New To Commercial Real Estate? Here are Some Terms to Know

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Navigating the world of commercial real estate (CRE) can be difficult, especially for those with no experience. To help those who are new to CRE, below are some important terms to become familiar with.

Class A, B and C buildings

These three building classifications represent different types of office spaces:

  • Class A – Newer, higher end high-rises in prime locations with high quality amenities. These office spaces command premium rents.
  • Class B – Average buildings with fewer amenities. In the past they could have been Class A, but their age bumps them down.  
  • Class C – Typically 20 years old or older, these need major repairs, are less expensive and are in less desirable locations.
Usable Square Footage (USF)

The actual occupiable space in a rental property. Non-exclusive spaces like restrooms, stairways, lobbies, hallways and storage rooms are not included. Calculate USF by subtracting shared square footage from the total floor area.

For partial floor leases, USF includes office space, storage rooms and private restrooms. For full floor leases, USF encompasses everything inside the building floor’s boundaries minus elevator shafts and stairwells.

Rentable Square Footage (RSF)

Tenants pay a share of the building’s common areas in proportion to the amount of building space they lease. RSF is the USF plus shared spaces like lobbies, hallways, restrooms and storage areas. Calculate RSF by dividing the total floor area by the USF.

Common Area Maintenance (CAM or CAMS)

A fee added to the base rent which covers a number of things like snow removal, escalators, sidewalks, outdoor lighting, parking lot maintenance, landscaping and others.

Landlord Representative

Negotiates with tenants or tenant representatives on the landlord’s behalf. Since they work for the landlord, their job is to get the best deal possible for the landlord.

Tenant Representative

Negotiate with the landlord or landlord representatives and can also help serve as an intermediary to resolve disputes between tenants and landlords. They get paid by splitting commission with leasing agents. If you have never negotiated a commercial lease before, having a tenant representative is very important.

Sublease clause

Some leases allow tenants to sublease their space to other tenants. This is stipulated in the lease and, if allowable, may come with additional restrictions. For example, a landlord may want to approve a sublessee before allowing them into the property. If a lease has no sublease clause, it may be wise to check with a lawyer before entering into a sublease agreement.

Escalation clause

Typically used in long term commercial leases, this clause allows for an annual rent increase based on a percentage of the CPI (Consumer Price Index) or based on increases in operating expenses, property taxes, or all three. Tenants can negotiate this clause to protect against rising costs.

Tenant Improvements

Changes or alterations made to the property by tenants. These should be negotiated before signing the lease to spell out what the landlord will pay. This is called a ‘tenant improvement allowance’ (TIA). Tenant improvements might include flooring, ceilings, painting, office partitions, air conditioning and other things. Tenants are responsible for any costs above the negotiated TIA.

Concessions

Negotiated allowances in a commercial lease to entice tenants into signing. These include things like reduced escalations, tenant improvement allowances and discounted or free rent for a fixed time period. A tenant’s concessions can be revoked if they default on their lease, a term which should be outlined in the lease. Typically, concessions can be renegotiated at the time of the lease’s renewal.

Before Signing, Educate Yourself

If you are considering a commercial lease, make sure to do your homework to educate yourself. You may not need to learn every single term associated with CRE, but at least you can learn enough not to feel completely out of your depth.

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