HOA)

Definition: A preliminary document that outlines the main terms of a commercial lease before the formal lease is signed.
Example: You and a tenant agree on rent, lease term, and fit-out period. These are written in an HOA before the lawyer prepares the final lease.

39. Gross Lease vs Net Lease

Gross Lease: The landlord pays all or most outgoings.
Net Lease: The tenant pays rent plus all outgoings.
Example: In a gross lease, you charge $70,000 per year and pay rates yourself. In a net lease, the tenant pays $60,000 plus all outgoings.

40. Due Diligence

Definition: The process of checking everything before buying a commercial property — leases, zoning, maintenance issues, tenant history, etc.
Example: Before buying an office building, you check that the tenant is paying rent on time and that there are no structural problems with the building.

41. Depreciation

Definition: A tax deduction you can claim over time for wear and tear on the building and assets.
Example: You buy a commercial property with a new air-conditioning system. You can claim depreciation each year on that system through a quantity surveyor’s report.

42. WALE (Weighted Average Lease Expiry)

Definition: WALE tells you the average time left until leases expire across all tenancies in a building, weighted by how much income each tenant contributes. A longer WALE usually means more stability.
Example:
You own a retail centre with three tenants:

Tenant A pays $50,000 and has 2 years left
Tenant B pays $30,000 and has 1 year left
Tenant C pays $20,000 and has 0.5 years left

WALE = (50k×2 + 30k×1 + 20k×0.5) ÷ ($100,000 total rent) = 1.15 years

In Plain Language:
It means that, on average, the tenants in this property have just over one year left on their leases. This is based on how much rent they pay. A WALE of 1.15 years suggests that most leases are short-term or coming up for renewal soon.

Why it matters:

A short WALE (like 1.15 years) means there could be more leasing risk because tenants might leave soon.
A long WALE (for example, 5 years) usually means more income security.

43. Gearing

Given: Gearing: 50%
Definition: Gearing refers to how much of the investment is funded by borrowed money (debt) compared to how much is funded by investor money (equity). It is usually expressed as a percentage.

In Plain Language:
With 50% gearing, half of the purchase price of the property is funded by a loan, and the other half is funded by investor contributions.

Why it matters:

Higher gearing means more borrowing, which can increase returns if the property performs well, but also adds risk if interest rates rise or the value falls.
Lower gearing means less risk but also lower potential return.

Example:
You buy a property for $10 million:

Loan: $5 million (50%)
Investor equity: $5 million (50%)
That is 50% gearing.

44. Investment Term

Definition: This is the planned period during which your money will remain invested in the property before it is sold or the investment is wound up.

In Plain Language:
For example, you are committing your money to this investment for 5 years. During this time, the property will be managed, rented out, and may grow in value. After 5 years, the property is usually sold, and profits are shared.

Why it matters:

You should not expect to access your money during this time.
It gives time for the property to stabilise and grow in value.

Example:
You invest $100,000 in a commercial property syndicate with a 5-year term. After 5 years, the property is sold and your share of the profit (capital gain) is returned, along with any income earned along the way.

45. Targeted Cash Return

Given: 10%+ per annum cash return at 90% occupancy
Definition: This is the annual income you are expected to receive from your investment — paid to you as cash — not including any capital growth from the sale of the property.

In Plain Language:
If the building stays at least 90% leased, you should receive 10% or more every year in cash, based on how much you invested.

Why it matters:

This is your income return, separate from any profit made when the property is eventually sold.
It depends on occupancy. If more space becomes vacant, the return could drop.

Example:
You invest $100,000 into the property.
If the cash return is 10%, you will receive $10,000 per year, likely paid quarterly or monthly.
This return assumes the property stays at least 90% leased.

47. Form 6

Form 6 is a standard contract used in Queensland under the Property Occupations Act 2014. It is required when appointing a real estate agent to manage, lease, or sell a property on your behalf. It sets out the scope of the agent’s authority, their commission, and the duration of their appointment.

Example:
If you are the owner of a commercial office building and want to engage a property agent to lease it, you must sign a Form 6. The form will detail the leasing fees, how long the agent will act for you, and what they are allowed to do (e.g. negotiate rent, sign leases, collect rent).

47. Title Office (also known as Land Titles Office)

Explanation:
The Title Office is the government body that keeps official records of who owns land and property. In Queensland, this is handled by the Queensland Titles Registry. When you buy or sell a property, the transaction must be registered with the Titles Office to make the change in ownership official.

Example:
After buying a retail shop, your solicitor lodges paperwork with the Titles Office to transfer the title from the seller to your name. Once registered, you officially become the owner in the eyes of the law.

