Commercial Real Estate Terms - HomeLife Paramount

The following are the general commercial terms. Homelife paramount realtors are the expert in commercial transactions.

Abatement: Often and commonly referred to as free rent or early occupancy and may

occur outside or within the primary term of the lease.

Above Building Standard: accommodate a tenant’s requirements.

Upgraded finishes and specialized design necessary to

Absorption: The rate, expressed as a percentage, at which available space in the

marketplace is leased during a predetermined period of time. Also referred to as

“Market Absorption”.

Absorption Rate: The net change in space available for lease between two dates,

usually expressed as a percentage of the total square footage.

Ad Valorem: According to value. This is a tax imposed on the value of property

(usually referred to as a general property tax), which is typically based on the local

government’s valuation of the property.

Add-On Factor: Often referred to as the Loss Factor or Rentable/Usable (R/U) Factor,

it represents the tenant’s pro-rata share of the Building Common Areas, such as

lobbies, public corridors and restrooms. It is usually expressed as a percentage which

can then be applied to the usable square footage to determine the rentable square

footage upon which the tenant will pay rent.

Allowance Over Building Shell: Most often used in a yet-to-be constructed property,

the tenant has a blank canvas upon which to customize the interior finishes to their

specifications. This arrangement caps the landlord’s expenditure at a fixed dollar

amount over the negotiated price of the base building shell. This arrangement is most

successful when both parties agree on a detailed definition of what construction is

included and at what price.

Anchor Tenant: The major or prime tenant in a building, shopping center, or

development.

“As-Is” Condition: The acceptance by the tenant of the premises in their existing

condition at the time the lease is executed. This would include acceptance of any

physical defects, code violations, or other problems with the physical and legal condition

of the premises.

Assessment: A fee imposed on property, usually to pay for public improvements such as

water, sewers, streets, improvement districts, which are specific to the property or its

general location.

Assignment: A transfer by tenant of tenant’s entire leasehold estate in the property

ending tenant’s legal duties and obligations to the landlord, which are then assumed by the

assignee. Distinguishable from a sublease where the subtenant acquires something less

than the tenant’s entire interest.

Attorn: To turn over or transfer to another money or goods. To agree to recognize a new

owner of a property and to pay him/her rent. In a lease, when the tenant agrees to attorn to

the purchaser or foreclosing lender, the lessee accepts the successor party as landlord.

Bankruptcy: Also known as insolvency, where a party’s liabilities exceed its assets, and

by filing bankruptcy the party seeks protection from creditors, stays proceedings against it,

but largely turns over control of its affairs to the court, a trustee, and perhaps approval of

creditors. In a lease context, the tenant filing bankruptcy requires either affirmation or

termination of the lease within a short period of time. Should a landlord file bankruptcy, it is

likely that a trustee or receivers would be appointed by the court to act for the landlord,

receive the rents, and operate the leased building. Proceedings under federal statutes to

relieve a debtor who is unable to pay its debts. After addressing certain priorities and

exemptions, the bankrupt’s property and other assets are distributed by the court to

creditors in full satisfaction for the existing debt. See also: “Chapter 11”.

Base Rent: A set amount used as a minimum rent in a lease with provisions for increasing

the rent over the term of the lease. See also “Escalation Clauses, Operating Expense

Escalation and Percentage Lease”.

Base Year: Actual taxes and operating expenses for a specified base year, most often the

year in which the lease commences. Once the base year expenses are known, the lease

essentially becomes a dollar stop lease, meaning that the tenant pays the increases in

taxes and operating expenses in excess of the base year figures.

Below-grade: Any structure or a portion of a structure located underground or below the

surface grade of the surrounding land.

Building Classifications: Building classifications in most markets refer to Class “A”, “B”,

“C” and sometimes “D” properties. While the rating assigned to a particular building is very

subjective and relative to the market, Class “A” properties are typically newer buildings with

superior construction and finish in excellent locations with easy access, attractive to credit

tenants, and which offer a multitude of amenities such as on-site management or covered

parking. These buildings, of course, command the highest rental rates in their sub-market.

As the “Class” of the building decreases (i.e. Class “B”, “C” or “D”) one component or

another such as age, location or construction of the building becomes less desirable. Note

that a Class “A” building in one sub-market might rank lower if it were located in a distinctly

different sub-market just a few miles away containing a higher end product.

Building Code: The various laws set forth by the ruling municipality as to the end use of a

certain piece of property and that may with varying levels of detail dictate the criteria for

design, materials and type of improvements allowed, and safety measures which may be

required.

Building or “Core” Factor: Represents the percentage of Net Rentable Square Feet

devoted to the building’s common areas (lobbies, rest rooms, corridors). This factor can

be computed for an entire building or a single floor of a building. Also known as a Loss

Factor or Rentable/Usable (R/U) Factor, it is calculated by dividing the rentable square

footage by the usable square footage.

Building Standard: A list of construction materials and finishes that represent what the

Tenant Finish Allowance/Work Letter is designed to cover while also serving to establish

the landlord’s minimum quality standards with respect to tenant finish improvements within

the building. Examples of standard building items are: type and style of doors, lineal feet of

partitions, quantity and quality of lighting, and quality of floor covering.

Building Standard Improvement Allowance: The landlord lists, in detail, the building

standard materials and costs necessary to make the premises suitable for occupancy. A

negotiated allowance is then provided for the tenant to customize or upgrade materials.

See also: “Workletter”.

Build-out: The space improvements put in place per the tenant’s specifications. Takes

into consideration the amount of Tenant Finish Allowance (see Tenant Finish) provided for

in the lease agreement. See also “Tenant Improvement Allowance”.

Build-To-Suit: An approach taken to lease space by a property owner where a new

building is designed and constructed per the tenant’s specifications, often a specialized

use.

