Following the cost of labor, real estate is the second largest expense found on the balance sheets of the vast majority of organizations across all industry sectors. For this reason, it’s especially critical for a company’s financial executives to have a strong understanding of commercial real estate fundamentals in order to make informed decisions – whether related to the state of the market, the types of inventory available or the terms of a lease agreement. Furthermore, this knowledge is important to avoid the all-too-common pitfall of overpaying for real estate.
While learning the ins-and-outs of real estate undoubtedly requires time and effort, it begins with having a firm grasp on key industry terminology. Below, I’ve included a glossary – a “cheat sheet” – defining the terms most commonly used when discussing real estate market dynamics, a physical property and the terms of a lease. The terminology is conveniently grouped in three segments to track the sequence of a corporate real estate transaction. One must first understand the dynamics of the market, then appreciate the differences between various buildings, and lastly understand the language of the lease that documents the terms and conditions of the transaction.
Market
AVAILABILITY RATE - Available space divided by the total square footage in a defined market, expressed as a percentage
BASE RENT - Stated rental obligation for the initial period of a lease, usually the first year, which may be subject to change in the future based on some method of indexation or other formula. This rent may be stated as an annual or monthly rent
CLASS - Classification, determined by the local market, of building quality (typically A, B, C, or D used as codes for highest class to lowest) within the overall guidelines of the Building Owners and Managers Association International (BOMA) [see Class A, B and C below]
CLASS A - The most prestigious buildings competing for premier office users with above average rental rates for the area along with high-quality standard finishes, state of the art systems, exceptional accessibility and a definite market presence (BOMA)
CLASS B - Buildings competing for a wide range of users with rents in the average range for the area. Building finishes are fair to good for the area and the systems are adequate, but the building does not compete with Class A at the same price (BOMA)
CLASS C - Buildings competing for tenants requiring functional space at rents below the average for the area (BOMA)
CLASS D - Generally non-competitive buildings in need of renovation or repair
DEMAND - In the context of "Demand for Space", demand is measured either by Net Absorption or Activity, and usage of the term must specify the usage basis
EXCLUSIVE AGENT- A real estate broker representing the landlord of a particular building
EXPENSE STOP - A level of expenses, usually quoted on a per rentable square foot basis, which will be paid by the landlord, with the tenant paying any overages
FAIR MARKET VALUE - The amount at which the property could be bought or sold in a current transaction between willing parties
NET ABSORPTION - Change in Occupancy from one period to another. Prior period Base SF is equal to current period Base less completions during the time from the prior period to the current period. Space committed in buildings under construction are not counted in a net absorption calculation (Buildings under construction are not part of the Base until completed)
SUBMARKET - A geographic data collection which describe a generally recognized area, with specific boundaries, containing concentrations of Office, Retail or Industrial Buildings
Building
ADD-ON FACTOR - Most frequently called Load Factor, it is an indicator of floor efficiency used to convert usable footage to rentable footage by multiplying the usable footage by 1+ the load factor
BASE BUILDING - Physical elements of the building that are provided by the landlord and are not considered to be part of Tenants Improvements (see Tenants Improvements)
BUILDING STANDARD - The level of quality of the materials offered by the landlord for constructing the tenant improvements
BUILDING OPERATING HOURS - The days and hours during which all building services and mechanical systems are fully operational
CAM CHARGES - Common Area Maintenance Charges to the tenant, usually quoted on a per square foot basis, for maintenance of common areas such as parking areas and spaces throughout the building that are outside of the demised premises
CAPITAL IMPROVEMENTS - Expenditures that cure or arrest deterioration of property or add new improvements and appreciably prolong its life. Expenditures for repairs, however, merely maintain property in an efficient operating condition are considered Operating Expenses
CERTIFICATE OF OCCUPANCY - Certificate issued by governmental authority signifying that construction conforms to all code requirements and can be legally occupied
COLUMNS - Vertical structural steel posts or I-beams
CONSTRUCTION DOCUMENTS - Full set of plans and specifications prepared by an architect providing instructions for construction
