Commercial Real Estate Terminology

Commercial Real Estate Terminology


Absolute Net:
Lease requiring tenant to pay in addition to base rent all costs associated with the operation, repair and maintenance of the building, all real estate taxes, and utilities including repair and maintenance of the building’s structure and roof. Often the tenant is directly responsible both for all such costs and for the active handling of the items themselves.

Base Rent:
A specific amount used either as a minimum rent in a lease which uses a percentage of sales or overage for additional rent or sets a base onto which is added expenses and taxes in a net lease or increases in those items in a fully serviced lease.

CAM Charges:
Common Area Maintenance charges. Those charges levied on or the expenses incurred in maintaining the common areas of a building.

Common Area:
Common area is the area used in common by the tenants of an office building. Common area includes building lobby, elevators, restrooms and the corridors.

Certificate of Occupancy (CO):
A statement issued by a local government verifying that a newly constructed building is in compliance with all building codes and may be occupied.

Classification:
Classification is usually used in conjunction with an office property and refers to the quality of property. Classification definitions fall with the following guidelines. Class A+: Landmark quality, high-rise building with prime central business district location (the best of the Class A buildings). Class A: Generally 100,000 sf or larger (five or more floors), concrete and steel construction, built since 1980, business/support amenities, strong identifiable location and access. Class B: Renovated and in good locations, newer building, smaller in size and/or in non-prime location. Class C: older, un-renovated of any size in average to fair condition.

Effective Rent:
The average per square foot rent paid by the tenant over the term of a lease. Takes into account only free rent and escalations. This doesn’t include TI allowances, space pocket, free parking and other similar landlord concessions.

Effective Useable Area:
Excludes those areas within the Useable Space that the tenant pays rent on but effectively cannot use such as columns and sharply angled spaces.

Escalation:
A clause in a lease providing for an increased rental at a future time. This may be accomplished by several types of clauses, such as: (1) fixed increases – a clause which calls for a definite, periodic rental increase; (2) cost of living – a clause which ties the rent to a government cost of living index, with periodic adjustments as the index changes; (3) direct expense – the rent adjusted according to changes in the expenses of the property paid by the lessor, such as real estate tax increases, increased maintenance costs, electricity, etc.

Estoppel Certificate:
An instrument which itself prevents individuals from later asserting facts different from those contained in the document. Often required by the buyer of an office building. the tenant and landlord both sign the estoppel certificate, confirming the lease and pertinent facts thereto. Thereafter, neither party may make claims to the contrary.

Expansion Option:
A right granted by landlord to the tenant whereby the tenant has the option to add more space to its premises pursuant to the terms of the lease.

Expense Stop:
A fixed amount (typically per square foot) in a lease where the tenant is responsible for all building operating expenses and taxes in excess of said amount.

Extension Option:
An agreed continuation of occupancy under the same conditions, as opposed to a renewal, which implies new terms or conditions. In a lease, it is a right granted by the landlord to the tenant whereby the tenant has the option to extend the lease for an additional term.

Fair Market Rent:
The rent which would be normally agreed upon by a willing landlord and tenant in an “arm’s length transaction” for a specific property at a given time, even though the actual rent may be different. In a lease, the term “fair market rent” is defined in a number of different ways and is subject to extensive negotiation and interpretations.

Full Service Gross Lease:
A lease in which the stated rent includes the operating expenses and taxes for the building.

Gross Up:
An adjustment made to operating expenses to occupancy level in a building. When operating expenses are “grossed up”, it means that the building’s variable expenses have been adjusted upwards to the level that those expenses would be incurred if the building was fully occupied (typically 95%).

Ground Lease:
A lease of land only, (either vacant or exclusive of any building on it). Usually a net lease on a long term basis (30 years+).

Letter of Intent (LOI):
A written proposal that two parties to a prospective transaction (buyer/seller or lessor/lessee) intend to proceed to a final agreement in good faith on stated principal business terms of the deal to be entered into. Generally this is not enforceable until it’s reduced to a written agreement which is signed by both parties.

