Introduction
There are numerous terms in the commercial real estate spectrum that you should be familiar with, particularly if you are an investor or commercial real estate owner. Here are some of the most important words and phrases to know.
Are you planning to invest in commercial real estate anytime soon? Do you own commercial real estate that you plan to lease out in the future? Whatever it is, learning more about some commercial real estate terms is essential. Let’s look at a few of them:
Incidental Expenses/Expenditure
Whenever a commercial space is rented, numerous costs are incurred in addition to the base rent. These expenses include property taxes, insurance, maintenance, utilities, repairs, and even common area fees. These are considered incidental expenses.
Gross Rent Lease
Gross rent lease refers to a simple lease system. You will pay a single monthly amount for rent and other property-related expenses. It may also be done on a bi-monthly basis if mutually agreed upon with the landlord.
Modified Gross Lease
This is a lease in which you and the landlord mutually agree to share the total incidental expenses. The landlord may pay a portion of the property taxes or insurance costs. The landlord may also cover some of the maintenance costs. Make an agreement with your landlord ahead of time about how you will split these costs.
Double Net Lease
Tenants pay the base rent under this system. The tenant also bears any two costs in the incidental expense category. It could be insurance or property taxes, for example. It could also be property-related utilities and taxes. Any mutually agreed-upon combination may be applicable in this case. Landlords are responsible for the remaining expenses.
Triple Net Lease
The tenant pays the base rent plus almost all incidental costs. They include insurance, property taxes, and maintenance. Landlords will not cover any costs, with the exception of scheduled repairs.
Percentage Rent Lease
A percentage rent lease is a type of lease agreement in which you must pay base rent as well as a gross sales percentage above a certain threshold. The minimum figure is mutually agreed upon before any premises are rented. This agreement occurs in the retail sector, specifically shopping malls and high-street retail.
Tenant Inducement
Landlords may provide several inducements and sops. Landlords may offer a rent-free period for a few months or make renovation/maintenance payments.
Trade Fixtures
Trade fixtures are items within the leased or rented space that can be taken with you when the rental space becomes vacant. These could be furniture, computers, or other removable equipment. Define these trade fixtures prior to signing lease agreements. You may want to hire a lawyer for these purposes.
Turnkey Improvements
These are the changes made by the landlord to the rental property (including renovations) before renting any space. It helps to attract more high-quality tenants.
Leasehold Improvements
These are renovations or changes made to the leased premises to improve them and support specific business activities. The landlord does the majority of them, and they become part of the unit. Tenants cannot remove them until they vacate the space. However, there are situations in which tenants can take these items with them. However, make this clear between you and your landlord.
Capitalization Rate
CAP Rate, also known as Capitalisation Rate, is calculated using a simple equation. The formula is CAP = NOI (net operating income) divided by the sales price or market value. It will calculate the rate of return on the property. Many investors want to know this rate before purchasing a commercial property.
Usable Square Footage
Usable square footage refers to the area available for use within any rental property in the commercial real estate sector. There is a lot of unusable space, such as stairways, exits, hallways, and bathrooms. USF allows you to get a sense of the usable or workable space at hand.
Rentable Square Footage
RSF stands for rentable square footage, which refers to the total amount of space (including shared areas) available in any commercial real estate unit. It will assist you in estimating the working and shared spaces such as bathrooms, lobbies, hallways, and other areas. Landlords use this to calculate commercial property rental amounts.
CAM
CAM stands for commercial area maintenance, and it is your responsibility to pay. Every landlord has a different calculation for this aspect.
ROFR
The Right of First Refusal allows tenants to reject or accept any extra space available for rent from the landlord. As a result, landlords will be required to provide tenants with the ROFR clause, as well as any additional space for general use.
Sublease Clause
A sublease clause may not always be included in the property rental agreement. It either grants or denies tenants the right to sublease their own spaces to other individuals or businesses. Subleasing occurs when tenants rent out their units to other people or businesses for a set period of time.
Assignment Clause
Assignment clauses may prevent tenants from transferring their interest to another person. According to this clause, the person transferring interest will not have their interest resuming. The person who receives the assignment will be responsible for the rental until the end of the lease term.
Escalation Clause
Escalation clauses assist in determining rental figures when they increase or escalate on an annual basis. This increase can be estimated using the property tax, operating expenses, and the CPI (consumer price index).
