Commercial Real Estate Terms & Definitions
Acre – A measure of land equal to 43,560 square feet.
Add-On Factor – Often referred to as the Load Factor or Loss Factor, it represents the tenant’s pro-rata share of the Building Common Areas, such as lobbies, public corridors and restrooms. It is usually expressed as a percentage which can then be applied to the usable square footage to determine the rentable square footage upon which the tenant will pay rent. For example: Assume you know there is 1,000 usable square feet (USF) and a 15% add-on factor. Your rentable square feet (RSF) would be 1,150 RSF.
Anchor Tenant – This term Typically applies to large office and retail Tenants. Generally, it does not make financial sense for a Landlord to turn the lights on in a new building until they have secured an anchor tenant (typically a tenant with 10,000 sf or more). A well-known commercial retail business such as a national chain store or regional department store strategically placed in a shopping center can help generate the most customers for all of the stores located in the shopping center.
Assignment – The ability to transfer the office space and all obligations of the lease document to another party (individual or entity). If your company has the potential of getting bought out it’s important that you ensure you have this right.
Attorment – A lease provision whereby the Tenant agrees, in advance, to accept and pay rent or other required payments to a new Landlord or legal owner of the property.
Base Year – Each year Landords estimate what portion of their full service lease rate, computed on a per-square-foot-per-year basis is actually operating expenses. Tenant are assigned this amount (base year) in the year that they sign a lease. Increases in operating expenses above the base year are passed through to Tenants, based on their pro rata share of a building.
BOMA – Building Owners and Managers Association which, among other things, established widely-accepted methods of computing square footage in commercial buildings.
Build-Out – Refers to the interior construction of a tenant’s space whether new construction or the reconfiguration of existing space.
Build-to-Suite – A customized design and build approach to a tenant’s space usually resulting in a single occupant building which is then leased or sold to the tenant.
Building Standard – A list of materials and finishes typcially used by the Landlord in all of their build-outs, repairs or restorations of their tenant’s suites.
Certificate of Occupancy – Presented by city building department to landlord or tenant after completion of tenant improvements and satisfactory inspections by city building department inspectors.
Class A – A real estate rating generally assigned to properties that will generate the highest rents per square foot due to their high quality and/or superior location
Class A, B, or C – This refers to the quality of the building. Usually, it is based on price or rental rates with the presumption that price reflects the image and appeal a property has. This classifying term is challenging, as each of us perceives quality differently. It should not be relied upon as a judgment of the property.
Class C – Buildings that offer few amenities but are otherwise in physically acceptable condition and provide cost-effective space to tenants who are not particularly image-conscious
Common Area Maintenance (CAM) – An additional, annual charge often assessed to tenants for maintenance of the property’s “common area”, such as its entryways, hallways or bathrooms.
Common Areas – Those areas or portions of a building used by more than one Tenant (hallways, elevator lobby area, janitorial and maintenance closets/rooms, health facilities, vending rooms, restrooms, and in some cases mechanical space, loading docks and other service areas).
Contiguos Office Space – Office suites adjacent to each other or having a common demising wall
Core Drilling – A method of drilling holes in building floors and ceilings to allow telephone, computer, electrical and plumbing installation. May require X-rays of the floor area to be drilled.
Demising Wall – The wall which separates a tenant’s suite from another tenant’s suite, or building common areas. In most cases, a demising wall will be constructed from floor to either the building roof deck or floor deck. The wall may also be a fire rated wall (see “partition wall”).
Dropped Ceiling – A suspended ceiling attached to the underside of the floor above; comprised of metal grid and ceiling tiles in either a 2-foot x 2-foot or 2-foot x 4-foot size.
Effective Rate – The dollar per square foot per year amount that a Tenant pays on an average over the entire term of a lease. Example: a 5-year or 60-month lease with 6 months’ free rent offers a 10% discount from the face rate; hence, the Effective Rate based on a gross rate of $10.00 per rentable square foot per year would equal $9.00.