Load Factor:
In a lease, the load factor is the multiplier to a tenant’s useable space that accounts for the tenant’s proportionate share of the common area (restrooms, elevator lobby, mechanical rooms, etc.).  The load factor is usually expressed as a percentage and ranges from a low of 5% for a full tenant to as high as 15% for a multi-tenant floor. Subtracting one (1) from the quotient of the rentable area divided by the useable area yields the Load Factor.  At times confused with the “loss factor” which is the total rentable area of the full floor less the useable area divided by the rentable area. (If a full floor is broken up into multiple tenancies and has a useable area of 18,000 sf and a rentable area of 20,000 sf, then the load factor is 11.1 % and the loss factor is 10%

Master Lease:
A lease controlling subsequent leases.

Operating Expenses:
The cost of operating an office building, such as janitorial, management fees, utilities, and similar day to day expenses, as well as real estate taxes, insurance, and a reserve for replacement of items which periodically wear out. Should not include capital expenses such as roof replacement nor expenses accociated with the production of income such as leasing commissions and legal fees.

Pass Throughs:
An increase in operating expenses over the base year amount that is billed to the tenant as additional rent.

Renewal Option:
The right of a tenant to renew (extend the term of) a lease for a stated period of time at a rent to be determined.

Rentable Area:
The (square footage) for which rent can be charged. Generally it is the gross area of the full floor less the area of all vertical penetrations (elevator shafts, stairwells, mechanical shafts etc.) Rentable area can be measured in many ways, but the most common measurement for office buildings is according to BOMA standards.

Request for Proposal (RFP):
A document typically issued by a tenant’s agent to an owner(s) of a real property, inviting the owner(s) to submit a proposal to the tenant for the leasing of a vacant space.  The RFP sets forth the specific areas of concern to the tenant, such as the space in question, the lease term, expansion and renewal options, rental rate, and tenant improvements and other allowances to be provided by the owner.

Space Planning:
Term is often loosely used. Most often it is the planning of the layout of the interior space of a building to meet the needs of the user/tenant which may also include detailed interior design and preparation of construction drawings.

Space Pocket:
A portion of a leased premises that is set aside to accommodate future growth on the part of the tenant. The space pocket is typically fully improved at the commencement of the lease and no rent is due on the pocketed area until the earlier of “actual use” or a specified future date.

Sublease:
A lease, under which the lessor is the lessee of a prior lease of the same property.

TI Allowance (Tenant Improvement Allowance):
A set dollar amount provided by landlord under a lease to be used by the Tenant for specific purpose. Examples include allowances for tenant improvements, moving expenses, design fees, etc. If the expense exceeds the allowance amount, such excess is usually the Tenant’s responsibility or it can be amortized into the rent. If the expense is less than the allowance, the savings are retained by the Landlord unless Tenant has an agreement that allows Tenant to use any excess allowance towards rent abatement.

Tripple Net:
A lease requiring the tenant to pay in addition to a fixed rental, the expenses of the property leases, such as real estate taxes, insurance, maintenance, utilities, cleaning etc.

Turnkey:
Referring to an owner making a property ready for a tenant to begin business by having the tenant furnish only furniture, phone and inventory, if any. Turnkey tenant improvements are provided at the landlord’s expense according to the plans and specifications previously agreed upon by the parties. Unlike an allowance where the tenant pays for costs in excess of the allowance amount, the landlord bears the risk of construction in a turnkey situation.

Useable Area:
The secured area (square footage) occupied exclusively by tenant within a tenant’s leased space. The useable area times the load factor for common area results in rentable area on which rent is charged.

Work Letter:
Specifications for tenant improvements usually attached to a lease and/or letter of intent. The work letter provides the basis for working drawings and contractor pricing and may allocate costs between the parties. Also establishes critical dates for approval of drawings and processes.