Search Commercial Real Estate Terms
A multi-tenant building attempts to treat all tenants equally. This includes charging them in an equitable manner. So all are charged for standard services and those that have special needs are charged separately for those services. This could include electricity usage if they occupy their space beyond normal business hours or have equipment which consumes an excessive amount of electricity.
Construction (tenant improvements) required by tenant over and above that considered standard or typical in the building. These items typically include wood or stone floors, crown molding, cabinets, appliances, lighting other than the building standard fluorescent fixtures, etc. These are described in detail in the work letter of the lease and on the construction documents.
The percentage of difference between the Rentable Area and the Usable Area divided by the Usable Area.
American with Disabilities Act (ADA)
Federal regulations intended to equalize access for people with disabilities in buildings. New buildings must comply in order to obtain their building permits. Lease spaces in existing buildings must comply when substantially remodeled. Architects are required by law in the State of Texas to send plans to the state if the cost of remodeling is expected to exceed $50,000.
Amortization of TI’s
A method for the landlord to pay for above-standard TI’s and then finance them by increasing the rental rate over all or a portion of the term of the lease.
The transfer of all obligations and rights of the lease or purchase contract to another party. This is often used in an offer letter, so that a Buyer would have the time to establish its final form of ownership, such as an LLC. An assignment does not necessarily relieve the assigning party of its obligation or liabilities. Confer with legal counsel
Lease provision in which the tenant agrees, in advance, to accept or pay rent to a new landlord or new owner. This is important if the current landlord defaults on their mortgage.
The basic per-annum rental specified in the lease
Base Year or Expense Stop
The expenses in a given year (usually the first year of the lease) over which the tenant is responsible for operating expenses. For example, if your base year is 2004 and the actual expenses in that year were $7.75 per square foot (/SF), then that would be considered your base year or expense stop for the remainder of the lease. You would then be responsible for your prorated share of any increase in subsequent years. If expenses go up to $8.50 /SF in 2005, you would be billed an extra $0.75/SF. That doesn’t sound like much, but if you lease 5,000 SF, that means a bill for $3,750. An expense stop is the same thing except that it is typically stated in the lease as a specific number regardless of what the actual expenses are in the first year of the lease.
The vertical backbone of the building usually in the center of the building including elevators, air shafts, restrooms, stairways, mechanical and electrical rooms, etc.
Building Standard TI’s
The tenant improvements routinely offered to all prospective tenants in a building. These are described in detail in the work letter of the lease and on the construction documents.
A Licensed Real Estate Agent working solely for the Buyer, not the Seller. Agency rules allow the Buyers Agent to receive a commission from the Seller even though he does not represent the Seller. Most Sellers have their own Sellers agents working to get them the best price and terms. The parties to the transaction must be informed ahead of the negotiations of this status.
Abbreviation for Capitalization rate. This is basically the net operating income (NOI) of the property divided by the purchase price. It can be viewed as the rate of return an investor would receive if the property was purchased with 100% cash. For example, a $100,000 property being sold on a 10% cap means that the NOI is $10,000.
Class A, B, or C
This refers to the quality of the building compared to the other buildings in the submarket. This is determined by the market as a whole and can vary from one submarket to another. The determination is usually based on age, image, amenities, access, etc. A building considered to be class A in the Stemmons Freeway market might be considered class C if it were in the central business district.
A date which Landlord and Tenant agree the lease actually started. This may be different than the occupancy date or rent commencement date. Often, a commencement letter will be signed by both parties once the date is determined. The commencement date often determines when rent will commence and acceptance of the property condition.
Portions of the building designated for the benefit of all tenants such as lobbies, corridors, restrooms, and mechanical areas.
The walls which separate or demise the leased premises from adjacent tenants.
Direct Pass-Through or Operating Expense Escalation
A formula through which the tenant is charged its prorated share of increases in the building’s real estate taxes and/or operating expenses over the base year or expense stop.
Refers to a Licensed Real Estate Agent who claims to be representing the best interests of both the Tenant and Landlord or both the Buyer and Seller.
Effective Annual Rent
The average rental rate of the total lease term after taking into account any free rent or base rent steps.
A document signed by the Tenant that confirms they are the tenant, confirms various terms of the lease, confirms that the lease is not in default, and confirms the amount of rent and any security deposit the Landlord is holding. It is usually required to be signed by the Tenant when an owner sells or refinances the property.
An operating business which leases a large space within a building and then subleases individual offices to other companies. In addition to the space, the subtenant has access to secretarial and receptionist services, copies, fax, phone, conference room, break room, etc. The rental rate per square foot is usually far higher than a direct lease because of these additional services.
The agreed-upon terms upon which a tenant has a right, but not an obligation, to expand into specific additional space.
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.
Full Service or Gross
A term which means that the rental rate includes all costs of operating the building including heat, lights, air conditioning, maintenance, management, security, landscaping, janitorial and general operation of the property. There many modifications to this including “plus E” meaning full service plus electric charges, “industrial gross” meaning that the tenant pays electric and janitorial separately, and “triple net” meaning that the tenant pays all operating expenses on top of the base rent.
Signer (guarantor) assures Landlord that Tenant signing the lease will pay the rent and, if not, the signer (guarantor) will be obligated to fulfill the lease. This is used when the Tenant may be financially weak or substantial tenant improvements are requested by the Tenant. The guarantor can be a corporation or a person.
Gross Rent Multiplier
This term is typically only used with multi-family properties – apartments. It is simply the purchase price divided by the gross potential rent of the property. So a $4,000,000 purchase price with gross potential rent of $750,000 would have a GRM of 5.33.