Capital Expenses: This type of expense is most often defined by reference to generally

accepted accounting principles (GAAP), but GAAP does not provide definitive guidance on

all possible expenditures. Accountants will often disagree on whether or not to include

certain items as a capital expense or as an operating expense. For example, roof

replacement is usually considered a capital expense, where roof maintenance or repair

would likely be considered an operating expense.

Capitalization: A method of determining value of real property by considering net

operating income divided by a predetermined annual rate of return.

Capitalization Rate (a/k/a “Cap Rate”): Most traditionally calculated as Net Income before

debt service divided by the purchase price and expressed as a percentage. The rate that

represents a reasonable return on investment (on the basis of both the investor’s

alternative investment possibilities and the risk of the investment). Used to determine and

value an investment. Also called “free and clear return”. See “Capitalization”.

Carrying Charges: Costs incidental to property ownership, other than interest (i.e. taxes,

insurance costs and maintenance expenses), that must be absorbed by the landlord during

the initial lease-up of a building and thereafter during periods of vacancy.

Certificate of Occupancy: A document presented by a local government agency or

building department certifying that a building and/or the leased premises (tenant’s space),

has been satisfactorily inspected and is/are in a condition suitable for occupancy.

Chapter 7: That portion of the Federal Bankruptcy code that deals with business

liquidations. Chapter 11 is that part of the Federal Bankruptcy code that deals with

business reorganizations, meaning that the debtor continues its business during and after

bankruptcy.

Chapter 11: That portion of the Federal Bankruptcy code that deals with business

reorganizations, meaning that the debtor continues its business during and after

bankruptcy. Chapter 7 is that part of the Federal Bankruptcy code that deals with business

liquidations.

Circulation Factor: Interior space required for internal office circulation not accounted for

in the Net Square Footage. Based upon our experience, we use a Circulation Factor of

1.35 x the Net Square Footage for office and fixed drywall areas and a Circulation Factor of

1.45 x the Net Square Footage for open area workstations. Also see: Net Square Footage

and Usable Square Footage.

Common Area: There are two components of the term “common area.” If used in

association with the Rentable/Usable or Load Factor calculation, the common areas are

those areas within a building that are available for common use by all tenants or groups of

tenants and their invitees (i.e. lobbies, corridors, restrooms, etc.). On the other hand, the

cost of maintaining parking facilities, malls, sidewalks, landscaped areas, public toilets,

truck and service facilities, and the like are included in the term “common area” when

calculating the tenant’s pro-rata share of building operating expenses.

Common Area Maintenance (CAM): This is the amount of Additional Rent charged to the

tenant, in addition to the Base Rent (see Base Rent), to maintain the common areas of the

property shared by the tenants and from which all tenants benefit. Examples include:

snow removal, outdoor lighting, parking lot sweeping, insurance, and property taxes. Most

often, this does not include any capital improvements (see Capital Expenses) that are

made to the property.

Comparables: Lease rates and terms of properties similar in size, construction quality,

age, use, and typically located within the same sub-market and used as comparison

properties to determine the fair market lease rate for another property with similar

characteristics.

Concessions: Cash or cash equivalents expended by the landlord in the form of rental

abatement, additional tenant finish allowance, moving expenses, cabling expenses or other

monies expended to influence or persuade the tenant to sign a lease.

Condemnation: The process of taking private property, without the consent of the owner,

by a governmental agency for public use through the power of eminent domain.

Construction Management: When the actual construction process is overseen by a

qualified construction manager who ensures that the various stages of the construction

process are completed in a timely and proper manner, from obtaining construction permit to

completion of the construction, to the final inspection and approval of the completed

premises with the tenant. The fee for construction management is often paid to a property

manager or other qualified professional.

Constructive Eviction: When the landlord, without intent to oust a tenant or deprive the

tenant of possession of all or a portion of the leased premises, either by act or by inaction

allows a condition to occur (e.g. roof leak, loss of utilities, failure of HVAC) denies the

tenant of use and possession of all or a portion of the leased premises.

Consumer Price Index (“CPI”): Measures inflation in relation to the change in the price of

a fixed market basket of goods and services purchased by a specified population during a

“base” period of time. It is not a true “cost of living” factor and bears little direct relation to

actual costs of building operation or the value of real estate. The CPI is commonly used to

increase the base rental periodically as a means of protecting the landlord’s rental stream

against inflation or to provide a cushion for operating expense increases for a landlord

unwilling to undertake the record keeping necessary for operating expense escalations.

There are many different consumer price indices for different markets (urban, rural), and

different goods or services. When using a CPI as a basis for rent increases, care should

be given to selection of the proper CPI.

Contiguous Space: (1) Multiple suites/spaces within the same building which adjoin and

which can be combined and rented to a single tenant; (2) A block of space located on

multiple adjoining floors in a building (i.e., a tenant leases floors 6 through 12 in a building).

Contract Documents: The complete set of design plans and specifications for the

construction of a building or of a building’s interior improvements. Working Drawings

specify for the contractor the precise manner in which a project is to be constructed. See

also “Specifications”. “Working Drawings”.

Conveyance: Most commonly refers to the transfer of title to property between parties by

deed. The term may also include most of the instruments by which an interest in real

estate is created, mortgaged, or assigned.

Corporation: An artificial or legal entity created under the authority of a state or

nation, which exists as an entity separate from those who operate the entity (officers,

directors, employees), and whose liability is generally limited to its assets.

Core Factor: Represents the percentage of Net Rentable Square Feet devoted to the

building’s common areas (lobbies, rest rooms, corridors). This factor can be computed for

an entire building or a single floor of a building. Also known as a Loss Factor or

Rentable/Usable (R/U) Factor, it is calculated by dividing the rentable square footage by the

usable square footage.

