Commercial real estate leases will introduce you to a whole new set of vocabulary, which can make it difficult to fully interpret documents. To make dissecting the fine print simpler, familiarize yourself with these common terms that you need to know:
1. Right of First Refusal
If you a sign a lease that includes a right of first refusal clause, your landlord is required to offer you additional space to lease before offering it to the general public. This gives you the opportunity to lease more office space in an in-demand building if it becomes available and can be highly beneficial if you anticipate major growth in the coming years.
2. Option to Purchase
Most common with whole-building leases, the option to purchase clause provides information about how your company can buy the space that you're leasing. It should outline the terms that you would need to meet in order to buy the property, including the price you would pay. Normally, tenants execute this right at the conclusion of their leases.
3. Usable Square Footage
The amount of space inside the office or building that you are renting is known as the usable square footage. It is the space that your company is actually occupying within the facility.
4. Rentable Square Footage
Rentable square footage includes the usable square footage plus a portion of the square footage that you share with other tenants, such as bathrooms located in hallways, reception areas, on-site gyms, elevators and cafeterias. Landlords base your rental rate on this number, rather than the actual usable square footage in your space.
5. Parking Ratio
The parking ratio is the number of parking spaces that are reserved in the lot for your employees. Take the total rentable square footage of your space and divide it by the number of parking spaces. This is usually as a ratio of spaces per 1,000 square feet.
6. Load Factor
Also known as the core factor, this number is used by the landlord to determine how much common area square footage to assess to each tenant. Your prospective landlord should be able to explain how this number was calculated, so that you can determine whether or not your rent is being calculated with a fair rentable square footage.
7. Common Area Maintenance
Called CAM for short, common area maintenance refers to the cost of operating expenses for a building that you are responsible for paying a share of with some types of leases. As with load factors, landlords should be transparent about how the common area maintenance fee is calculated and exactly what it covers.
8. Request for Proposal
One of the first steps in finding new space to lease is to sit down with your commercial real estate broker and figure out both what you need and what you want in a space. As you find spaces that you think might suit your needs, you can submit those wants and needs in a request for proposal (frequently referred to by its initials -- RFP) document. That RFP lets the landlord know what your general needs are so that they can then begin negotiating with you.
Knowing these terms will put you in a better position at the negotiating table, but you should still be prepared to encounter other terms with which you may not be familiar. That's why it's important to have a tenant representative to assist you throughout the process.
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