Commercial Real Estate Glossary
Get straight forward definitions to commonly used commercial real estate terms.
An absolute net lease requires that the tenant pays, in addition to base rent, all costs associated with real estate taxes and utilities, including the operation, repair and maintenance of the building. This also includes any repairs and maintenance to the building’s structure and roof. Under an absolute net lease, the tenant is often directly responsible for all of these costs, as well as for the active handling of the items themselves.
The ADA stands for the Americans With Disabilities Act, which was passed by Congress in 1994. The ADA’s intent is to provide persons with disabilities accommodations and access equal to or similar to that of the general public.
Any extra amounts due under a lease in addition to base rent. The most common form of additional rent is operating expense increases.
Any relationship in which one party (agent) acts for or represents another (principal) under the authority of the latter. Agency involving real property should always be in writing, such as listings, trusts, powers of attorney, etc.
A set dollar amount provided by the landlord under a lease to be used by the tenant for a specific purpose. Examples include allowances for tenant improvements, moving expenses design fees, etc. If the expense exceeds the allowance amount, such excess is the tenant’s responsibility. If the expense is less than the allowance, the savings are retained by the landlord unless the agreement with the tenant specifies otherwise.
A term used to embody any nontraditional work space or concepts – this can include telecommuting, coworking, and/or open office plans.
The payment of debt in regular, periodic installments of principal and interest, as opposed to interest only payments is called amortization. This can also be used in a lease where the landlord incurs costs for additional tenant improvements which are effectively treated as a debt and repaid by the tenant over the term of the lease.
The most prominent tenant in a commercial property. These are often big box stores or well known establishments. Due to their general ability to attract consumers and other tenants to the property, anchor tenants will often have added advantages like lower rent or lengthy lease terms.
An assignment is a transfer to another of any property, real or personal, or any rights or estates in the said property. While common assignments include leases, mortgages, and deeds of trust, the general term encompasses all transfers of title.
The existing shell condition of a building prior to the installation of tenant improvements. This condition varies from building to building, landlord to landlord, and generally involves the level of finish above the ceiling grid.
A specific amount used as the minimum rent. Alongside base rent, additional payments can be owed by the tenant based on other factors. Depending on the lease terms, in addition to base rent the landlord can also require that a percentage of the tenant’s sales or overage cover the additional rent. Under net leases, a base rent can be set in addition to utilities and any added expenses to cover real estate taxes, building insurance, and maintenance.
The 12 month period upon which a direct expense escalation of rent is based. The base year is typically the calendar year at which the lease commences.
BOMA stands for the Building Owners and Managers Association. BOMA publishes the definition of rentable and useable area, which is used to determine the square footage leased in most commercial office buildings.
Stands for common area maintenance charges. These charges are any charges or expenses levied on or incurred in maintaining the common areas of a building.
Moving people from one workspace to another within the leased premises. This usually involves relocation of furniture, phones, and the like and can be very expensive and time consuming. A high churn rate is to be avoided.
Any areas (hallways, corridors, etc.) in an office space that are used to travel between offices, cubicles and the like.
The date on which a lease begins. This is typically, but not always, the day on which the tenant takes possession of the leased space, which usually occurs upon substantial completion of the tenant improvements.
Class is usually used in conjunction with an office property and refers to the quality of property. Class 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/access. Class B: Renovated and in good locations. Newer building are smaller in size, wood frame construction, and/or in non-prime location. Class C: Older, unrenovated of any size in average to fair condition.
Common area is the area used in common by the tenants of an office building. Common area includes building and elevator lobbies, restrooms and the corridor leading from an elevator lobby to a tenant space.
Fees to be paid only in the event of a future occurrence. Examples include: Attorneys (especially in negligence cases) paid based on winning the suit and collecting damages; and a broker’s commission paid only upon closing the sale of a piece of property.
Certificate of Occupancy (COO)
A statement issued by a local government verifying that a newly constructed building is in compliance with all codes and may be occupied.
A type of communal workspace where tenants, independent from one another, can lease on a short or long term basis. Most coworking spaces allow tenants to purchases daily, monthly, or even yearly passes. Tenants can lease a variety of space options – including desks, private offices, or quads. Coworking spaces are often a popular alternative for tenants who aren’t looking for a fully traditional commercial real estate lease and the upkeep that comes with it.
The walled off and secured area of a leased space, separated from spaces leased to others (by a “demising” wall). Also measured as useable area.
The rate of interest used in a present value analysis representing the “time value of money”.
Double Net Lease
A type of net lease. A lease requiring the tenant to pay a fixed rental and a portion of the property insurance, as well as the building’s property taxes. Landlords cover the maintenance of the common areas, but tenants are still responsible for the cost of utilities and cleaning.
The average per square foot rent paid by the tenant over the term of a lease. This takes into account only free rent and stepped rents, but does not include allowances, space pockets, 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.
Equivalent Level Rate (ELR)
The ELR is the flat rate per square foot that, if paid each year in nominal dollars, will equal the same total present value as a proposed lease’s variable cash flows. The ELR is calculated by discounting all cash flows to a net present value per square foot and then amortizing this lump sum amount evenly over the term of the lease on a cost per square foot basis.