Covenant: A written agreement inserted into deeds or other legal instruments stipulating

performance, or non-performance, or perhaps prohibition of certain acts or, uses of a

property and/or land.

Covenant of Quiet Enjoyment: The old “quiet enjoyment” paragraph, now more

commonly referred to as “Warranty of Possession”, had nothing to do with noise in and

around the leased premises. It provides a warranty by landlord that it has the legal ability

to convey the possession of the premises to Tenant; the landlord does not warrant that it

owns the land. This is what landlord agrees to provide as consideration for the tenant’s

obligation to pay rent. If the landlord breaches this convenant, it may constitute an actual

or constructive eviction.

Debtor: the person or entity which declares bankruptcy by filing a petition in bankruptcy.

Default: The failure to perform a legal or contractual duty or to discharge an obligation

when due. Specific examples are: 1) Failure to make a payment of rent when due. 2)

Failure to perform any of the terms of a lease agreement. A default which is not cured

within the applicable cure period becomes a breach.

Demising Walls: The partition wall that separates one tenant’s space from another or

from the building’s common area such as a public corridor.

Design/Build: A system in which a single entity is responsible for both the design and

construction. The term can apply to an entire facility or to individual components of the

construction to be performed by a subcontractor; also referred to as “design/construct.”

This sometimes refers to a project constructed by a developer for a prospective buyer’s

specific requirements on a turn key basis.

Depreciation: Spreading out the cost of a capital asset over its estimated useful life or a

decrease in the usefulness, and therefore value, of real property improvements or other

assets caused by deterioration or obsolescence.

Distraint: The act of seizing (legally or illegally) personal property of a tenant based on the

right and interest which a landlord has in the property of a tenant in default.

Dollar Stop: An agreed dollar amount of taxes and operating expense (expressed for the

building as a whole or on a square foot basis) over which the tenant will pay its pro-rata

share of increases. May be applied to specific expenses (e.g., property taxes or

insurance).

Easement: A right of use over the property of another created by grant, reservation,

agreement, prescription, or necessary implication. It is either for the benefit of adjoining

land (“appurtenant”), such as the right to cross A to get to B, or for the benefit of a specific

party (“in gross”), such as a public utility easement.

Economic Rent: The market rental value of a property at a given point in time, even

though the actual rent may be different.

Effective Rent: The actual rental rate to be achieved by the landlord after deducting the

cost of concessions from the base rental rate paid by a tenant, usually expressed as an

average rate over the term of the lease.

Efficiency Factor: Represents the percentage of Net Rentable Square Feet devoted to

the building’s common areas (lobbies, rest rooms, and corridors). This factor can be

computed for an entire building or a single floor of a building. Also known as a Core Factor

or Rentable/Usable (R/U) Factor, it is calculated by dividing the rentable square footage by

the usable square footage. See “Usable Square Footage”.

Eminent Domain: A power of the state, municipalities, and private persons or

corporations authorized to exercise functions of public character to acquire private property

for public use by condemnation, in return for just compensation. See also “Condemnation”.

Encroachment: The intrusion of a structure which extends, without permission, over a

property line, easement boundary or building setback line.

Encumbrance: Any right to, or interest in, real property held by someone other than the

owner, but which will not prevent the transfer of fee title (i.e. a claim, lien, charge or liability

attached to and binding upon real property).

Escalation Clause: A clause in a lease which provides for the rent to be increased to

reflect changes in expenses paid by the landlord such as real estate taxes, operating costs

and the like. This may be accomplished by several means such as fixed periodic

increases, increases tied to the Consumer Price Index, or adjustments based on actual

changes in expenses paid by the landlord in relation to a dollar stop or base year reference.

Estoppel Certificate: A signed statement regarding the lease certifying that certain

statements of fact are correct as of the date of the statement, and can be relied upon by a

third party such as a prospective lender or purchaser. In the context of a lease, this is a

statement by a tenant confirming that the lease is in effect, that no rent has been prepaid

and that there are no known uncured defaults by the landlord (except those specified in the

estoppel certificate).

Exclusive Agency: A generic term for a representation or listing agreement between

landlord and a broker, providing that such broker is the only broker hired to list the property

for sale or lease, and if a buyer or tenant is procured by the exclusive agent or any other

broker, the landlord is obligated to pay its exclusive agent a commission. In many states, an

exclusive agency allows the landlord to procure a tenant without the assistance of the

broker, without liability for commission. See Exclusive Right to Sell or Lease

Exclusive Right to Sell or Lease: A broad form of exclusive listing between owner

and broker such that if a tenant or purchasers is procured during the term of the listing by

the broker, the owner, or by anyone else (including another broker), then the owner is

obligated to pay the listing broker a commission on the transaction.

Exclusive Use Clause: A clause that may be included in a lease (usually retail) specifying

that the business of the tenant is exclusive in the property and that no other tenant

operating the same or similar type of business may occupy space in the building or

shopping center. This clause benefits service-oriented businesses desiring exclusive

access to the building’s population (i.e. travel agent, deli, and other retail uses).

Expense Stop: An agreed dollar amount of taxes and operating expense (expressed for

the building as a whole or on a per square foot basis) over which the tenant will pay its

prorated share of increases. The stop may be applied to specific expenses only (e.g.,

property taxes or insurance), as well.

Face Rental Rate: The “asking” rental rate published by the landlord.

Finance Charge: The amount paid for the privilege deferring payment of goods or

services, including any charges payable by the purchaser as a condition of the loan, or

charges accruing on above standard tenant improvements made by a landlord at tenant

expense, i.e. repaid in rent.

