Dec 12, 2014

10 Must-Know Commercial Real Estate Terms

By Don Catalano



Once, even mid-sized companies had large corporate real estate departments that handled lease negotiation, site selection and property management. Today, many companies choose to run leaner and, instead, put responsibility for managing their commercial real estate on anyone from a COO, CFO or even, in some cases, the human resources department. If you're a part-time CRE manager, here are some terms that might not be familiar, but that you should know:

1. Letter of Intent

Because commercial real estate documents like leases and purchase agreements are frequently complicated, many people choose to start the process of negotiating a deal with a letter of intent, or LOI. LOIs are short documents that spell out deal points and get used to draft legal documents.

2. Rentable vs. Usable Square Footage

When you rent a space, the area inside its walls is called the usable square footage. You will usually also have to pay for your share of the floor's common areas -- like hallways and bathrooms. The combination of the two is called your rentable square footage.

3. Load Factors

Load, or core, factors are ways to express how much common area space you have to pay for. If you have a 5,000 square foot usable space and also have to pay for 600 square feet of common area, you would have a 12 percent load factor, since 5,600 divided by 5,000 is 1.12, or 12 percent more.

4. Rent Escalations

Leases have language that makes their rate go up periodically, frequently to keep pace with inflation. These increases are referred to as rent escalations and are common in commercial real estate.

5. Tenant Improvements

When you lease new space, you typically need to have it customized for your needs. Those customizations are referred to as tenant improvements and you can frequently get the landlord to pay some or all of their cost.

6. Full Service Gross Leases

When you sign a full service gross lease, you pay a set amount that includes both your rent and the costs of managing your space, such as utilities, repairs, taxes and management.

7. Triple Net Leases

In a triple net lease, you pay rent for your space and you pay your share of the building's operating expenses. Typically, triple net rents are less than gross rents, but that does not take into account the additional expense that you will have to bear.

8. CAM / Common Area Maintenance

The extra money that you pay along with your triple net rent to cover operating expenses is referred to as CAM charges. CAM stands for common area maintenance or management.

9. Options to Renew

One of the most favorable terms that you can have your commercial real estate broker negotiate for on your behalf is an option to renew. Options let you stay in your space beyond the end of your lease without you having to commit up front.

10. Assignment and Subletting

On the other hand, if a space ceases to meet your company's commercial real estate strategy, you might need to move out of it early. Having an assignment and subletting clause in your lease lets you either step away by assigning your lease to someone else or find a sub-tenant to sub-lease the space from you. In a sublet, they pay you rent and you turn around and make your lease payments.

Other great CRE articles:

Commercial Lease Renewal Myths... Busted!

5 Office Lease Terms to Watch For

A Tenant's Guide to Office Lease Terms


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Don Catalano

Don Catalano