Estoppel Certificate – A document signed by the Tenant that confirms they are the Tenant, that their lease is legitimate, and the amount of any security deposit the Landlord is holding. It is usually required to be signed by the Tenant when an owner sells the property, or is refinancing their debt on the property.
Executive Suite – An office within an office. Usually less than 200 square feet. In addition to the space, the tenant may receive services such as secretarial, reception, copy, fax, and phone. The price is usually 2 to 4 times typical space. Great option for one or two man shows or startups. Lease terms may be as short as month to month.
Expense Stop – A dollar amount (usually stated as an amount per foot per year) that the Landlord agrees to pay for building expenses. If expenses of the building exceed this amount, then the Tenant pays the amount above the expense stop based on their square footage of the building.
Flex Space – A building providing use flexibility between office, and other uses such as manufacturing, laboratory, warehouse, etc. Usually provides high bays and relocation flexibility for overhead doors and other entrances.
Full Service Lease – A term used to describe a lease in which the stated rent amount being paid to the Landlord includes all the expenses of the building (ie:electricity, water, gas, janitorial, real estate taxes, maintenance, insurance, etc..). However, the name “Full Service” is really a misnomer because the tenant is usually responsible for any operating expense or tax increases above their Expense Stop (AKA Base Year). The tenants portion is called the Pass-through cost.
Gross Lease – Commonly specifies one rental amount inclusive of rent, taxes, utilities, maintenance, janitorial, etc. associated with the rental of a property. In a gross lease tenants typically do not pay pass-through costs. Even if operating expenses increase the tenant does not pay increases. Gross leases are very rare these days.
Holding Over – A situation whereby a tenant is still occupying the space after their lease has expired. It can occur with or without the landlords consent. Often, hold over periods are pre-stated in the lease, and the tenant will incur a rent increase (i.e. 150% of current rate) until they vacate or renegotiate the lease. It causes the Tenant to agree on renewing or vacate as the cost of making no decision could be excessive.
HVAC – Heating, Ventilating and Air Conditioning.
Lease Commencement Date – The date upon which the lease commences and the obligations of the parties begins (see also “rent commencement date”).
Lessee – The Tenant
Lessor – The Landlord/Owner
Letter of Intent – A document that outlines the general terms of a proposed lease or purchase. Commonly called the LOI. It becomes the basis from which a formal lease or purchase document is written. These may or may not be binding between the parties, depending on language used. A more thorough Letter of Intent provides the parties with a more clear understanding of what they will agree to in the formal lease or purchase contract.
Letter of Representation – A written agreement between a Tenant and a broker stating that the broker (or his or her representatives) will be the only agents working on behalf of the Tenant to locate and negotiate for office space. The letter of representation provides credibility for both the Tenant and the broker in the marketplace and establishes a fiduciary relationship between the broker and the Tenant. This relationship is disclosed to each Landlord that might have office space to meet the Tenant’s needs.
Load Factor – That portion of the building which is shared by all tenants (ie. restrooms, enclosed stairwells, lobbies, restrooms). Typical load factors in Austin are 15% to 21%. If a space is 1,000 square feet with a 13% load factor, it means the building is only 87% efficient. In real terms, that means a 1,000 rentable square feet with zero load factor is 13% cheaper than the 13% load factored 1,000 rentable square foot space.
Modified Gross Lease – Contrasted with a full service lease, a modified gross lease has the tenant paying directly some of the expenses. Typically, it is where the electric and water are separately metered and the tenant pays directly to utility. This may be favorable in controlling expenses for frugal lessees. In comparing lease rates, make sure you consider who is responsible to pay for what.
Parking Ratio – The number of parking spaces divided by the total size of the building. A ratio of 1:250 means tenants are allowed one parking space for every 250 square feet in the building. The lower the ratio, the more parking spaces there are.
Pass Throughs – An expense associated with tenancy in which landlord “passes through” to tenant certain increases in building operating expenses occurring after a base year in the lease.
Pro Forma – A financial estimate of the gross and net income and expenses that are expected to be incurred in a new (or renovated) office building (or any real estate investment venture).