FLOOR PLAN - Scale drawn depiction of an entire floor of a building usually showing location of all fixed base building components
HVAC - Heating ventilation and air conditioning
JOISTS - Horizontal structural supports for the floor and roof
LAYOUT - Scale drawn depiction of all walls and doors of a tenants demised premises
MULLION SPACING - The distance between exterior wall support points which determine the typical spacing of office wall positions at the window line in an office building
PARKING RATIO - Number of parking spaces per 1,000 square feet of the entire rentable area of a building
SUSPENDED ACCOUSTIC CEILING - System of a metal grid suspended by wires which holds tiles designed to absorb sounds as well as lighting fixtures, HVAC diffusers and sprinkler heads
REAL ESTATE INVESTMENT TRUST - Public or private real estate operating company with a special tax structure which enables investors to own and transfer shares of an interest in a property or properties and which enables the trust to reduce its own taxable income by a distribution to the shareholders in accordance with requirements of the special tax structure
TENANCY TYPE - Identifies whether a building is Single or Multi-tenanted. Properties are generally Multi-tenant unless occupied totally by a single tenant (or owner) or are being marketed solely as a Single Tenant facility in all buildings within a defined area (submarket, municipality, county or state)
VACANCY RATE - Vacant Space divided by the total footage within all of the building in that area, expressed as a percentage. For the purposes of the National Vacancy Rate, as published, Vacant Space includes Sublease space. Only Available Vacant Space is considered because vacant space not being marketed is considered not consistently measurable
Lease
ABSOLUTE NET LEASE - Lease agreement whereby the tenant assumes responsibility for all taxes, operating expenses, utilities, and maintenance, including structural improvements such as roof and walls
ASSIGNMENT - A transfer of obligations under a lease to another party
BASE RENT - Stated rental obligation for the initial period of a lease, usually the first year, which may be the subject to increases in the future based on some method of indexation or other formula. This rent may be stated as an annual or monthly rent
BASE YEAR - Usually the first calendar year (or fiscal year) of the lease, it is used to set the base level of expenses which will be paid by the landlord, with the tenant picking up costs in future years that are in excess of those incurred in the Base Year
CAPITALIZATION RATE - Net Operating Income (Annualized), divided by the Purchase (or Asking) Price, expressed as a percentage. "Actual" Capitalization Rates are based upon current rent rolls and expenses, projected for the next twelve months. Expressed alternatively, it is the projected first- year pre-tax return on investment from ownership of a property without consideration of the cost of financing
COMMON AREA - For lease purposes, the areas of a building and its site that is available for the non-exclusive use of all its tenants, e.g., lobbies, corridors, parking lots, etc. For measurement purposes, the square footage of lobbies, corridors, etc. contained within the building
COMMON AREA MAINTENANCE (CAM CHARGES) - Often referred to interchangeably with Operating Expenses, these are the total costs associated with operating and maintaining the Common Areas of a building
DEBT SERVICE - Annual payments required to satisfy all loan obligations secured by the property
DEMISED PREMISES - A space physically separated from all other tenants and common areas of a building
EFFECTIVE RATE - Total Lease payments to be paid during the term, considering all minimum escalations which can be calculated with certainty, divided by the term (including free rent periods), and further divided by the leased area. Expressed as a rate per square foot
ESCALATIONS - The proportionate share of increases over a base year for real estate taxes and operating expenses due to the landlord in future lease years
FACE RENT - The base rental rate, expressed as an amount per foot, per year, as contained in the lease agreement
FULL SERVICE GROSS - Lease agreement whereby the Landlord assumes responsibility for all Operating Expenses and Taxes for the property specifically in the initial lease year
GROSS LEASE - A lease which obligates the Lessor to meet all or part of the expenses of the leased property, such as taxes, insurance, maintenance and/or utilities
LESSEE - Tenant
LESSOR - Landlord
LETTER OF INTENT - Proposed terms to a lease signed by both parties typically not designed to legally bind the parties
LOAD FACTOR - Sometimes called the Add-On Factor, it is an indicator of floor efficiency used to convert usable footage to rentable footage (the ratio of Rentable to Usable = 1 + Load Factor(decimal))
LOAN TO VALUE RATIO (LTV) - The ratio of the loan amount to the value (or purchase price) of the property
LOSS FACTOR - An indicator of floor efficiency used to convert rentable footage to usable footage (the ratio of Usable to Rentable = 1 – Loss Factor(decimal))
