The commercial real estate industry has its own unique terms. Knowing them will save you a whole lot of stress and misunderstanding. In addition, it will help you in being effective in your negotiations. Here are ten commercial real estate terms that you need to know in order to obtain a favorable lease.
1. Triple Net Leases
Triple Net Leases (TNL) refers to the type of payment where you (as the tenant or lessee) is responsible for the ongoing expenses of the property. This usually includes building insurance, real estate taxes and building maintenance, in addition for the payment for utilities and rent.
2. CAM or Common Area Maintenance
CAM refers to the extra money you pay along with your triple net. It covers the operating expenses.
3. Tenant Improvements
The customizations you make when you lease new space is called tenant improvements. You can frequently get the landlord to make part or all of the payment, depending on your negotiations.
4. Load Factors
Also known ad core factors, load factors are a way to express how much you have to pay for space. For example, if you have a 10,000 square foot usable space and also have to pay for 1,200 square feet of common area, you would have a 12 percent load factor, since 11,200 divided by 10,000 is 1.12, or 12 percent more.
5. Letter of Intent
Also known as LOI, Letter of Intent is a short document that spells out in detail the agreements between you and the landlord. It is the first document many people like to get started with when negotiating a commercial real estate deal.
6. Lease Buyout
This specifies how much you need to pay your landlord in order to be able to move out early. If a lease buyout is not included in your lease, you may still be able to negotiate one with your landlord.
7. Fair Market Value
In your lease, you may have a term called Fair Market Value (FMV). This means that your landlord is willing to write renewal options that reset to “fair market value.” Or, at a percentage close to the FMV. Since the FMV could leave you with a renewal that is 50 percent higher if rents skyrocket, it is advisable to negotiate a fixed increase—like 5 or 10 percent.
8. Effective Date
This is the date when your lease starts. Ideally, when you sign your lease, it does not begin that day. Instead, it begins when you move in. The effective date is the official date when your lease begins. This date is the basis from which every other milestone is calculated. These milestones include CAM adjustments and termination dates.
9. Options to Renew
This is one of the most favorable options you can have on your lease agreement. This option allows you to renew your space and maintain the space after the initial agreement has expired. In addition, if you have the option in your lease, you won’t have to commit upfront to maintain your space.
10. Full-Service Gross Leases
This is a commercial lease where you pay a base rent that covers all operating expenses such as common area maintenance, utilities, property insurance, and property taxes.
This is not an exhaustive list of all commercial real estate terms, but knowing these ones will put you in a comfortable position when negotiating your next space lease.
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