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The SquareFoot Glossary of Commercial Real Estate Terms

All the terms you need to know about commercial real estate.

a

  • Asking Rent: Asking Rent is the price landlords advertise as the cost to rent commercial space. Usually quoted as a dollar per square foot per year amount. During the leasing process, the cost of rent is a negotiation between the prospective tenant and the landlord.
  • Anchor Tenant: An anchor tenant is the featured, premium tenant of a commercial property. Their name is on the marquee, so to speak. Anchor tenants tend to be well-known brands whose mere presence lures other tenants to the site. Anchor tenants typically enjoy long lease terms and considerable influence with property owner and landlord, as well.
  • Assign (the right to): The right to assign allows you to transfer your entire lease and financial responsibilities to another tenant.

b

  • Building Class: A set of industry standards that rate the overall quality and condition of commercial property, with Class A representing the highest quality, and Class C representing the lowest.
  • Base Year: In a full service lease or "gross lease", the base year dictates the initial, annual amount tenants owe for the property's operating expenses (in addition to their base rent). The first year of a lease term is the base year, which usually stipulates a ceiling for operating expenses that tenants have to pay. For all subsequent years of the lease term, the landlord can adjust operating expenses beyond those established in the base year. Tenants then pay any increase beyond the base year according to their share of common building space.
  • Base Rent: Base rent is the minimum amount a commercial tenant pays to the landlord, expressed as a monthly or annual amount. Tenants typically pay expenses beyond base rent, however, in accordance with their lease. In a triple net lease, for example, tenants pay property taxes, maintenance fees and building insurance premiums, in addition to base rent.
  • Business Incubator: Business incubators are environments that nurture the growth and success of entrepreneurial companies.

c

  • Coworking: Coworking is the social gathering of a group of people, who are still working independently, but who share values and who are interested in the synergy that can happen from working with talented people in the same space.
  • Common Areas: Areas of a property used by all owners or tenants. (i.e a hallway, lobby or an elevator).

d

  • Double Net Lease: In a double net lease the lessee or tenant is responsible for real estate taxes and building insurance.

e

  • Exclusive Broker Agreement: An agreement between tenant and broker stipulating that, for a clearly defined period of time, the broker (and only that broker) will represent the tenant's interests throughout the office leasing process. Exclusive agreements also generally stipulate that, once all parties sign the lease, the broker earns a commission for her hard work. For brokers, it protects them against losing weeks and months of hard work to another broker, and for tenants it can deliver a broker fully incentivized to help them close on an office rental.
  • Eviction: A legal process landlords will undertake to repossess a commercial rental if the tenant is in violation of their lease e.g. failing to pay rent or unauthorized use of the space. Eviction terminates the tenants rights as a leaseholder and effectively returns possession of the space to the landlord.

f

  • Free Rent: When a landlord offers a Tenant Improvement Allowance to help fund office renovations, rather than pay the allowance up front, the landlord may choose to reimburse the tenant with "free" rent for a specified number of months. Depending on the size of the allowance.
  • Full Service Lease: In a full service lease (sometimes known as a “gross lease”), tenants pay base rent, and the landlord covers all the building expenses, which include maintenance fees, insurance and real estate taxes. The landlord will commonly recoup these costs, however, through higher rents and/or the building's Load Factor, which is rent tenants pay for use of the building’s common areas.

g

  • Gross-Up: A “Gross-Up” applies to full-service leases, or leases where the tenant pays a percentage of money due for certain services, like common area maintenance. The landlord will divide the cost of common area maintenance, or another service, by the amount of total square feet in the building, and then will charge each tenant a percentage of that number. Therefore, the amount any tenant has to pay is dependent on how much of the building is occupied. Gross-ups are money due on top of the rent that can also be spent towards real estate taxes, maintenance, janitorial service, utilities, and more.
  • Gross Lease: A type of commercial lease in which the landlord pays for the building's expenses, including taxes, insurance and maintenance. Gross leases can be "modified" to reallocate certain costs to tenants.
  • Good Guy Guarantee: A "Good Guy" Guarantee is a provision in a commercial lease stipulating that the landlord can take legal action personally against a delinquent tenant who stops paying rent and doesn't vacate the premises in a timely manner.

h

  • Holdover Clause: A Holdover Clause in a lease determines what happens if a tenant remains in their space past the expiration of their lease. It can provide some flexibility for the tenant in extenuating circumstances. Or it can provide no flexibility at all. It's negotiable.

i

  • Insurance Premium: The amount of money a landlord pays to insure a building. In some commercial leases, like a modified gross lease, the cost of insurance is split between the building's tenants on a pro rata basis.
  • Improvements: Additions and upgrades to raw commercial space for lease. A Tenant 'Improvement' Allowance is financing the landlord provides to help fund agreed-upon improvements to the space.

l

  • Load Factor: Load factor is the amount of area added by a building’s common areas. It is calculated by dividing rentable square feet, all of the space in the building, by usable square feet, everything except the shared spaces. By multiplying that number by one hundred, you can figure out what percentage of the building’s common space belongs to a specific tenant. Load factors are generally in the range of ten to fifteen percent, but can be higher in some cases. It’s important to know the load factor when leasing a space, as this is an add-on to your usable square feet.
  • Loss Factor: Loss factor is the percentage difference between a commercial space's usable square footage (space belonging exclusively to individual tenants) and rentable square footage (space that includes common areas). It's a common way for landlords to pass the cost of a building's upkeep to tenants.
  • Letter of Intent (LOI): A non-binding document that issues the preliminary framework for a lease agreement, like the rent figure, the lease term (length) and square footage of the space. A formal step on submitting an offer to rent commercial space.