First Mortgage: The senior mortgage which, by reason of its position (i.e. earliest

recording date), has priority over all junior or later recorded encumbrances. The holder of

the first or senior mortgage has a priority right to payment in the event of default,

foreclosure, or sale.

First Refusal Right or Right Of First Refusal (Purchase): A lease clause giving a tenant

the first opportunity to buy a property at the same price and on the same terms and

conditions as those contained in an offer from a third party which the owner has expressed

a willingness to accept. See “Right of First Refusal”.

First Refusal Right or Right Of First Refusal (to Lease adjacent space): A lease

clause giving a tenant the first opportunity to lease additional space that might become

available in a property at the same price and on the same terms and conditions as those

contained in a third party offer that the owner has expressed a willingness to accept. This

right is often restricted to specific areas of the building such as adjacent suites or other

suites on the same floor. See “Right Of First Refusal” and “Right Of First Offer”.

Fixed Costs: Costs, such as rent, which do not vary with changes in the level of sales or

production and would continue if the entity produced and sold nothing at all.

Fixture: Usually a fixture is personal property (e.g. equipment, display pieces,

shelving, racking) which becomes affixed or attached to real property. Unless the right to

remove fixtures (and repair the leased premises) is reserved by the tenant, a landlord may

claim ownership of fixtures at lease termination.

Flex Space: A building providing its occupants flexibility in how they utilize the space for

different purposes. Usually provides a configuration allowing a flexible amount of office or

showroom space in combination with manufacturing, laboratory, warehouse or distribution

space. Typically this type of space also allows the flexibility to relocate overhead doors.

Generally constructed with grade level loading facilities, load-bearing floors, and high

ceilings but with little or no common area.

Floor Area Ratio (FAR): The ratio of the gross square footage of a building to the land on

which it is situated. Calculated by dividing the total square footage in the building by the

square footage of land area.

Force Majeure: A force which cannot be controlled by the parties to a contract and

prevents the parties from complying with the provisions of the contract or lease. This

includes acts of God such as flood or a hurricane, or acts of man such as strike, fire, or

war.

Foreclosure: A procedure by which the mortgagee (“lender”) either takes title to or forces

the sale of the mortgagor’s (“borrower”) property in satisfaction of an unpaid debt.

Full Recourse Loan: A loan on which a borrower or guarantor is liable in the event of

default by the borrower beyond the value of the collateral (i.e. the property), usually

personally.

Full Service Rent: An all-inclusive rental rate which includes operating expenses and real

estate taxes for the first year. The tenant is generally still responsible for any increase in

operating expenses over the base year amount.

Future Proposed Space: Space in a proposed commercial development which is not yet

under construction or where no construction start date has been set. Future Proposed

Projects include all those projects waiting for a lead tenant, financing, zoning, approvals, or

any other event necessary to begin construction, and this term may also refer to the future

phases of a multi-phase project.

General Contractor: The prime contractor who contracts for the construction of an entire

building or project, rather than just a portion of the work. The general contractor hires all

other trades (subcontractors) and suppliers of materials (material men,) coordinates all

work, and is responsible for their performance and payment to them.

General Partnership: A form of partnership where all partners are deemed general

partners, are jointly and severally liable for the acts and duties of the partnerships and the

other partners in partnership business, without limitation of liability to each partner. See

also “Limited Partnership,” “and Limited Liability Company”.

Graduated Lease: A lease, generally long term in nature, which provides that the rent will

vary depending upon future contingencies, such as a periodic appraisal, the tenant’s gross

income, or simply the passage of time.

Grant: To bestow or transfer an interest in real property by deed or other instrument; either

the fee or a lesser interest, such as an easement.

Grantee: Party to whom a grant is made.

Grantor: The party making the grant.

Gross Absorption: A measure of the total square feet leased over a specified period of

time with no consideration given to space vacated in the same geographic area during the

same time period. See also: “Net Absorption.”

Gross Building Area: The total floor area of the building measuring from the outer surface

of exterior walls and windows and including all vertical penetrations (e.g. elevator shafts,

etc.) and basement space.

Gross Lease: A lease in which the tenant pays a flat sum for rent out of which the landlord

must pay all expenses such as taxes, insurance, maintenance, and non sub-metered

utilities, with no pass through of these expenses or increase in these expenses to tenant.

Gross Up: An adjustment made to operating expenses to account for the present

occupancy level in a building as compared to a higher level such as 95% or more. When

operating expenses are “grossed up”, it means that the building’s variable expenses have

been adjusted (usually) upward to the level that those expenses would be if the building

were fully or almost fully occupied (typically 95%).

Ground Rent: Rent paid to the owner for use of land, normally on which to build a

building. Generally, this involves a long-term lease (e.g. 99 years) with the ground lessor

retaining title to the land and owning the building upon ground lease expiration. Unless the

ground lessor agrees to subordinate its interest to the ground lessee’s lender, the ground

lessee will not likely be able to use the land for collateral for a loan.

Guarantor: Party which makes a guaranty. See also “Guaranty”.

Guaranty: Agreement whereby the guarantor undertakes collaterally to assure satisfaction

of the debt or other obligation of another or perform the obligation of another if and when

the debtor or tenant fails to do so. Differs from a surety agreement in that there is a

separate and distinct contract rather than a joint undertaking and shared liability with the

debtor.

Hard Cost: The cost of constructing the actual physical improvements (i.e. labor and

material for construction). See also “Soft Cost”.

High Rise: In the Central Business District, this could mean a building higher than 25

stories above ground level. In suburban sub-markets, it generally refers to buildings higher

than 7 or 8 stories.

Hold Over Rent: Rent owed by a tenant to a landlord for occupying leased premises after

expiration of the lease term, often expressed as a multiple of the base rent charged

immediately prior to expiration of the term.

