The commercial real estate vocabulary can sometimes be intimidating. And it can be quite challenging to learn how to navigate through all the commercial real estate terms.
If you’re like many other experienced property owners that are switching from residential to commercial property, learning the language can be difficult. You may know certain commercial real estate terms, but when it comes time to talk to sellers, you may still feel under-informed.
Maybe you have heard of commercial real estate terms like “tenant improvement,” or “usable square footage,” but you certainly don’t know what lies underneath.
If you are coming from a residential property and wanting to do an Exchange for a commercial property, we’ve outlined some key commercial real estate terms that you’ll need to know.
Knowing these commercial real estate terms will benefit your business and clarify any misconceptions about commercial real estate market.
1. Right Of Expansion
Your lease contract may include a Right of Expansion clause. In such case, the landlord is liable for providing an additional space for leasing before he presents it to the general public. Thus, you are liable to lease more space to such a tenant.
This is a good thing, as you can increase the contract, but you will need to keep an eye on this as it can cause problems later on if you have more tenants with such Expansion requests.
2. Option To Buy
The tenant may want a contract with an option to buy the property. This could be the case if it’s a single-tenant situation, but it can be the case in multi-tenant properties too.
If there is such a case, you will want the contract to specify the terms under which they can buy the property as well as the price that you can expect, if you decide to sell. Tenants usually perform the option-to-purchase at the conclusion of the lease.
You may not want to sell though, especially if it’s a multi-tenant commercial property. So you will need to keep an eye on the fine print so you would avoid unpleasant situations at the expiration of the lease agreement.
3. Common Area Maintenance (CAM) Fees
CAM Fees include all the costs of operating the commercial property.
These are all the fees spent on maintenance of shared areas: hallways, elevators, stairways, lobbies, public restrooms, parking lots, sidewalks etc.
Being a landlord, you will need to know how the CAM fee is calculated per tenant.
As different tenants will have different needs, you will also need to be able to communicate clearly how CAM Fees will affect each individual lease contract.
You could advise your tenants to think about what they would use from the common areas. This would mean them meeting with their own real estate agent and outline those expectations in a request for proposal document.
This way you’re demonstrating a very open and partner-like approach in helping the tenant be on the same page with you about all the details making up the lease agreement.
4. Usable Square Footage
Usable Square Footage is the amount of space that is being leased. It is the footprint that your tenant will take in a building.
Usable square footage determines wall-to-wall space under the lease terms and includes the square footage of the place that is reserved for your tenant.
Knowing this information will help you determine whether you have enough space for your potential tenants.
5. Rentable Square Footage
This includes the usable square footage as well as some part of the square footage that will be shared among tenants. This may include bathrooms in hallways, lobbies, restrooms, elevators, or cafeterias. It may even cover spaces like maintenance and janitorial areas. So, the rent amount is determined by the rentable square footage.
6. Parking Ratio
Remember that a lease involves all the available parking spaces reserved for tenant employees. In order to determine the parking ratio, take the total rentable square footage of a space, and divide it by the number of parking spaces. The lease contract should suggest how many parking spaces will be available for each tenant.
You can also advise your potential tenants to consult with their employees to learn how many of them drive to work, and how many would take public transportation. Small things like these will show your tenants that you are a good landlord who takes care of the tenants.
7. Tenant Representative
The Tenant Representative is the real estate agent who represents the tenant. They help in determining office space and negotiating with the landlord or his representative.
These representatives work on commission, splitting it with the leasing agent. They act as an intermediary between tenants and landlords. Moreover, they try to resolve some issues between the tenant and the landlord.
As a landlord, you may mention the option of the tenant having their own representative just so there would be no awkward situations during the lease term. People tend to forget details, and having a tenant representative will make your life easier as you’re putting one extra degree of separation (and liability) between you and the tenant.
8. Landlord Representative
The Landlord Representative works as the leasing agent. This agent represents the landlord and takes care of the landlord’s interests. When you become an owner of a multi-tenant commercial property, your leasing agent is one of your best friends, so choose wisely.
The Landlord Representative job is getting you the highest amount of rent, with the least amount of expense. The holy grail deal is an NNN lease of course.
Your representative is negotiating with the tenant’s representative on your behalf, to draft an agreement which (ideally) optimizes rental costs, security deposit, tenant improvement allowances etc.
