Top 10 Commercial Real Estate Terms You Need to Know

In this article, you'll learn:

Key terms like usable and rentable square footage and how they affect your lease.
The importance of load factor, right of first refusal, and common area maintenance (CAM) fees.
What holdover rent, rent escalations, and subletting clauses entail.
Differences between full service gross leases and triple net leases.

When you're searching for an office space and perusing leasing contracts, you'll be introduced to an entirely new vocabulary. Understanding the terms commonly used in commercial real estate is important to understanding lease agreements and assessing how much it will cost to rent a particular space. The following 10 terms are some of the most important words to look out for:

1. Usable Square Footage

Usable square footage is the actual number of square feet that your company will occupy within a building. If you are renting more than one office, the usable square footage will equal the sum of the square footage of each individual space.

measure-1

2. Rentable Square Footage

Rentable square footage includes the usable square footage plus a portion of the shared areas that your company has access to with other tenants in a building. This may include hallways, lobbies, reception areas, bathrooms, cafeterias and elevators.

3. Load Factor

Sometimes referred to as the core factor, the load factor is a number that a landlord uses to calculate how much common area square footage should be given to each tenant. It should be clear how a prospective landlord arrived at this number.

4. Right of First Refusal

The right of first refusal is a clause in a lease agreement that requires landlords to offer additional space that becomes available in the building to your company before advertising it to the general public.

5. Common Area Maintenance

Abbreviated as CAM, Common Area Maintenance is a fee assessed to a tenant to cover some of the costs of a landlord's operating expenses and common area within the building. The amount is calculated using the load factor, and a prospective landlord should be able to clearly explain what formula was used to determine the CAM.

6. Holdover Rent

Holdover rent is a fee assessed to a tenant who moves out at the end of a lease without providing notice. The amount can vary and is spelled out in the Holdover Clause of a lease agreement. Normally, the amount is 125 to 200 percent of one month's rent.

7. Rent Escalations

Many leases allow for rent escalations annually or over another period. Rent escalations are usually imposed when a landlord's operating costs increase. The amount of the escalation could be tied to a specific index or be a specific dollar amount or percentage.

8. Assignment and Subletting

Assignment and subletting are two rights that may be given to tenants in a commercial lease. If you have an assignment or sublease clause in your agreement, you have the right to rent or surrender part or all of your space to another tenant in the event that you do not need it before your lease expires.

9. Full Service Gross Lease

With a full service gross lease, your monthly payment is a set amount that includes your rent and property management expenses, such as utilities, repairs and taxes.

10. Triple Net Lease

With a triple net lease, your monthly payments include only your rent and your common area maintenance fee. This type of lease will require you to pay your utilities separately.