48. Building Classification

Under the Building Code of Australia, every building is given a classification based on its intended use (e.g. commercial, industrial, or residential).
Each classification comes with specific construction and safety standards.
Example:
An office building is typically classified as Class 5, while a storage warehouse might be Class 7b.

49. Zoning

Zoning rules are set by local councils to determine what type of activity can occur on a piece of land.
Common zones include residential, commercial, industrial, and mixed-use.
Example:
A property zoned as “Centre Zone” may allow for uses like shops, restaurants, and office spaces, but not heavy industry.

50. Survey Plan

A survey plan is a legal document showing the exact boundaries, shape, and size of a piece of land.
It can also show easements, encroachments, and access points.
Example:
Before buying a vacant commercial block, your solicitor checks the survey plan to confirm that the fence does not cross over into neighbouring land.

51. Option to Renew

This is a clause in a lease that gives the tenant the right to extend their lease for another term, usually under the same or slightly revised terms.
It provides security to tenants and can also help investors keep reliable tenants longer.
Example:
A retail lease is signed for five years with an option to renew for another five years. If the tenant exercises the option, the lease continues for a total of ten years.

52. Encumbrance

An encumbrance is a legal burden or interest registered on the title of a property. It can include easements, mortgages, covenants, or restrictions.
It is important to identify any encumbrances before purchasing a property, as they can affect how the land is used or developed.
Example:
A telecommunications company has a right to access a strip of land on your property where cables are laid. This right is recorded as an encumbrance on the title.

53. Exclusive Agency

This is a type of agreement where only one agent is appointed to sell or lease a property during a specific period.
The agent is entitled to a commission if the property is sold or leased, even if the owner finds the buyer or tenant themselves.
Example:
You appoint one agent to lease your office space under an exclusive agency for 90 days. If you find a tenant during that time, the agent still gets paid.

54. Gross Building Area (GBA)

This refers to the total floor area of a building, including all internal and external walls.
It is commonly used in industrial and warehouse property measurements.
Example:
A warehouse has a Gross Building Area of 1,200 square metres, which includes all usable floor space and wall thickness.

55. Landlord Disclosure Statement

A document that a landlord must give a potential commercial or retail tenant before signing a lease.
It outlines key details such as lease terms, outgoings, rent reviews, and known risks.
Example:
Before a café signs a lease in your retail complex, you must give them a Landlord Disclosure Statement showing all the financial commitments and conditions.

56. Tenant Mix

This refers to the combination of tenants in a shopping centre or multi-tenant property. A well-balanced tenant mix can improve foot traffic and tenant success.
Example:
A small retail centre has a supermarket, pharmacy, bakery, and hair salon. This tenant mix serves daily needs and encourages cross-shopping.

57. Property Condition Report (PCR)

A written report that documents the condition of the property at the start of a lease.
It protects both landlord and tenant by providing a reference in case of disputes at the end of the lease.
Example:
Before handing over the keys to a tenant, you prepare a Property Condition Report showing photos of the clean walls, floors, and lighting fixtures.

58. Rental Bond (Security Bond)

A sum of money paid by the tenant at the beginning of the lease as security against unpaid rent or property damage.
In commercial leases, the bond is usually 3 to 6 months’ worth of rent and may be held as a bank guarantee or cash deposit.
Example:
A tenant leasing your industrial shed pays a rental bond equal to four months’ rent. If they leave damage behind, you can claim against the bond.

59. Make Good Obligation

A legal obligation in a lease requiring the tenant to return the property in its original condition when they vacate.
This may include repainting, removing partitions, or repairing damages.
Example:
At lease end, your office tenant must remove the desks and partitions they installed and repaint the walls as part of their make good obligation.

60. Retail Shop Lease Act (Queensland)

A law that protects tenants of retail premises in Queensland. It includes rules about disclosure, minimum lease terms, rent reviews, and dispute resolution.
Example:
If you lease a shop in a shopping centre in Queensland, your lease is governed by the Retail Shop Lease Act, and you must follow its requirements, such as giving the disclosure statement at least seven days before lease signing.

61. Permitted Use

This defines what the tenant is legally allowed to use the premises for, as outlined in the lease agreement.
It must align with the zoning and council approvals.
Example:
A lease says the tenant may use the space for a bakery. If they later want to run a café, they need landlord consent and council approval.

62. Fit-Out Period (Rent-Free Fit-Out Period)

A rent-free period given at the beginning of the lease to allow the tenant to fit out the premises without paying rent.
Example:
Your new tenant signs a 5-year lease for a fashion store. You offer them a 2-month rent-free fit-out period so they can install shelves, lighting, and displays before opening.

To be continue

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