MANAGEMENT FEE - Fee charged for the landlord for overseeing the operation of a building
MODIFIED GROSS - Lease agreement whereby certain obligations, normally the responsibility of the Landlord in a Gross Lease, have been assumed by the tenant
NET LEASE - Used to describe lease arrangements whereby the tenant pays an agreed rent plus utilities and taxes, insurance and/or maintenance expenses. This term should not be used without being specific about which expenses and other cost items are included in the lease
NET OPERATING INCOME - The annual operating income, net of operating expenses, from a property before consideration of loan payments and depreciation. It is calculated by subtracting vacancy losses and expenses from the Gross Scheduled Income
NET RENTABLE AREA (NRA) - For Office properties, most commonly calculated by subtracting the elevator core, flues, pipe shafts, vertical ducts, balconies and stairwell areas from the Gross Building Square Footage. There are different methods used in different areas so care must be taken with this measurement. For Industrial properties, the Net Rentable Area (NRA) is usually the same as the Gross Building Square Footage
NON-DISTURBANCE - An agreement between a lender and a tenant that protects the tenant’s rights in the event of a foreclosure
OCCUPANCY COST - Cost of Occupancy including Rent, Service Charges and Property Taxes
OPERATING EXPENSES - Expenses incurred in the operations of a property, excluding expenditures for capital improvements
RENTABLE AREA - For Office properties, most commonly calculated by subtracting the elevator core, flues, pipe shafts, vertical ducts, balconies and stairwell areas from the Gross Building Square Footage. There are different methods used in different areas so care must be taken with this measurement. For Industrial properties, the Net Rentable Area (NRA) is usually the same as the Gross Building Square Footage
ROLLOVER - The amount of occupied space subject to lease expiration in a given period. Used in financial analyses of rental property to indicate assumptions regarding the terms of lease renewals and projected occupancy and related income streams
SECURITY DEPOSIT - Cash or cash equivalents deposited by the tenant to the landlord to secure the tenant’s agreement to perform its obligations under the lease
SUBLEASE - Lease agreement between the Lessee and a subsequent tenant for the rights to use specified premises. Also, space available for lease subject to an existing lease. May also include space which may be taken over through an assignment of lease obligations
TENANT ELECTRIC - The electricity consumed by lighting and plug-in electric devices within a tenant’s demised premises
TENANT’S SHARE - Proportion of tenant’s rentable area to the total rentable area of a building expressed as a percentage
TENANT IMPROVEMENTS - Construction within the demised premises to make the space suitable for the tenant’s intended use
TENANT REPRESENTATIVE - A real estate agent hired by the tenant
TENANT IMPROVEMENT ALLOWANCE - An allowance, usually quoted on a per rentable square foot basis, available for improving the basic unfinished space. Rarely are TI’s directly comparable from building to building as the basic space improvements may include different components
TRIPLE NET LEASE - Used to describe lease arrangements whereby the tenant pays an agreed rent to the landlord and is directly or indirectly responsible for utilities, taxes, insurance maintenance expenses and capital expenses. This term should not be used without being specific about which expenses and other cost items are included in the lease
TURNKEY - Related to Tenant Improvements, indicates that the landlord will finish out the space to suit the needs of the tenant
USABLE AREA - Usually only mentioned with regard to office properties and is the Net Rentable Area less common areas, such as hallways, lobbies, restrooms, etc.
USE - The purpose of the tenant’s occupancy
WORKLETTER - Related to Tenant Improvements, indicates that specific quantities and qualities of materials have been designated as available for the buildout by the landlord
YIELD - Net Operating Income (Annualized), divided by the Purchase (or Asking) Price, expressed as a percentage. "Actual" Yields or Capitalization Rates are based upon current rent rolls and expenses, projected for the next twelve months. Expressed alternatively, it is the projected first-year pre-tax return on investment from ownership of a property without consideration of the cost of financing
Randy Eigen is First Vice President and Remy deVarenne is Senior Vice Presidentat CBRE, the world's largest commercial real estate services firm serving owners, investors and occupiers.
*All real estate terms listed are provided by CBRE Research.
The above is part of a three-part series of contributed content for FEI by Mr. Eigen of CBRE. Next up, Mr. Eigen will delve into “The Renewal Gambit” – how to effectively negotiate a commercial lease renewal – and will share a sample real estate transaction timeline to offer readers a clearer understanding of the process.