Commercial Real Estate Terms

Base—The definition of “base” in lease terminology refers to the base rental rate per square foot per year.

Base rent—“The definition of “base rent” is the contracted quoted periodic rent due to the landlord. Rent escalations are based on the annual base rate

Capital expenditures—The definition of capital expenditures are expenses that are property improvements and, for tax purposes, cannot be expensed as current operating expenses. A current operating expense for a property would include grass cutting or HVAC maintenance. Examples of capital expenses would be tenant improvements or a new roof on the building.

Common areas—These are areas in a commercial building such as the lobby, deck or outside walking area that are available to all tenants and their guests.

Contract rent—The total rent obligation in the lease contract. It is also known as the base rent.

Due Diligence—The examination of a property and its related documents conducted by a renter, buyer or lender to determine first hand if the property is actually the way it is being represented. An example of due diligence would be if you are renting a 2,500 square foot office to go in and physically measure the space to see what square foot you come up with.

Equity lease—This is a type of joint venture where a lessee agrees to rent and occupy a space from the owner as would a traditional tenant. The difference is that the lessee a share of the ownership benefits--periodic cash flows, interest, and cost recovery deductions. When the property is sold, perhaps a share of the sales proceeds.

Fixed lease—An arrangement whereby the lessee of a space pays a fixed amount for the space.

Flex space—This is the type of space that can be typically used for office, light manufacturing, storage and other uses.

Free rent—In negotiating with a tenant for space, a landlord will sometimes sweeten the deal by offering several months or more when the tenant does not have to send in the rent check.

Government incentives—Sometimes if you are a large enough company and bringing a certain number of jobs to the area, local or regional government will assist you by among other things giving you a better tax deal than others are getting in an area. Typically, this does not apply to the small space user who is planning to start a business.

Gross area—This is the total square footage of a commercial building or the total square footage of a floor in that building.

Gross leasable area—The gross leasable area of a building, sometimes referred to as GLA, is the space in a building for a tenant’s exclusive use and the amount of space that the tenant pays rent on. If the tenant will occupy more than one level, this number could include basement space and mezzanine space. Gross leasable area is calculated from the center line of joint partitions and from outside wall faces. A lessee or his representative needs to carefully measure and check this square footage.

Gross lease—The definition of a gross lease is a lease in which all property expenses are paid by the owner of that property.

Ground lease—This is a lease on the land only. Typically, it is for a very long period of time and separates ownership of the land and ownership of the structures on that land. Sometimes universities will undertake a ground lease. If furnishes it with income but without giving up ownership of the land. For the lessee of that land, the lessee term has to be long enough to make economic sense to construct a building on the site.

Index lease—The definition of an index lease is a lease whereby the rental adjusts to changes and/or movements in a price index such as the Consumer Price Index.

Landlord—The owner or lessor of a property. The lessee is the tenant.

Land sale leaseback—This is a transaction where a parcel of land is sold and then leased back to the former owner. It is a similar arrangement to the straight land lease.

Lease—A contractual agreement between an owner and a tenant whereby the owner allows the tenant to exclusively occupy a space that he owns for a specified period of time in return for period rent on that space.

Lease buyout—The lease buyout is an agreement where the lease of an existing tenant is extinguished for its remaining term. It could be undertaken by the landlord, the tenant or a third party. This is seen a lot in prime retail locations where a little store may have been in business for many years but now the landlord wants to move a high-rent national retailer into the space and may pay the existing tenant to move. Sometimes a tenant that needs to get out of a lease will offer the landlord a certain amount of money to extinguish it.

Leased fee—The owner of a property has the right to charge a fee to a tenant for use of a space and to repossess the space at the end of the lease period.

Leasehold estate—The tenant or lessee has a right to occupy the space for the term of the lease for which he or she has contracted for.

Leasehold interest—The difference between what a tenant is paying to the landlord to lease a space and the market rent that the landlord could get if the space were available. It is market rent - contract rent = leasehold interest.

Lessee—The definition of lessee is the person or company renting space and is known as the tenant.

Lessor—The owner of a property who rents space to the lessee or tenant.

Load Factor—According to the Building Owners and Managers Association (BOMA) in its “Standard Method for Measuring Floor Area in Office Buildings,” the Load Factor is the percentage of space on a floor that is not usable, expressed as a percent of Usable Area. It is also known as the Common Area Factor or the Loss Factor.: Load Factor (Load) = R/U Ratio - 1.

Moving allowance—This is the amount of money that an owner will pay to a tenant to move.

Moving expenses—The amount of money incurred by the tenant to move into a new space.

Multiple use office space—This is also called generic office space and it is space that can be used for a variety of purposes.

Net lease—This is a lease where the tenant, besides paying the rent, will pay all of the taxes and upkeep on a property for the term of the lease. The net lease arrangement is very attractive to investors when there is a credit-worth tenant occupying a space for a long period of time.

Occupancy costs—This is the total cost a tenant pays to occupy a space.

Operating expense stop—A negotiable amount at which the owner’s contribution to operating expenses stops.

Operating expenses—Cash outlays necessary to operate and maintain a property. These expenses include: real estate taxes, property insurance, property management and maintenance expenses, utilities, and legal or accounting expenses. Operating expenses do not include capital expenditures, debt service, or cost recovery.

Percentage rent—The definition of percentage rent is the amount of rent paid over the base amount and it is calculated on the tenant’s sales over a specified amount. Retailers will often use this type of lease.

Rent concessions—The amount of free rent that the lessor agrees to with the lessee.

Rentable Area—According to the Building Owners and Managers Association (BOMA) in its “Standard Method for Measuring Floor Area in Office Buildings,” the rentable area of a building “measures the tenant’s pro-rata portion of the entire office floor, excluding elements of the building that penetrate through the floor to areas below. The Rentable Area of a building is fixed for the life of a building and is not affected by changes in corridor sizes and configuration.

Rentable to usable area—See Load Factor.

Rent escalators—When trying to figure out how much a space will cost, the tenant does not only look at the base rent in the lease but also rent escalators, which detail how much operating expenses, and taxes that may increase by predetermined amounts at stated intervals or by a constant annual percentage.

Sublease—A lease in which the lessee leases space to another user.

Tenant or lessee—A person or company that takes possession of space for its own use for a period of time and pays the owner a predetermine amount of money. At the end of the term of the lease, the tenant or lessee must give up possession of the space unless other arrangements have been made.

Tenant improvements or TI—Work done to improve a space that a tenant or lessee will take possession of. This TI may be paid for by either the tenant or the landlord or both and is one of those items aggressively negotiated before the signing of the lease.

Total effective rate—the total amount of rent that a tenant will pay on a square footage basis over a period of time analyzed.

Total effective rent—The total dollar amount of rent that a tenant will pay out for space over a the period of time analyzed.

Usable Area—According to the Building Owners and Managers Association (BOMA) in its “Standard Method for Measuring Floor Area in Office Buildings,” usable area is “measures the actual occupiable area of a floor or an office suite and is of prime interest to a tenant in evaluating the space offered by a landlord and in allocating the space required to house personnel and furniture.”