Hold Over Tenant: A tenant retaining possession of the leased premises after the

expiration of a lease.

HVAC: The acronym for “Heating, Ventilating and Air-Conditioning”.

Improvements: In the context of leasing, the term typically refers to the improvements

made to or inside a building but may include any permanent structure or other

development, such as a street, sidewalks, utilities, etc. See also “Leasehold

Improvements”.

Indirect Costs: Development costs, other than material and labor costs which are directly

related to the construction of improvements, including administrative and office expenses,

commissions, architectural, engineering and financing costs, also known as Soft Costs.

Inventory: Refers to the total amount of rentable square feet of existing and soon to be

delivered space in a given category, for example, Class A office space. Inventory refers to

all space within a certain prescribed market without regard to its availability or condition,

and categories may include all types of leased space such as office, flex, retail, and

warehouse space.

Judgment: The final decision of a court resolving a dispute and determining the rights and

obligations of the parties. Money judgments, when recorded with the county recorder of

deeds, become a lien on real property of the defendant.

Judgment Lien: An encumbrance that arises by law after recording a notice of judgment

with the county recorder of deeds when a judgment for the recovery of money attaches to

the judgment debtor’s real estate. See also “Lien”.

Just Compensation: Compensation which is fair to both the owner and the public when

property is taken for public use through condemnation (eminent domain). The theory is that

in order to be “just,” the property owner should be no richer or poorer than prior to the

taking.

Landlord’s Lien: A lien which may be created by contract or by operation of law.

Examples are: (1) a contractual landlord’s lien based on a lease agreement; (2) a statutory

landlord’s lien; and (3) landlord’s remedy of distress (or right of distraint), which is not truly

a lien, but has a similar effect when the landlord seeks to attach a tenant’s property to

satisfy the landlord’s claim.

Landlord’s Lien or Warrant: A warrant from a landlord to levy upon a tenant’s personal

property (e.g., furniture, machines.) and to sell this property at a public sale to compel

payment of the rent or other financial obligation based on the lease, known in some states

as distraint.

Lease: An agreement whereby the owner of real property (landlord) gives the right of

possession to another (tenant) for a specified period of time (term) and for a specified

consideration (rent).

Lease Agreement: Any agreement which gives rise to a relationship of landlord and

tenant. A contract for the exclusive possession of the leased premises entered into

between landlord and tenant reflecting agreed upon terms and conditions.

Lease Commencement Date: The date which usually constitutes the commencement of

the term of the lease for all purposes, whether or not the tenant has actually taken possession, so long as occupancy is possible. In reality, there could be other agreed

dates, such as in an Early Occupancy Agreement, which have an impact on this definition.

Leasehold Improvements: Improvements made to the leased premises by or for a

tenant. Generally, especially in new space, part of the lease negotiations will include in

some detail the improvements to be made in the leased premises by Landlord or in the

alternative, an allowance provided to the tenant to fund improvements made by the tenant.

See also “Tenant Improvements”. These improvements are usually considered landlord’s

property upon lease termination.

Legal Description: A description identifying a parcel of land by government survey, metes

and bounds, or lot numbers of a recorded plat including a description of any portion thereof.

Legal Owner: The term is in technical contrast to equitable owner. The legal owner has

legal title to the property.

Letter of Attornment: A letter from the grantor (seller) to a tenant, stating that a property

has been sold, and directing rent to be paid to the grantee (buyer). See also “Attorn”.

Letter of Credit: A commitment by a bank or other person, (issuer) made at the request of

a customer, that the issuer will honor drafts or other demands for payment upon full

compliance with the conditions specified in the letter of credit, such advance constituting a

loan to the customer. Letters of credit are often used in place of cash deposited with the

landlord to constitute the security deposit.

Letter of Intent: A preliminary agreement stating the proposed terms for a final contract of

purchase or lease. They can be “binding” or “non-binding”, depending on their terms and

the intent of the parties. The parties should always consult their respective legal counsel

before signing any Letter of Intent.

Lien: A claim or encumbrance against property used to secure a debt, charge or the

performance of some act. Includes liens acquired by contract or by operation of law. All

liens are encumbrances but all encumbrances are not liens.

Lien Waiver (Waiver of Lien): A waiver of mechanic’s lien rights, signed by a general

contractor and his subcontractors, that is often required before the general contractor can

receive a draw under the payment provisions of a construction contract. May also be

required before the owner can receive a draw on a construction loan. In roughly ½ of the

states in the U.S., real estate brokers have right to assert liens on a property to secure their

role or lease commission, and usually (in these states), the broker must exchange a lien

waiver for payment of the claimed commission.

Limited Liability Company (a/k/a “LLC”): A business entity organized under the state’s

limited liability and characterized by its owners being termed member, its day to day

management being accomplished by its members or by a manager (which may or may not

be a member). Liability of a member is limited to the member’s contribution to the entity,

while the manager’s liability is not similarly limited. This entity can be taxed either as a

partnership or as a corporation, as the LLC elects with the IRS.

Limited Partnership: A partnership consisting of one or more general partners (see

general partnership) and other partners called limited partners, where the liability for the

acts of the partnership is total for each general partner. A limited partner whose role is

generally passive, as an investor, has liability only to the extent of the specific amount

invested in the partnership. A type of partnership, created under state law, comprised of

one or more general partners who manage the business and who are personally liable for

partnership debts, and one or more limited partners who contribute capital and share in

profits but who take no part in running the business, and most important, incur no liability

beyond the amount they have contributed to the partnership.

Low Rise: A building with fewer than (generally) 4 stories above ground level.

Lump-Sum Contract: A type of construction contract requiring the general contractor to

complete a building or project for a fixed cost normally established by competitive bidding.

