Ten Commercial Real Estate Terms You Should Know

Whether you own or rent your office space, property costs are one of the largest business overhead expenses. That’s why it’s important to comprehend the full ramifications of taking over the title to a property or entering into a lease agreement. Before you sign a lease, work with a commercial real estate broker with a proven track record, and consult with an attorney skilled in real estate law. You should also familiarize yourself with some common real estate terms:

  1. Appraisal. A written report by a state-licensed professional that includes an unbiased analysis of the property’s value and the reasoning that led to that opinion. An appraisal report is required for any property sale.
  2. Broker. An agent who brings together a buyer and a seller, or a landlord and a tenant, in a real estate transaction. All brokers must be licensed by the state in which they work. Most work on commission, and the landlord or seller usually pays the fee.
  3. Build-to-suit. A method of leasing property in which the landlord makes improvements to a space based on the tenant’s specifications. The cost of construction is generally factored into the lease terms. Most build-to-suit provisions apply to long-term (10-year) leases.
  4. Concessions. Benefits or discounts given by the seller or landlord of a property to help close a sale or lease. Common concessions include absorption of moving expenses, space remodeling or upgrades (also called “build-outs”), and reduced rent for the initial term of the lease.
  5. Escalation clause. A clause in a lease that allows the landlord to increase rent in the future. Rent increases dictated under an escalation clause may be charged in various ways, including:
    • A fixed increase over a definite period
    • A cost-of-living increase tied to a government index, such as the tax rate
    • An increase directly related to increases in operating the property
  6. HVAC. An acronym for “heating-ventilation-air-conditioning” system. In a commercial building, the landlord generally is responsible for maintaining the HVAC.
  7. Lease. An agreement by which the owner of a property (the “lessor”) grants the right of possession to a tenant (the “lessee”) for a specific period of time (the “term”) for a predetermined amount of money (the “rent”). A “leasehold estate” is the space occupied by the tenant. Common types of leases include:
    • A straight, or flat, lease, which stipulates that the same periodic payment (usually monthly) be made for the entire term of the lease.
    • A percentage lease, which uses a percentage of the net or gross sales to determine the monthly rent. This is most often used in retail properties and with a minimum base rent.
    • A net lease, which requires the tenant to pay maintenance, taxes, insurance and so on, along with a fixed rent. This is also called “net-net-net” or “triple net.”
  8. Lien. A legal claim filed against a property for payment of a debt or obligation. If a property owner fails to pay a creditor, for example, the creditor can place a lien on the property. A lien can halt the sale of a property.
  9. Sale-leaseback. A transaction in which an owner sells a property to an investor, who then leases the property back to the original owner under prearranged terms. Sale-leaseback deals offer the original owner freed-up capital and tax breaks and the investor a guaranteed return and appreciation.
  10. Sublease. A lease given by a tenant for some or all of a rented property. For example, if a tenant rents 20,000 square feet but only ends up needing 10,000 square feet, they may want to sublet the extra space for some or all of the remaining term of the lease, providing they continue to occupy and pay rent for the property.

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