A technique used to adjust the operating expenses of a building to a level that would exist if the building were fully occupied. This
allows for a more equitable calculation of the base year expenses and subsequent years’ expense escalations payable by tenants.
Heating, ventilating and air conditioning.
When a tenant continues to occupy the leased premises after the lease has expired. It can occur with or without the landlord’s consent. Leases usually state a holdover rent increase (i.e. 150-200% of current rate) until the tenant vacates or renegotiates the lease.
An escalation formula that increases the rent each year by a fixed or variable percentage.
The date on which the lease starts. This may be a different date than tenant moves in or starts paying rent.
Space which is leased to the tenant usually for its exclusive use within the demising walls.
The landlord or owner.
Letter of Intent
A document that outlines the general terms of a proposed lease or purchase. It becomes the basis from which a formal lease or purchase document is written. These are typically not binding between the parties depending on the language used.
Modified Gross Lease
As opposed to a full service lease, a modified gross lease requires that the tenant pays some of the expenses directly – typically electricity, janitorial and/or water. In comparing leases, it is important to adjust for the differences in the lease rates.
A large sign containing the names of one or more tenants that is normally on the ground facing the street in front of the building, but not attached to it.
The metal posts between the exterior windows. Landlords typically require that walls terminate on a mullion instead of in the middle of a window.
Net Present Value
The current value of a future cash flow stream discounted at a given rate.
Expenses related to the building and property including electricity, water, gas, janitorial, parking lot sweeping, landscape maintenance, building maintenance (except major renovations), real estate taxes, insurance, and management fees. These items should be detailed in the lease document in order to avoid confusion.
A licensed Real Estate agent working to get the best deal for the Owner or Landlord frequently referred to as the Listing Agent.
The number of parking spaces divided by the total size of the building. A ratio of 1:250 means there is one parking space for every 250 square feet in the building. The lower the ratio, the more parking spaces there are. Tenants need to be sure this resulting number of spaces available to it will accommodate its employees and visitors.
This refers to operating expenses that are incurred on the property that are passed through to the tenants. Contrasting this are those expenses or costs that can not be passed through such as capital improvements or major replacements.
This is typically only used for retail tenants. This is rent calculated by applying a percentage stated in the lease to the tenant’s income generated from that location.
The uses or activities allowed to be performed in the leased premises. This becomes particularly important if zoning is in question or if Tenant plans to sublease its space.
Phase One Study
A review of the current and historical environmental condition of a property. Owners typically have a Phase One done prior to purchasing a property. Large tenants occasionally require them. And lenders usually want one done before they will either lend on or foreclose on a property.
Preliminary Title Report
Generated by a title company as a review of liens, encumbrances, ownership, and taxes on a property. This is normally done in preparation for a sale transaction.
An amount calculated by dividing the square footage of the tenant’s space by the entire building size. A 1,000 SF tenant would have a 10% pro-rata share of a 10,000 SF building.
Real Estate Tax
This is the property tax paid to the county, city, school district, etc. This is paid once a year between October 1 and January 31 to avoid interest and penalties. The lease should require that the landlord protest the assessed value annually to ensure the taxes are always as low as possible. Reserved usually means the Tenant is paying for it, whether per space or as part of the lease.
The right of the landlord to void a tenant’s lease for all, or a portion,
of the premises in order to prevent a sublease or assignment.
A lease clause specifying the terms and conditions under which the tenant may extend the lease term without obligating the tenant to do so.
Rent Abatement or Free Rent
A period of time during which the tenant is not charged rent for space under lease.
The date upon which the tenant is obligated to begin paying rent.
Agreed-upon increases in the Base Rent that take effect at specified dates during the term of the lease.
The square footage used to calculate Base Rent. It is the Usable Area that a tenant actually occupies plus a percentage of common areas.
An agreement whereby a tenant finds another tenant to occupy all or a portion of the leased premises. This is often done when a tenant closes an office or outgrows its space. It is important to include the appropriate language in the lease when first signed to give the primary tenant the right to sublease if that ever becomes necessary. It does not normally release the primary tenant or their guarantors from the lease obligations. The landlord must consent.
The amount by which rent paid on a sublease exceeds that paid on the underlying lease. Leases generally state that any premium
must be paid to the landlord, but a split can often be negotiated.
Money collected at the execution of the lease to provide additional confidence the Tenant will perform. It is not normally the last month’s rent but is typically equal to that amount. Landlords will require the
deposit be increased as their risk increases. Letters of credit can often be used in lieu of cash deposits.
A separate charge for electricity shown on a submeter monitoring the actual consumption of a large computer room, piece of equipment or machinery.
Tenant Improvement Allowance
A dollar amount provided by the landlord for the construction in the leased premises to make it ready for tenant’s occupancy.
Tenant Improvements (TI’s) or Build-out
Interior construction necessary to customize the space for occupancy by the tenant.
A Licensed Real Estate Agent working for the best interests of the Tenant, not the Landlord. They usually don’t have a listing agreement or agency relationship with the Owner or his Agent. This allows the Tenant Rep to commit fully to achieving the objectives of the Tenant.
Triple Net Lease (NNN)
A lease arrangement whereby the Tenant is obligated to pay for all the operating expenses associated with their space. They would have to contract individually for janitorial, electricity, insurance, and repairs. This is used mainly for industrial properties but is not often seen in office buildings because many services overlap (i.e. there is a central air system, central restrooms).
The square footage that the individual tenant can actually use sometimes characterized as “carpetable” area.
Architectural drawings required before a building permit can be obtained and construction can commence. This typically includes partition plans, HVAC plans, and specifications, plumbing,
electrical, reflected ceiling, finish detail, etc.
The landlord’s itemized schedule of specific labor and materials to be provided in constructing the TIs (tenant improvements).