Glossary of terms

PURCHASER/INVESTOR

BULK
The market value of office and shopping-centre land is generally expressed as the value per bulk square metre. Bulk square metres refer to the gross building area (GBA) of a building. According to The Sapoa Method for Measuring Floor Areas in Commercial and Industrial Buildings, GBA covers: “The entire building area, but it excludes patios, plant boxes, sunscreening, escape stairs, machine rooms, parking (basements or above ground), lift motor rooms, service rooms, caretakers’ flats, etc. GBA is mainly used by planning consultants in order to plan and execute a building in accordance with the permissible Floor Area Ratio (F.A.R) as derived from the zoning of the property. GBA is fixed for the life of the building but it should be noted that different local authorities may interpret the National Building Regulations which regulated the F.A.R definition in a slightly different manner.”

STANDARD CAPITALIZATION RATE
It is the expected net operating income for year 1, assuming the entire building is let at open-market rentals, divided by the purchase/transaction price, normally expressed as a percentage. This calculation ignores VAT, transfer duty and income tax, and assumes a cash transaction (in contrast to a paper-based sale).

FORWARD (INCOME) YIELD
A bourse term, hence it is typically applied to listed properties. In the non-listed property market, its approximate equivalent is the capitalization rate. It represents the expected net income of year 1 (the following 12 months) divided by the current price/value. It stands to reason that existing leases would largely determine the net income of year 1. See also historic (income) yield.

INITIAL YIELD
The first year’s expected net operating income (based on existing leases and other income reasonably expected) divided by the purchase price. Therefore the initial yield and the capitalization rate are only the same in those rare cases where a building is let at open-market rentals.

INTERNAL RATE OF RETURN (IRR)
A performance measurement that takes cognisance of the time-value of money. Technically, it is that rate which equates the inflows with the outflows of a cash flow. Also known as the money-weighted rate of return because the timing and weights of the money-flows influence the return. See also geometric mean return.

LEASEBACK
A fully repairing and insuring lease (tenant pays all operating costs) for 10 years or longer (with typically 5yearly rent reviews or fixed annual escalations) with a tenant with a strong covenant.

TENANTS

ESCALATION RATE
The rate by which a rental is hiked once a year in terms of a lease. The ruling market escalation rate can be seen as an attempt by the market to forecast the growth in market rentals over the duration of the lease, but this attempt is obviously rarely successful. Thus it is important to differentiate between an escalated rental and a market rental.

LESSEE
A person or other entity to whom space is rented under a lease. A tenant.

LESSOR
One who rents space to another under a lease. A landlord.

MARKET RENTAL
The most probable rental that a voluntary, informed and prudent lessee will pay a voluntary, informed and prudent lessor in a normal open-market (arms-length) transaction, when neither party is under any compulsion to rent or let, other than their normal desire to transact. Market value: The most probable price that a voluntary, informed and prudent purchaser will pay a voluntary, informed and prudent seller in a normal open-market (arms-length) transaction at the date of valuation – after allowing for proper marketing prior to the valuation date — when neither party is under any compulsion to sell or to purchase, other than their normal desire to transact. See also price and fundamental value.

NNN LEASE
Also known as a triple nett lease. A fully repairing and insuring lease (tenant pays all operating costs). The commonest example is a Leaseback.

RENTAL

GROSS RENTAL
The total rental payable by the tenant, excluding VAT, the tenant’s own electricity and water charges, but including other operating costs recovered by the landlord (if any), as well as promotion expenses payable by the tenant in the case of shopping centres. See also rental, net.

NET RENTAL
The amount payable by the tenant, excluding VAT and excluding operating costs recovered by the landlord (if any). See also rental, gross.

RENT-FREE PERIOD
No rent is payable by the tenant for an initial portion of the term of a lease. It is offered by a landlord as a rental concession to attract tenants.

TENANT INSTALLATION (TI) ALLOWANCE
A negotiated sum a landlord is willing to spend to customize space for the needs of a particular tenant

GENERAL
INDUSTRIAL-BUILDING GRADES

PRIME
A property in which space is easily lettable because it satisfies each of the following prerequisites:

Generally in a good condition;
Satisfactory macro access (i.e. access to freeway);
Satisfactory micro access (i.e. from street to building);
Proper loading facilities;
Eaves >4 m (excluding micro/ mini units);
Clear spans;
On ground level;
Adequate three-phase electrical power.
The eight conditions above are prerequisites for space to be considered prime. However, a building may possess additional enhancements that could improve lettability through increasing the size of the potential tenant pool.

