Commercial Real Estate Glossary
Absolute Net Lease - The next step above the "triple net" lease, an absolute net lease has no cost to the landlord, with the tenant being responsible for any and all costs associated with maintenance of the property. Good deal for the landlord.
Appraisal - A valuation of the property's intrinsic worth, typically done by a private and certified appraisal company, often performed during the process of sale to assure the lender of the property's value, to prevent a loss in the event of default by the borrower.
Blended Rate - Location matters, especially in retail, where the ground floor is often much more valuable than the 2nd floor or (gasp) basement, which has a fraction of the value of its upstairs sibling. To mask the cost of less valuable floors, landlords and their brokers often advertise the "blended rate" that includes several floor and averages them, to come up with a single rate that presumably sounds better than would the asking rate for each of the floors individually.
Broker - The most misunderstood, misused term in real estate. While commonly misused as any party representing someone else in a real estate transaction, the broker is a person at an agency licensed specifically as a broker, or the head of the brokerage, legally responsible for the actions of all the agents in the office. All others in the office are either Associate Brokers, or, most often, agents. Though state laws govern brokerage licenses and are therefore somewhat different by location, they require additional educational and testing requirements and a minimum time having practiced as an agent.
Broker Price Opinion (BPO) - An opinion of value (not an appraisal) performed by a real estate broker or agent based on recent sales, pending sales, and current listings. Often requested by the lender for potential Real Estate Owned (REO) properties, where the lender is taking the property back and wants an updated value prior to putting the property on the market for sale.
Capitalization Rate - Otherwise known as the "cap rate", the net annual income from a property (generated by the lease) divided by the purchase price. This is the annual return rate on the investment of a commercial property. Note that it is net income in this equation, so all landlord costs for maintaining the building get subtracted from the numerator of this equation.
Cold Dark Shell - A term of art for the condition of a commercial space, one that has not been outfitted with HVAC or lighting, and typically no interior finishes of any kind, just the demising walls (separating it from other spaces). An improved space may be "warm" (with HVAC) or "lit" (lighting). "Shell" usually refers to the raw concrete, whereas a "box" is often finished with drywall.
Common Area - Spaces in a commercial building that are shared by all tenants, such as elevators, gyms, garages. Costs for maintenance of these spaces are usually divided pro rata between all the commercial tenants.
Common Area Maintenance (CAM) - CAM charges are those costs associated with shared areas of the building, typically hallways, elevators, parking lots or other areas used by all tenants. The combined charges for the common area are then shared proportionately by the tenants based on the percentage of the building they use exclusively. Tenants have the right to audit the common area fees. CAM charges are not always negotiable, but tenants may choose during negotiations to not pay for areas they do not have access to, as when some spaces are used by office tenants and not retail tenants.
Core Area - The common area of a leased building. Why does it matter? Landlords often factor in the core to charge for the unchargeable portion of the building. In their ever-more-creative attempts to pass through every cost of the building (and then some), the core factor calculates the percentage of non-rented space, and adds that to the base rent of a particular space, under the theory that the common area benefits everyone equally, and each tenant should pay for it. Except the landlord. You be the judge.
Floor Area Ration (FAR) - A common zoning term, used to calculate the floor area to land, used to establish a limit of how much building can inhabit a lot. An FAR of 3 would allow a 3,000 s.f. building on a 1,000 s.f. lot.
Full Service - Unlike a "triple-net" lease, a full service lease does not pass through nets like taxes, insurance, and maintenance. Full service leases are common with office space, where a tenant typically pays a defined rent through the term of the commercial lease. This is the same as a gross lease, except that the utilities are often included in a full service lease and paid by the landlord, though like many commercial property terms, specifics can very and changes are often negotiated.
General Warranty Deed - A type of deed granted by the seller of a property to a purchaser of the property, guaranteeing that the property is free from any defects or clouds on title. This is a broader warranty than a special or limited guarantee, though a title insurance policy will cover the purchaser in case of any defects in title.
Gross Lease - A fixed rent for the tenant, where the landlord pays the costs of the building such as taxes, insurance and management.
Lease Fee Market Value - A valuation of the commercial property's worth based on the value of an existing lease. Using a fair market capitalization rate (cap rate), which varies by location and region, applying that rate to the annual rent will give the Lease Fee Market Value. For instance, if the annual rent on the subject property is $100,000, and the local cap rate is 7 (7%), the presumed value is 100k / .07, or $1,428, 571. The rent does not typically calculate in triple net charges.
Load Factor - Either: (A) A convenient tool for landlords to charge more to a commercial tenant, or (B) a measurement of the common areas of a commercial building that is then used to share the common space costs pro rata among the tenants, depending on your perspective. Load factor is found by dividing the total square footage (or "rentable square footage") by the usable square footage (space that can be rented to a single tenant), for a ratio slightly more than 1. E.g., if a building has 100,000 s.f., and 90,000 is rentable to tenants, the load factor is 1.11. The landlord will sometimes then multiply this by the square footage of a commercial lease to come up with "rentable square feet." Some commercial tenants will pay this in addition to a "common area maintenance" charge for the landlord to maintain the common spaces. Double dipping? Hmmm....
LOI - A Letter of Intent is often a precursor to a commercial lease, used to memorialize basic lease terms between the potential tenant and landlord during negotiations. The LOI is a basic statement of terms, and almost uniformly non-binding (and should state so explicitly), helping the parties track terms in the back and forth. The drafter of the lease uses the Letter of Intent as a guideline for lease terms.
Modified Gross Lease - A lease that requires the commercial tenant to pay a fixed base rent, plus any increase in external costs like taxes or insurance. This is a blend between a gross lease, where the landlord pays for all expenses in exchange for base rent, and a triple net lease, where the tenant pays for all related external expenses such as taxes, repairs, and insurance. There can be infinite variations of this, but typically the landlord agrees to pay a base of external fees like electricity usage or taxes, and the tenant commits to pay any costs above the agreed upon landlord obligation. This limits the liability of a landlord in case costs escalate.
OpEx - Operating Expenditures in maintenance of the property. Operating expenses, unlike "Cap Ex" expenses, are deductible in the tax year spent, on items such as utilities, management, repairs, payroll, insurance, etc.
Rentable Square Footage - See "core factor" for the corollary of rentable square footage, which would ordinarily be the amount a tenant is actually using, and paying for, but may be less if the landlord is charging a core factor. By way of clarity, if a landlord is charging for the core factor, the rentable square footage will be what the tenant is using exclusively, but the core factor will be an additional charge.
Special Warranty Deed - A type of deed issued by the seller at settlement of a commercial or residential property, warranting that the deed to the property is free from defects caused by the seller, i.e. that the seller has full right to sell the property and has not encumbered the property during his ownership. This contrasts with a "general warranty deed," which applies the warranty to the entire history of the property, not just the period of ownership of the seller. Special warranty deeds are more common in commercial real estate transactions. A purchaser can obtain a buyer's policy of title insurance that will cover any defects in title for the full history of the property, as well as going forward.
Triple Net - Written often as "nnn" or "net net net". "Nets" are charges paid by the landlord that are often passed through to a commercial tenant, a practice common in retail leases. In a "triple-net" lease, there are 3 nets passed through: Property taxes, base building insurance, and Common Area Maintenance (CAM), which often includes management fees. While this is common in retail leases and uncommon in office leases (which are often "full service"), remember that everything is negotiable. When the tenant pays the nets, it pays a percentage that equals its percentage use of the entire building. Nets can change as taxes change and as costs go up, or as maintenance is performed, so the nets are an estimate that are often adjusted at least annually.
Washington DC commercial real estate glossary
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