A clause in a lease providing for increased rent 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 tax increases, increased maintenance costs, etc.
An instrument which itself prevents individuals from later asserting facts different from those contained in the document. This is often required by the buyer of an office building. The tenant and landlord both sign the estoppel certificate, confirming the lease and pertinent facts Neither party may make claims to the contrary afterwards.
Any property where the owner has signed an agreement with a real estate broker to lease and/or sell their property. That broker has an “exclusive listing” on the owner’s property.
Exclusive Broker Agreement
An agreement between a broker and a tenant that specifies that the broker will represent the tenant and their interests throughout the leasing process for a set length of time. Due to the lengthy closing process and the potential for commission, commercial real estate brokers prefer to work exclusively with a tenant for their own protection. On the flip side, signing an exclusive broker agreement can benefit the tenant as well since it can help legitimize them as a serious prospect to landlords and motivate their broker to help them close on a commercial space.
A right granted by the landlord to the tenant where the tenant has the option(s) to add more space to its premises in accordance to the terms of the option(s).
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 the said amount.
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.
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 interpretation.
A concession granted by a landlord to a tenant where the tenant is excused from paying rent for a stated period during the lease term.
Fully Serviced Lease
A lease in which the stated rent includes the operating expenses and taxes for the building. This can also be referred to as gross lease, and is the opposite of net lease.
A lease in which the stated rent includes the operating expenses of the building. This can also be referred to as fully serviced lease, and is the opposite of net lease.
An adjustment made to operating expenses to account for the 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%.
A lease of land only – either vacant or exclusive of any buildings on it. A ground lease is usually a net lease on a long term basis (30 years+). In this instance, ground rent should not be charged back to the tenant as an operating expense.
A clause in a lease that lays out what happens to a tenant if they remain in a property after the lease has expired. Provisions in this clause can be negotiated.
Stands for Heating, Ventilation, Air Conditioning. A general term encompassing any system designed to heat and cool a building in its entirety, as opposed to a space heater.
The party (usually the owner) who gives the lease (right to possession) in return for a consideration (rent).
The specific period of time in which the landlord grants to the tenant the right to possession of real estate.
The party to whom a lease (the right to possession) is given in return for a consideration (rent).
The party (usually the owner) who gives the lease (right to possession) in return for a consideration (rent).
Letter of Intent (LOI)
There are potentially multiple uses of this term. It can be used to describe a written statement between two parties (buyer/seller or lessor/lessee) that intend to proceed to a final agreement in good faith on stated principal business terms of the deal to be entered into. This meaning applies when executed by both parties. Alternatively an LOI can be signed by only one party and is then an indication of a willingness to enter into agreement on the stated terms and conditions. To avoid legal issues regarding offer and acceptance and thus formation of a binding contract, care should be taken to include a clause stating that there is not a specific offer and no intent to be a legally binding obligation. However, an obligation to continue to negotiate in good faith to conclusion can be created.
The real estate agent hired by the property owner to lease a property on their behalf. The agent obtains a listing agreement, which calls for that agent to act on the owner’s behalf as a fiduciary in leasing the property.
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.
The percentage difference between usable area and rentable area.
A lease that controls subsequent leases. A master lease may cover more property than subsequent leases. For example, “A” leases an office building, containing ten offices, to “B”. “B” subsequently subleases the ten offices individually. The ten subleases from “B” as sublessor are controlled by the lease from “A” to “B” (master lease).
This generally indicates a lease in which the stated rent excludes the insurance, utilities, maintenance fees, operating expenses and real estate taxes for the building. The tenant is then responsible for the payment of these costs either directly or as additional rent. It is the opposite of gross or fully serviced lease. There are several types of net leases: single net, double net, triple net, absolute triple net.
Net Present Value (NPV)
The calculation of NPV takes into account both the netting of cost and benefits and the time value of money.
Net Rentable Area
Also known as just rentable area. The area (square footage) for which rent can be charged. Generally it is the gross area of the full floor minus 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. Net rentable area includes the tenant’s premises plus an allocation of the common area directly benefiting the tenant, such as restrooms, common corridors, mechanical and janitor’s rooms and the elevator lobby on the tenant’s floor.
So long as lease is not in default, its rights to occupancy under the lease will not be disturbed by the lessor or it’s successors or assigns.
Any cost or charge incurred by a tenant pursuant to its lease, such as rent, operating expense increases, parking charges, moving expenses, remodeling costs, etc.
Unless specifically stated otherwise in the lease, it is the date on which the tenant takes possession of its leased premises.
Any property that is leased directly by the owner. Sometimes, the owner will employ an in-house leasing agent. Typically, these are called open listings, where the owner will pay a full commission to any broker who brings a tenant to the property.
The cost of operating an office building, such as janitorial, management fees, utilities, and similar day to day expenses, as well as taxes, insurance, and a reserve for replacement of items which periodically wear out. This should not include capital expenses such as roof replacement nor expenses associated with the production of income such as leasing commissions and legal fees.