Such enhancements could include sufficient office accommodation, adequate parking, sprinkler systems, masonry up to sill height, adequate floor loadings, roof insulation, sufficient yard space and a good location (as opposed to access).

COMPARATIVE GRADING OF INDUSTRIAL AND OFFICE SPACE

Industrial Offices
Prime + A
Prime B
Prime – C
Secondary D

SECONDARY
This is industrial space which is not classifiable as prime because it does not satisfy all eight prerequisites for prime space listed above. Such space is typically old buildings or structures, which have been haphazardly renovated. It would have poor access, too little yard space or office accommodation, inadequate goods lifts, no three-phase power and obsolete electrics and ablution facilities. Such space is often (but not exclusively) found in highly urbanised areas.

INDUSTRIAL PARK
An industrial park is a multi-tenanted complex of industrial buildings, typically surrounded by a security fence with access control and possibly some greenery.

OFFICE BUILDING GRADES DEFINED BY QUALITY OF FINISHES AND FACILITIES

GRADE A:
Generally not older than 10 years, unless renovated; prime location; high-quality finishes; adequate on-site parking; air-conditioning. Commands a gross market rental as indicated in the accompanying table.

GRADE B:
Generally 10 to 20 years old, unless renovated; accommodation to modern standards; prime location; air-conditioning; on-site parking. Commands a gross market rental as indicated in the accompanying table.

GRADE C:
Generally 20 to 30 years old, unless renovated; in fairly good condition, although finishes are not up to modern standards; good location; may have onsite parking; unlikely to be centrally air-conditioned; commands a gross market rental as indicated in the accompanying table.

GRADE D:
A building reaching the end of its functional life; old and in poor condition; near the bottom of the rental rate range; typically no air-conditioning and no on-site parking; may have good location.

OFFICE VACANCIES
This is the floor area available for leasing at any given time, irrespective of whether there is still a valid lease over the space. Often expressed as a percentage of the stock in rentable m².

OUTGOINGS (OPERATING COSTS)
In the case of office buildings, the following items are included under total gross outgoings, irrespective of who pays for these:

Cleaning.
Repairs & maintenance.
Common-area electricity & water (not tenant’s own).
Security.
Management (excluding head office overheads).
All leasing expenses: broker’s commission and in-house payroll, advertising, tenant installations & relocations (unless recovered), buy-outs, etc.
Municipal tax.
Insurance (fire & SASRIA). In the case of self-insurance, the landlord’s provision should be included.
Refuse & sewerage less recoverable amount.
External & common area repairs & maintenance.
Audit fees.

THE FOLLOWING ITEMS ARE EXCLUDED:
VAT.
Head office overheads.
Tenant’s own electricity and water.
Tenant installations/relocations recovered.
Recoverable refuse & sewerage.

PRICE:
The amount actually paid for an asset. Not the same as market value, because special circumstances may have applied when the transaction was concluded.

SAPOA:
South African Property Owners Association

GROSS LEASABLE AREA (GLA):
The amount of floor space available to be rented in a commercial property. Specifically, gross leasable area is the total floor area designed for tenant occupancy and exclusive use, including any basements, mezzanines, or upper floors. It is typically expressed in square metres. It is measured from the center line of joint partitions and from outside wall faces. That is, gross leasable area is the area for which tenants pay rent, and thus the area that produces income for the property owner.

GROSS BUILDING AREA (GBA):
According to The Sapoa Method for Measuring Floor Areas in Commercial and Industrial Buildings, GBA covers: “The entire building area, but it excludes patios, plant boxes, sunscreening, escape stairs, machine rooms, parking (basements or above ground), lift motor rooms, service rooms, caretakers’ flats, etc. GBA is mainly used by planning consultants in order to plan and execute a building in accordance with the permissible Floor Area Ratio (F.A.R) as derived from the zoning of the property. GBA is fixed for the life of the building but it should be noted that different local authorities may interpret the National Building Regulations which regulated the F.A.R definition in a slightly different manner.”