The contractor absorbs any loss or retains any profit, in excess of the lump sum.

Market Rent: The rental income that a property would command on the open market with

a landlord and a tenant ready and willing to consummate a lease in the ordinary course of

business; indicated by the rents that landlords were willing to accept and tenants were

willing to pay in recent lease transactions for comparable space.

Market Value: The highest price a property would command in a competitive and open

market under all conditions requisite to a fair sale with the buyer and seller each acting

prudently and knowledgeably in the ordinary course of trade.

Master Lease: A primary lease that controls subsequent leases of all or portions of the

leased premises. An Executive Suite operation is an example in that a master lease is

signed with the landlord and then individual offices within the leased premises are leased or

licensed to other individuals or companies for different (usually shorter) terms.

Mechanic’s Lien: A claim created by state statute for securing priority of payment of the

price and value of work performed and materials furnished in constructing, repairing or

improving a building or other structure, and which attaches to the land as well as to the

buildings and improvements thereon.

Metes and Bounds: A form of legal description which, with the terminal points and angles,

described by listing the compass directions and distances of the boundaries. Originally,

metes referred to distance and bounds referred to direction.

Mid-Rise: A building with (usually) 4 to 8 stories above ground level although in a Central

Business District, this might extend to buildings up to twenty-five stories.

Mixed-Use: apartments).Space within a building or project provided for more than one use (e.g., an

apartment building with office space, a hotel with office space, or a retail establishment with

Modified Gross Lease: A lease in which a tenant pays a fixed sum for rent from which

landlord pays all operating expenses for the first or lease year (or dollar stop), and

thereafter tenant pays all increases in operating expenses or the increases beyond the

fixed ceiling, called a dollar stop.

Mortgage: A written instrument creating an interest in real estate and that provides

security for the payment of a debt, usually repayment of a loan. The borrower (i.e.,

mortgagor) retains possession and use of the property during the period while payments

are made to the lender (mortgagee).

Net Absorption: The square feet leased in a specific geographic area or defined market

over a fixed period of time offset by space vacated in the same area during the same

period. See also; “Gross Absorption”.

Net Lease: A lease in which there is a provision for the tenant to pay, in addition to base

rent, certain costs associated with the operation of the property, which include some or all

of property taxes, insurance, repairs, utilities, and maintenance. There are also “NN”

(double net) and “NNN” (triple net) leases, depending upon the degree to which the tenant

is responsible for operating costs. See also “Gross Lease.”

Net Rentable Area: The floor area of a building which remains after the square footage

represented by vertical penetrations, such as elevator shafts, stairways, plumbing and

HVAC chases has been deducted. Common areas and mechanical rooms are included

and no deductions are made for necessary columns and projections of the building.

(BOMA Standard).

Normal Wear and Tear: The deterioration or loss in value caused by the tenant’s normal

and reasonable use. In most leases the tenant is not responsible for “normal wear and

tear,” on the leased premises when the tenant vacates the premises at the end of the lease

term.

Operating Expense Escalation: Although there are many variations of escalation

clauses, all are intended to adjust rents by reference to external standards such as

published indices, negotiated wage levels, or expenses related to the ownership and

operation of buildings. During the past 30 years, landlords have developed the custom of

separating the base rent for the occupancy of the leased premises from escalation rent.

This technique enables the landlord to better ensure that the “net” rent to be received under

the lease will not be reduced by the escalating costs of operating and maintaining the

property. The landlord’s definition of Operating Expenses is likely to be broad, covering

most costs of operation of the building. Most landlords pass through proper and customary

charges, but in the hands of an overly aggressive landlord, these clauses can operate to

impose obligations which the tenant would not willingly or knowingly accept.

Operating Expenses: The actual costs associated with operating a property including

maintenance, repairs, management, utilities, taxes, and insurance. A landlord’s definition

of operating expenses is likely to be quite broad, covering most if not all aspects of

operating the building.

Option: A stated right of a tenant with respect to leasing additional space, renewing the

lease or extending its term, or perhaps purchasing the property. Options usually contain

conditions such as exercise thereof in writing, within a certain time period (usually a number

of months prior to lease expiration) and the option may contain a stated rent or purchase

price, or perhaps simply state “at fair market rent or value,” leaving the parties to negotiate

the rent or sale price at the time of exercise of the option.

Parking Ratio or Index: The intent of this ratio is to provide a uniform method of

expressing the amount of parking that is available or required at a given building. Dividing

the total rentable square footage of a building by the total number of parking spaces for the

building provides the amount of rentable square feet per each individual parking space

(expressed as 1/xxx or 1 per xxx). Dividing 1000 by the previous result provides the ratio of

parking spaces available per each 1000 rentable square feet (expressed as x per 1000).

Partial Taking: The taking of part of an owner’s property for public use through the power

of eminent domain.

Pass Throughs: Refers to the tenant’s pro-rata share of operating expenses paid in

addition to the tenant’s base rent.

Percentage Rent: Lease provision requiring the tenant to pay a percentage of the

tenant’s gross sales as a component of rent. There is usually a base rent amount to which

“percentage” rent is then added. This type of clause is most often found in retail leases, but

is not a common element of rent.

Performance Bond: A surety bond posted by a contractor guaranteeing full performance

of a contract (usually a construction project) with the proceeds to be used to complete the

contract or compensate for the owner for loss or cost of completion in the event of

nonperformance.

Pre-leased: Refers to space in a proposed building that has been leased prior to the start

of construction or in advance of the issuance of a Certificate of Occupancy.

Punch List: An itemized list documenting incomplete or unsatisfactory items, usually

prepared by the architect or construction manager after the contractor has notified the

owner or tenant that the work on the property or in the leased space is substantially

complete.