Pro-rata-Share – An amount calculated by dividing the square foot of the Tenants space by the entire building size. A 1,000 sqft Tenant would have a 10% pro-rata share of a 10,000 sqft building.
Renewal Option – Lease language that provides the means for tenant to give landlord notice of its intent to renew (extend) the lease.
Rent Abatement – A concession offered by a Landlord as an inducement to Tenants to lease office space. It provides for a reduction of monthly rent due by omitting a required payment for a specific number of months. This offers the Tenant the benefit of occupying without paying and also serves to lower the net effective rental rate over the lease term. Rent abatement may or may not include abatement of operating expense pass-throughs and any applicable expense or base rent escalators.
Rent Commencement Date – The date upon which the rent and usually the term of the lease begins. May be different from the lease commencement date when certain obligations must be fulfilled such as the construction of tenant improvements.
Rentable Square Feet – Refers to the square footage that is used in calculating rent. The rentable square footage normally exceeds the usable square footage because the Landlords allocate the areas that all the tenants have in common (i.e. Elevators, central lobbies, columns, restrooms, restrooms, storage closets). The difference between the rentable and the useable is called the load factor. Useable plus load factor equals rentable.
Shell Condition – The interior condition of either a new or existing building without improvements or finishes. Space typically has not yet been built out for a Tenant. There are no interior walls, the ceiling is unfinished, electrical circuits and lighting fixtures are not installed, the HVAC has not been distributed, etc.
Subletting – The process of leasing space from a Tenant who is already obligated to a Landlord, however it does not normally release the primary tenant or their guarantors from the original lease. Most leases require Landlords consent. Subleases are great for companies seeking flexibility, shorter lease terms and low cost office space. Subleases are typically 20-50% below the current lease rate. However, factors that help determine the price of sublease space include the existing layout, the condition of the local market, the length of term remaining on the primary lease, and the overall contract rent as compared with market rents.
Subordination – A lease provision in which the lease is stated to be less important, of lesser rank, and thereby junior to any deeds of trust, mortgages or ground leases on the building or property. Any covenants or provisions of these other documents are superior to, and will overrule any of the lease provisions.
Tenant Improvement Allowance – The estimated or actual dollar value of the construction funding offered by a Landlord to a Tenant as an inducement to a Tenant to lease office space, also called a “TI” allowance. The TI Allowance is typically proposed as “X” dollars times the Rentable Square Feet of the leased premises. The TI Allowance must be utilized for the construction of a Tenant’s proposed interior build-out.
Tenant Improvements (TI’s) – Refers to physical work done to a space to accommodate a specific tenants needs. Can include many things, such as carpet, paint, new wall partitions, new sinks, etc. Depending on negotiations, most Landlords allocate money to pay for certain standard items. Unusual items may have to be paid by the Tenant, or amortized over the lease term as additional rent. A full remodel could run between $25 and $40 per foot, depending on condition of space prior to changes.
Tenant Representation – Arrangement whereby a prospective tenant engages a real estate broker as its exclusive agent in negotiating a lease for commercial space. Also know as a “buyer’s broker.”
Tenant’s Market – Describes a situation in which there is a large amount of vacant office space available in a given market and few users (relative to the available supply) are looking for this office space. When this situation occurs, Landlords often lower rental rates and offer more and more valuable, concessions (free rent, expanded flexibility) or allowances (Tenant Improvement or Move Allowances) as inducements to Tenants planning to lease office space.
Triple Net Lease (NNN) – Generally refers to the requirement for the lessee to pay for its share of the property’s taxes, insurance and maintenance.
Turnkey – Complete build-out of a Tenant’s premises to the Tenant’s specifications and at no additional charge to the Tenant.
Usable Square Feet – The square footage that the individual tenant can actually use to sit or work in. (see rentable square footage and load factor).
White Box – The interior condition of either a new or existing building or suite in which the improvements generally consist of heating/cooling with delivery systems, lighting, electrical switches and outlets, lavatories, a finished ceiling, walls that are prepped for painting, and a concrete slab floor. Also called a “vanilla box”.