Important Commercial Real Estate Terms You Should Know

In this article, you'll learn:

• Key commercial real estate terms like effective date and square footage
• Differences between gross and net leases
• The significance of CAM charges and rent escalations
• The importance of renewal options in your lease agreements

Like many industries, commercial real estate has a language that is all its own. Getting to know the industry's jargon can help you to understand what you're being offered and, when it comes time to execute a letter of intent or a lease, what you're signing. Here are eight terms that are particularly important -- and highly nuanced -- in the commercial real estate world.

1. Effective Date

When you sign a lease, the date you sign it usually isn't the date that matters. Instead, your lease usually has multiple dates, and the most important one is the effective date.

The effective date is when the lease is considered to have "officially" started and it usually controls the term of the lease (measured in months or years from the effective date and ending on the termination date), when rent escalations occur (usually on the anniversary of the effective date), and when you have to notify your landlord of your desire to leave or to take a renewal option (usually months before the termination date, which is tied to the effective date). Interestingly, the effective date isn't when you start paying rent -- that's the rent commencement date. How do you find your effective date? Read the lease carefully -- it's spelled out in there.

2. Common Area

The common area is the part of the building that isn't in anyone's particular space, but that is shared by all tenants and visitors to the building in common. Hallways, restrooms, lobby spaces and the like are all considered common area. Usually, when you pay rent on a space, you actually pay rent for the space and your share of the common area, since you benefit from those spaces.

After all, your office will get unpleasant if you don't have your own bathrooms and you can't use the building's common ones! It's also hard to get from ground level to a space on the 20th floor if you don't have hallways and elevator lobbies to use in between.

3. Square Footage

If you remember elementary school geometry, measuring areas might seem simple. A 30 by 60 rectangular space is 1,800 square feet, right?

Wrong.

Buildings have three different measures of square footage:

• Usable square footage is the space inside the demising walls of your space (the 1,800 square foot example above).
  
  
• Rentable square footage is your usable space plus your share of the common areas. So if your building has 10 1,800 square foot spaces and another 2,700 square feet of lobbies, hallways, and other shared areas, your rentable square footage would be 2,070 -- 1,800 usable plus your 270 square foot share of the common area.
  
  
• Gross square footage is the total space in the building -- including areas (like holes for vertical penetrations like elevator shafts) that get excluded from rentable square footage.

You occupy your usable square footage, and you pay for your rentable square footage.

4. Gross Leases

Gross leases mean that your landlord pays some or all of the building's operating expenses. More specifically, if you have a  full-service gross agreement, you make a single monthly (or annual) payment to your landlord that covers everything -- rent and all covered operating expenses. Modified gross means that the landlord pays many of those expenses, but not all.

5. Net Leases

In a net lease arrangement, you are responsible for some or all of the expenses of the building. Triple-net leases mean that the landlord bills you for rent and for your share of every expense, while other types of net leases see some shared responsibility. It's important to understand this because, while net rents are usually lower than gross rents, much of that rent differential usually gets taken up by the higher operating costs that you pay in addition to the rent.

6. Common Area Maintenance

Common area maintenance charges, usually abbreviated as CAMs, are what you pay to take care of the common areas of the building. Here, when you think of common area, think of it expansively. So, CAMs include the cost of cleaning, heating and lighting the hallways.

But it also usually includes the cost of the water bill that drives the sink in your space's kitchen, since the building has a single in common water meter. Usually, you pay CAMs on a per square foot basis.

7. Escalation

Many leases have periodic rent increases to help the landlord keep pace with inflation. The language that defines how your rent increases work is referred to as the "escalation clause." Escalations can happen annually, every few years, or on lease renewal. They can be for a fixed dollar amount ($1.50 per year), a percentage (3% per year), tied to inflation, or anything else that you and your landlord decide.

8. Renewal Options

Read your lease carefully to see if you have the right to renew your space on a pre-determined basis. Renewal options are powerful tools for you because they give you a way to stay in the space if you want to. You aren't forced to use them, so you can always try to negotiate a better deal if the market will bear it.

Managing your commercial real estate portfolio can be tough, so always make sure you have a tenant representative on your side!

Here are a few other articles to check out:

8 Lease Negotiation Tips From Pro Tenant Reps

Commercial Leasing Due Diligence Guide: Get The Best Deal

15 Reasons You Need a Tenant Rep Broker for Commercial Leases

Subscribe to our blog for more CRE tips!!