Raw Space: Unimproved shell space in a building.

Real Property: Land, and generally whatever is erected or affixed to the land, such as

buildings, fences, and including light fixtures, plumbing and heating fixtures, or other items

which would be personal property if not attached. See “Fixtures”.

Recapture: (1) As used in leases, a clause giving the landlord a percentage of profits

above a fixed amount of rent; or in a percentage lease, a clause granting the landlord a

right to terminate the lease if the tenant fails to realize minimum sales. (2) Right of

recapture may refer to the right retained by landlord when a tenant elects to sublease or

assign, and the landlord elects to terminate the lease and recapture the leased space

rather than approve the proposed sublease or assignment.

Recourse: The right of a lender, in the event of a default by the borrower, to recover

against the personal assets of a party who is liable for the debt (e.g. endorser or

guarantor).

Rehab: Short for rehabilitation, the extensive renovation of a building or project that is

intended to cure obsolescence.

Renewal Option: A clause giving a tenant the right to extend or renew the term of a lease,

usually for a stated period of time and at a rent amount as provided for in the lease and

option clause.

Rent: Compensation paid, usually periodically, for the occupancy and use of any rental

property, land, buildings, or space in a building.

Rent Commencement Date: The date on which a tenant is obligated to begin paying rent,

as contrasted with the lease commencement date when the lease term commences, but

payment of rent is deferred for a period of time.

Rentable Square Footage: Rentable Square Footage equals the Usable Square Footage

plus the tenant’s pro-rata share of the Building Common Areas, such as lobbies, public

corridors and restrooms. The pro-rata share, often referred to as the Rentable/Usable

(R/U) Factor, will typically fall in a range of 1.10 to 1.16, depending on the particular

building. Typically, a full floor occupancy will have an R/U Factor of 1.10 while a partial

floor occupancy will have an R/U Factor of 1.12 to 1.16 ratio to the Usable Area.

Rentable/Usable Ratio: The number resulting from dividing the Total Rentable Area in a

building by the Total Usable Area. The inverse of this ratio describes the proportion of the

rentable leased square feet that a tenant may expect to actually utilize.

Rental Concession: Concessions a landlord may offer a tenant in order to secure the

tenancy. While rental abatement or reduced rent over a fixed period of time is one form of

monthly concession, there are many others such as: increased tenant improvement

allowance; special signage; below market rental rates; and moving allowances. See also

“Abatement”.

Rent-Up Period: The period, following construction of a new building, while tenants are

actively being sought and the project approaches its stabilized occupancy.

Request for Proposal (“RFP”): The formal and often customized compilation of the many

considerations that a tenant might seek to reflect the tenant’s specific needs. Just as a

building’s standard form lease document represents the landlord’s “wish list”, the RFP

serves in that same capacity for the tenant. A standardized RFP issued to multiple

prospective landlords gives the tenant the opportunity to compare various landlord

proposals on the same criteria.

Right of First Offer (“ROFO”): A tenant may hold a ROFO in its lease, meaning that if

space becomes vacant or available, or if landlord should elect to sell the building, the

landlord must first advise tenant of the available space, or landlord’s intent to sell the

property so that if so inclined, the holder of the ROFO then has the right to make the first

offer to lease the available space or to purchase the property on any terms and conditions

which the ROFO holder might offer. Of course, landlord is free to accept, decline, or

counter such offer, as a ROFO contains no specific terms, rent, or sale price. (See Right of

First Refusal and option which are similar but have criterial differences from a ROFO).

Right Of First Refusal (“ROFR”): A right which a tenant may hold to lease additional

space in the property or to purchase the property under the following circumstances. If and

when landlord is prepared or has agreed (subject to this right of first refusal) to lease space

to a third party or sell the property to a third party on certain terms and conditions, that

same transaction must be offered to the holder of the right of first refusal who has a fixed

period in which to exercise the ROFR and purchase the property or lease the subject space

on the specified terms and conditions, or waive the ROFR. See definition for option and for

right of first offer (“ROFO”) which is similar, but differences from ROFR should be noted.

Sale-Leaseback: An arrangement by which the owner/occupant of a property agrees to

sell all or part of the property to an investor and then lease it back, continuing to occupy

the property as a tenant. Although the lease technically follows the sale, both the lease

and purchase and sale agreement will have been negotiated and executed as part of the

same transaction.

Second Generation or Secondary Space: Refers to space which has been previously

occupied and then becomes available for lease, either directly from the landlord or as

sublease space.

Security Deposit: A deposit of money (or other security) by a tenant with a landlord to

secure the tenant’s performance of a lease. This can also take the form of a Letter of

Credit or other financial instrument in lieu of cash.

Shell Space: The interior condition of the tenant’s “usable square footage” when it is

delivered to the tenant without improvements or finishes. While existing improvements and

finishes can be removed, thus returning space in an older building to its “shell” condition,

the term most commonly refers to the condition of the usable square footage after

completion of the building’s “shell” construction but prior to the build-out of the tenant’s

space. Shell construction typically includes the floor, windows, walls and roof of enclosed

premises and may include some HVAC, electrical or plumbing improvements but usually

does not include completion of demising walls or interior space partitioning. In a new multi-

tenant building, common area improvements, such as lobbies, restrooms and exit corridors

may also be included in the shell construction. With a newly constructed office building,

there will often be a distinction between improvements above and below the ceiling grid. In

a retail project, all or a portion of the floor slab is often installed along with the tenant

improvements, to better accommodate tenant specific under-floor plumbing requirements.

Site Analysis: The study of a specific parcel of land which takes into account the

surrounding area and is meant to determine its suitability for a specific use or purpose.