o

  • Office Sublet: Commercial space offered to or rented by a subtenant. Office sublets usually come with shorter, more flexible lease terms than landlord-direct rentals. They usually come at cheaper rental rates, too.

p

  • Percentage Lease: A percentage lease is when a tenant pays a landlord a base payment of rent, plus a share of business revenue done on the premises. Percentage lease mainly applies to commercial real estate, and can benefit both tenant and landlords. Typically, the base rent is decreased to make room for a percentage of annual or monthly gross sales. Many retail stores use percentage leases in addition to their base rent. As the retailer may be in a shopping center or mall, the landlord is partially responsible for all foot traffic, and thus, revenue. Retailers in spaces with coffee shops, restaurants, and general stores benefit from their surrounding neighbors, and a percentage lease is a great way for retailers to pay for this foot traffic advantage. The percentage rent usually only kicks in after a certain amount of revenue is raised, which the retailer may or may not reach.
  • Pro Rata: The proportionate allocation or "shares" of a building's operating costs between its commercial tenants. Usually proportionate to the percentage of the building each tenant occupies.

r

  • Right of First Refusal: The right of first refusal gives the option holder the contractual right to refuse entering a transaction with a third party buyer. A right of first refusal necessarily includes three parties: the owner, the option holder, and the third party buyer. It ensures that the owner has to make the offer to the option holder before it makes the offer to the buyer. For example, if the owner bypasses the holder and directly sells the property to the third party, the holder can sue the owner for damages. However, the option holder may not be able to stop the transaction from taking place, as it is only a contractual and not a legal right.
  • Rent: Rent is a fixed amount that a tenant pays to a landlord at previously agreed upon fixed intervals. Rent is often paid monthly by the tenant, who in exchange can occupy and use the landlord’s owned space. Rent is determined before the tenant moves into the space, and will always be in the official lease. Depending on the lease, rent can be raised or controlled, which mean that it can only increase by certain, prescribed amounts.
  • Rentable Square Feet: The total amount of commercial space a tenant would be renting, including their pro-rata share of the building's common areas.

s

  • Security Deposit: A security deposit is an amount of money that the tenant pays their landlord to cover any damages, wear and tear, unpaid rent, and other conditions of the lease. If all goes well and the tenant upkeeps the space well and pays their rent on time, then the security deposit can be returned at the end of the lease. Typically, smaller damages like worn floors, dirty air filters, chipped paint and the like are not taken out of the security deposit. Many landlords do a walk-through with the tenant at the end of their lease to assess the damages, or lack thereof. The amount of security deposit can differ from landlord to landlord and from state to state, but it is often based around monthly rent.
  • Sublease: To rent all or part of a commercial space under lease to another another tenant. The original tenant retains theirs rights and obligations as the official leaseholder. A "sublet" can also refer to the commercial space itself offered to a subtenant.

t

  • Turnkey Build-out: A turnkey build-out is an arrangement through which the landlord of a commercial property finances and project-manages office space renovations for a tenant upfront. Turnkey build-outs shift the cost and responsibility—as well as control—of renovations away from tenants.
  • Tenant Improvement Allowance: The Tenant Improvement Allowance (TIA) is a financial contribution the landlord of a commercial property will offer tenants to help fund the renovation, or "build-out" of their office. Landlords will sometimes offer the Tenant Improvement Allowance as a reimbursement, either through free rent or some other means. With the Tenant Improvement Allowance, the tenant assumes more control over their office build-out, from allocation of budget to which contractors to use. The alternative to renovating an office with a Tenant Improvement Allowance is taking a "turnkey" build-out.

u

  • Usable Square Feet: Usable square feet is the amount of square feet that can actually be used by the tenant.This term typically applies to commercial property and covers everything except common spaces, hallways, stairwells, public restrooms, storage closet, et cetera. If a tenant leases an entire floor, then hallways and restrooms on their floor would count as usable square feet. Usable square feet differs from rentable square feet in that the latter includes a portion of the building’s shared space (hallways, lobbies, etc). In other words, usable square feet is the amount of space that only you or your company occupies. It excludes all shared spaces.

v

  • Vacancy Rate: A vacancy rate is the percentage of all the units in a building that are unoccupied. A vacancy rate is the opposite of an occupancy rate, which is the percentage of units that are occupied. While low vacancy rates mean rental sales are up, high vacancy rates mean that the space is not performing well in attracting renters. However, a vacancy rate can also point to units that are in need of renovations or repairs. A vacancy rate is calculated by multiplying the total number of vacant units by one hundred, then dividing the product by the total number of units. Vacancy rates can be analyzed as a metric to determine a competitive price for the space.

w

  • Work Letter: A work letter is a letter that the landlord writes the tenant which lists all of the interior elements that they will build in the space. Work letters outline the building’s standards of construction (type of ceiling, walls, floors, etc.), as well as the numbers of items that come with the building (light fixtures, doors, outlets, etc.). The work letter acts as an outline for the entire renovation, listing all of the interior elements of the space including the number of doors, measurements of partitions, and more. It’s important for companies to know what kind of interior work is needed before they sign a lease, and what the landlord will cover in the work letter.

z

  • Zoning: Zoning determines how land within a certain area can be used. Zoning laws help local governments organize communities by type- retail, residential, et. cetera- and also help maintain property values. Zoning laws often have to do with safety (a sex shop cannot be next to an elementary school) and values (A busy supermarket would disrupt a tiny residential block). Broad categories like residential, commercial, and agricultural zones may also be divided into smaller, hybrid categories. For example, residential areas many only include single family homes, or can be open to apartments and townhouses. Property owners must comply with local zoning laws or they will face legal troubles. Sometimes, property owners can file an application for their desired use of the land and be granted an exception.

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