Choosing a good Leasing Agent will help you get the best possible deal with every tenant. But be careful with leasing agents as you don’t want an overly aggressive deal where the tenant is cornered so much that the lease agreement becomes a legal liability for you.
Some landlords decide to sign an exclusive listing agreement with a commercial real estate broker.
As these brokers are there to hasten the rental process, they may invite other brokers to look over the property and to rent it. These other brokers, from your perspective, are co-brokers.
If your broker and their co-broker find a tenant, who agrees on leasing the property, the two brokers divide up the commision. As the co-broker is not directly connected to you, you are not liable for paying extra commission for the co-brokers involvement.
So you should be perfectly fine with your broker reaching out for help from other brokers as then, you have two brokers working together, and you still end up paying a single broker.
10. Referral Fee
This term applies to the fee which is paid from one broker to another when they refer a client.
Usually, it is the percentage of the commission.
This is how your broker works with another co-broker. The two of them agree to usually split the fee 50/50. You get double the help, they split the money, everybody’s happy.
11. Building Classifications
There are three classes of buildings (A, B, and C), and you need to understand what these commercial real estate terms mean.
- Class A buildings are almost new, at a highly attractive location, and are known for good maintenance.
- Class B are average buildings with fewer amenities.
- Class C buildings are older than 20 years, and they need a lot of improvement and repairs.
Class A buildings will be the most attractive for tenants, but will also be the most expensive to buy and to rent out.
Class B buildings will be cheaper to buy, have lower rent and are less desirable.
Class C are the cheapest buildings to buy, but you will face a lot of renovation expenses that may even include zoning issues and permit renewals.
It helps to understand these commercial real estate terms in order to make sure that you are not paying more than you should, or that you are not getting a deal that would not fit your expectations.
12. Rent Concessions
Rent Concessions are allowances that permit discounted or free rent for a fixed period of time.
Usually, rent concessions are linked to renovations or adaptations of the place done by the new tenant. It can also mean pushing forward the first rent payment, so the tenant is not facing extra expenses to move into your building.
You will need to be very wise here as you don’t want to get too far in concessions that would hurt your bottom line. You will also need to pay attention to the cashflow, as you may face tax liabilities, especially when postponing the first payment.
You will want your broker nearby to think through this carefully and make your property attractive to solid tenants without hurting profitability.
13. Tenant Improvements
Tenant Improvements is a subset of the Rent Concessions you would discuss with the tenant.
These improvements include changes that are made to the property by the tenants. Tenants may decide to alter the property and make some changes so that it suits their needs better. Such improvements may include flooring, ceilings, painting etc., and they should be negotiated before signing the lease.
You will want to have counter-offers for all these improvements, so you know if what the tenant suggests as Rent Concessions is not overly expensive for you.
In some cases, you may be better off doing Tenant Improvements yourself and flipping the rent toward a higher number, rather than accepting a rent reduction because of Tenant Improvements that the tenant would do.
14. Letter Of Intent
This is a written document that reinforces the tenant’s commitment to lease the property. This document includes the terms of the lease such as negotiations, concessions, or timeframes and it is signed before the lease agreement.
One thing to keep in mind here is to make sure your broker quickly evaluates how serious this Letter of Intent really is. In some cases, co-brokers will hasten the Letter of Intent without checking if the tenant is really a solid pick. It will be up to you and your broker to leave no stones unturned and make sure that you are closing a deal with the right tenant.
Sometimes, you will have more than one Letter of Intent. This should actually be a preference so that you can pick which tenant you like the most. Bottom line, it’s your place you’re renting, and you should have the option to choose.
To Wrap It Up
Getting into commercial real estate as a landlord can be quite scary if you are not familiar with the basics. But, once you decide to have your own place as a long-term investment, it is very important that you educate yourself on the basics of working with commercial clients.
As key figures in the entire landlord lifestyle are you as the owner and your broker. You will need to work as a team with your broker and make sure that there are no blind spots in any negotiation and any contract you sign with any of your tenants.
Hopefully, this short list of key commercial real estate terms is helpful and serves as a springboard for you. We will be covering these commercial real estate terms (and others) in more detail, so you are better prepared to make your commercial real estate investment a good deal.
Westwood is here to help.
If you are not sure whether you are ready for such a large financial commitment of buying a commercial property, please do not hesitate to contact Westwood Net Lease Advisors.commercial real estate, commercial real estate investing, commercial real estate investors, commercial real estate terms, landlord, landlord best practices, lease negotiations