Site Development: All necessary improvements made to a site before a building can be

constructed, such as grading, and utility installation.

Site Plan: A detailed plan depicting the location of improvements on a parcel of land and

containing all information required by the zoning ordinance, best included as an exhibit to a

lease.

Slab: The exposed wearing surface laid over structural support beams of a building to form

the floor(s) of the building or laid slab-on-grade in the case of a non-structural, ground level

concrete slab.

Soft Cost: That portion of the total project cost other than the actual cost of the

improvements themselves (generally including architectural and engineering fees,

commissions, and construction loan interest) and which may often be tax-deductible in the

first year of ownership. See also “Hard Cost”.

Space Plan: A graphic representation of a tenant’s space requirements, showing wall and

door locations, room sizes, and sometimes including furniture layout. A preliminary space

plan will be prepared for a prospective tenant at any number of different properties and this

serves as a “test-fit” to help the tenant determine its actual space needs and which property

will best meet its requirements. When the tenant has selected a building, a final space plan

is prepared which addresses all of the landlord and tenant objectives, and then is approved

by both parties. It should be sufficiently detailed to allow an accurate estimate of

construction costs. This final space plan should be an exhibit to the lease.

Special Assessment: Any special charge levied against real property for public

improvements (e.g., sidewalks, streets, water and sewer, etc.) that specifically benefit the

assessed property.

Speculative Space: construction on a new building.

Any tenant space that has not been leased before the start of

Statute of Frauds: In most if not all states, contracts for the sale of land or contracts which

cannot be performed within one year (such as a lease with a term exceeding one year)

must either be in writing or evidenced by a written memorandum thereof in order for such

contract to be enforceable.

Step-Up Lease (Graduated Lease): A lease calling for set increases in base rent at set

intervals during the term of the lease.

Straight Lease (Flat Lease): A lease calling for the same fixed amount of base rent to be

paid periodically, usually monthly, during the entire term of the lease.

Subcontractor: A contractor working under and being paid by the general contractor.

Often a specialist in nature, such as an electrical contractor, cement contractor, including

providers of construction materials (materialmen).

Subordination: To place priority of a party’s right (e.g. to possession or ownership)

below another party’s rights, such as a tenant agreeing that its leasehold rights are lower in

priority in relation to a lender’s right to the property, often in exchange for the lender’s

agreement to allow the lease to continue (non-disturbance), so long as the tenant agrees to

attorn (or treat the lender as its landlord) to the lender. Hence the common term

Subordination and Non-Disturbance Agreement is often utilized.

Subordination Agreement: As used in a lease, the tenant generally accepts the leased

premises subject to the lien of any recorded mortgage or deed of trust and all existing

recorded restrictions, and in return for the obligation of a lender or successor owner to

accept the lease and not disturb the tenancy (“Non Disturbance”) so long as the tenant

attorns to the lender or successor owner, the landlord is given the power to subordinate the

tenant’s interest to any first mortgage or deed of trust lien subsequently placed upon the

leased premises.

Subrogation: Literally the substitution of one person or party in the place of another

with reference to a lawful claim or right. When an insurer pays or defends a claim, the

insurer may “step into the shoes” of the insured, including the right to pursue claims of the

insured against others. Waiver of subrogation is an important aspect where a landlord and

tenant mutually agree in the lease to require their insurers to waive subrogation on landlord

claims against the tenant and tenant claims against the landlord. Mutual waiver of

subrogation usually results in the equivalent of: “If one party’s insurer pays or defends a

claim, the other need not fear retribution for its causation.”

Surety: One who at the request of another, and for the purpose of securing to him a

benefit, voluntarily binds himself to be obligated for the debt or obligation of another.

Although the term includes guarantor and the terms are commonly, though mistakenly,

used interchangeably, surety differs from guarantor in a many respects.

Taking: A synonym for condemnation or eminent domain or any actual or material

interference with private property rights. However, it is not essential that there be physical

seizure or appropriation.

Tenant (Lessee): by virtue of a lease.

Tenant At Will: One who holds possession of premises by permission of the owner or

landlord, the characteristics of which are an uncertain duration (i.e. without a fixed term)

and the right of either party to terminate on proper notice.

One who rents real estate from another and holds a possessory estate

Tenant Improvements: Improvements made to the leased premises by or for a tenant.

Generally, especially in new space, part of the negotiations will include in some detail the

improvements to be made in the leased premises by the landlord or at landlord’s expense.

See also “Leasehold Improvements” and “Workletter”.

Tenant Improvement (“TI”) Allowance or Work Letter: Defines the fixed amount of

money contributed by the landlord toward tenant improvements. The tenant pays costs

that exceed this amount.

Time Is Of The Essence: Means that performance by one party within the period

specified in the contract is essential to require performance by the other party.

Title: The means by which the owner of real property has record legal ownership of the

real property.

Title Insurance: A policy issued by a title company after searching the title and which

insures against loss resulting from defects of title to a specifically described parcel of real

property, or from the enforcement of liens or other claims existing against it prior to the time

the title policy is issued.

Trade Fixtures: Personal property used in a business and attached to a structure, but

removable upon lease termination because it is deemed to be part of the business, not of

the real estate. This term often refer to articles of personal property by tenants for use in

their trade or business, and are often removed from leased premises at lease termination.

Triple Net (NNN) Rent: A lease in which the tenant pays, in addition to rent, certain costs

associated with a leased property, which may include property taxes, insurance premiums,

repairs, utilities, and maintenances. There are also Net and “NN” (double net) leases,

depending upon the degree to which the tenant is responsible for all operating expenses.

The following are the general commercial terms. Homelife paramount realtors are the expert in commercial transactions.

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The following are the general commercial terms. Homelife paramount realtors are the expert in commercial transactions.

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