An agent who is an advocate for the owner and/or landlord.
An increase in operating expenses over the base year amount that is billed to the tenant as additional rent.
Percentage leases require tenants to pay a base rent and a monthly percentage based on the tenant’s sales. These are commonly associated with retail spaces like malls, mixed use buildings, and shopping centers with high foot traffic.
Typically the entire rentable area leased by the lessee. Sometimes used to designate solely the useable area leased by the lessee.
The present value is the amount that must be invested now to produce the known future value. For any sum invested at a given interest rate, the amount one would receive at the end of the period can be determined by taking the investment times one (1) plus the interest rate of the period to the power of the period. For example, if $10 is invested in an interest rate of 10% for one year, the investment would grow to $11 at the end of the year. It follows, then, that $11 one year from now is worth $10 today; that is $10 is the present value of $11.
A standard applied in a lease (most often in a sublease clause) which limits the landlord’s ability to withhold consent in its sole discretion. If a reasonable person would give consent to an action given the circumstances, so must the landlord.
The right of a tenant to renew a lease for a stated period of time at a rent to be determined (i.e. 9.5% of “fair market rent”).
Consideration paid for the occupancy and use of real property. Also a general term covering any consideration (not only money).
The tenant’s usable square footage alongside their portion of the building’s common area.
The amount of Rent paid for the occupancy and use of real property. Typically stated on a per square foot per month or per year basis.
Request For Proposal (RFP)
A document typically issued by a tenant’s agent to an owner(s) of 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.
Right of First Offer or First Opportunity
A right, usually given by an owner to a tenant, which gives the tenant a first chance to buy the property or lease a portion of the property if the owner decides to sell or lease. Unlike under a right of first refusal, the owner is not required to have a legitimate offer which the tenant can then match or refuse. If the tenant refuses to make an offer or if the parties cannot agree on terms, the property can then be sold or leased to a third party.
Right of First Refusal
A right, usually given by an owner to a tenant, which gives the tenant a first chance to buy the property or lease a portion of the property if the owner decides to sell or lease. The owner must have a legitimate offer which the tenant can match or refuse. If the tenant refuses, the property can then be sold or leased to the offeror.
Right of Offset
A specific clause in a lease where the tenant has the right to deduct from the rent certain costs which are due to the tenant from the landlord. Included may be the costs incurred by tenant to cure defaults of the landlord, after notice and failure by landlord to cure the defaults. These are called “self help”.
Single Net Lease
A type of net lease. A lease requiring the tenant to pay a fixed rental and property taxes, which are calculated based on the portion of the building leased by the tenant, as well as utilities and cleaning costs. The landlord covers insurance fees and building expenses.
While this term is often loosely used, it is most often referred to as the planning of the interior layout of a building. It can also include detailed interior design and preparation of construction drawings.
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.
A lease, under which the lessor is the lessee of a prior lease of the same property. The sublease may be different in terms from the original lease, but cannot contain a greater property interest. Example: “A” leases to “B” for five years. “B” may sublease to “C” for three years, but not for six years. (Rent can be greater or less than that in the prior lease.)
To make subject or junior to.
Generally used in reference to the construction of tenant improvements (TIs). The tenant’s premises is typically deemed to be substantially completed when all of the TIs for the premises have been completed in accordance with plans and specifications previously approved by the tenant. It is sometimes used to define the commencement date of a lease.
A holder of an interest in property for a specific term under a lease or other rental agreement (generally a right to occupancy and use).
Tenant Improvements (TI’s)
Improvements to land or buildings to meet the needs of tenants. This may include new improvements or remodeling and is either paid for by the landlord, tenant, or part by each.
An agent who is an advocate for the tenant. The relationship is most often the product of a signed representation agreement.
Triple Net Lease
A type of net lease. A lease requiring the tenant to pay in addition to a fixed rental, the expenses of the property leases, such as taxes, insurance, maintenance, utilities, and cleaning services.
Refers 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 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.
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. Useable area can be measured in many ways, but the most common measurement for office buildings is according to BOMA standards.
The percentage of units in a commercial building that are not occupied. This is the opposite of occupancy rate. Vacancy rate can be calculated by multiplying one hundred (100) by the total number of vacant units, and dividing that result by the total number of units.
The process by which costs can be decreased or benefits can be added to an undertaking or project through redesign, prioritization or other similar actions.
An office that moves with the person. Typically used in a sales organization where the salespeople are given portable computers, modems, and cellular phones in return for having their offices taken away.
Elevators, stairs or escalators moving people or freight between floors in a building.
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.
Drawings prepared by a licensed architect and used by contractors in the construction of tenant improvements. Shows all architectural detail such as electric, plumbing, partitions, etc.
Zoning dictates how a property can be used within certain areas. Through zoning laws, municipals or local governments can regulate how land can be used in order to better ensure the community’s health and safety. Zoning categories can include residential, commercial, industrial, recreational or agricultural