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10 Commercial Real Estate Terms You Need to Know

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10 Commercial Real Estate Terms You Need to Know

By Caron_Beesley, Contributor
Published: November 9, 2011 Updated: January 9, 2013

Getting ready to enter the commercial real estate market? In an earlier article, I outlined 6 Tips for Negotiating a Commercial Property Lease without Getting Burned.  If you are looking to rent or buy space for your small business, it’s well worth knowing some of the common terms that are used widely in this industry so that you and your real estate agent are talking the same language.

From abatements to zoning ordinances there are literally hundreds of commercial real estate terms that span the dictionary. Here are 10 of the most common terms you should acquaint yourself with.

  1. Real Estate Broker –State-licensed agents with expertise in the leasing process.  A good broker will not only help you find a space, but also help you in all aspects of the lease transaction. Because most brokers receive a commission or fee from the landlord or seller they represent (via a representation agreement), it’s worth doing your research to find a good one; a real estate lawyer can often offer advice in this regard.
  2. Common Area Maintenance (CAM) – This is the amount of additional rent charged to the tenant to maintain the common areas of the property shared by tenants. Typical examples include such work as landscaping, snow removal, exterior lighting, as well as insurance and property tax.
  3. Usable Square Footage – This is the square footage rented and used exclusively by the tenant. It includes footage for private rest rooms, storage, and any other areas used only by the tenant. In contrast, Rentable Square Footage combines usable square feet, plus a portion of the common area and typically encompasses 10-15 percent more space.
  4. Escalation Clause – A clause in a lease which allows the landlord to increase the rent in the future to reflect changes in expenses paid by the landlord, such as real estate taxes, operating costs, etc. This can take three forms: 1) fixed periodic increases, 2) adjustments based on the Consumer Price Index (cost-of-living increases), and/or 3) an increase tied to the increased costs of operating the property.   
  5. Tenant Improvements –Defines any improvements to the leased space either by, or for, a tenant. If you expect to make lots of improvements to the space, it’s worth negotiating these with your landlord and trying to get as much of these costs covered as you can. The Tenant Improvement (TI) Allowance or Work Letter defines the fixed amount that the landlord will contribute towards these improvements, and costs over this amount are then covered by the tenant (also known as the Tenant Finish Allowance).
  6. Full Service Rent – This refers to an “all-inclusive” rent that 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.
  7. Gross Lease – A type of lease in which the tenant pays a flat sum for rent, covering all landlord-paid expenses, including taxes, insurance, maintenance, utilities, etc. By having all these costs thrown in, you can better forecast your monthly expenses and also avoid potentially high bills associated with these operating costs.
  8. Net Lease – With a net lease, you will pay for other building operating costs such as property taxes, insurance, repairs, utilities, etc. in addition to your rent. For a small business owner this can potentially be a large sum.
  9. Non-Compete Clause – This clause prevents the landlord from leasing any other premises on the development to a direct competitor of yours or another tenant operating the same type of business. It might be worth considering such a clause to protect your investment for the long term – especially if you are in the service industry and expect a lot of walk-in traffic.
  10. Letter Of Intent: This is an informal and preliminary agreement between the tenant and the landlord indicating intent to move forward with negotiations. Always consult your legal counsel before signing any Letter of Intent.

Related Resources

About the Author:

Caron Beesley

Contributor

Caron Beesley is a small business owner, a writer, and marketing communications consultant. Caron works with the SBA.gov team to promote essential government resources that help entrepreneurs and small business owners start-up, grow and succeed. Follow Caron on Twitter: @caronbeesley

Comments:

If the person is a private lender that we need to still consider these points while taking commercial real estate loan.
This is nice compilation of terms, which are not very common. There are hundreds of terms, but some of the terms in this list are really good to know, Full service and tenant improvements. How ever Real estate broker is a very worn out term I bet everyone would know that. http://www.allnewdeals.com/
Caron, Solid post on commercial real estate terms. In a future post it might help the audience by expanding in detail the differences between the leases: gross, full-service, and net leases (single, double, & triple). Thank you for taking the time to share this information. Look forward to seeing you around the message board.
This is a great list of terms, especially since commercial real estate can be a confusing process. I always suggest getting the experts on your side early on. Contact a reputable real estate agent and insurance agent, and have them work with you throughout the process to ensure you are making the best possible business decisions for your needs.
This is nice compilation of terms, which are not very common. There are hundreds of terms, but some of the terms in this list are really good to know, Full service and tenant improvements. How ever Real estate broker is a very worn out term I bet everyone would know that.
Of course There are hundrends of terms, but these are the first 10! Thanks Caron
There are plenty of property and real estate terms that we need to know, but I am sure that there 10 are the more essential ones. Of course, for someone who wants to dabble into property investment himself, learning more about the law and the industry is a must.
Those are some of the most common real estate terms a person planning to enter real estate business should know. Good post! Thanks. House and Lot for Sale
Probably the most important term to me is Tenant Improvements. I know first hand that as a land lord this type of activity from your tenants can be a blessing or your worst nightmare. Make sure that if you "go in" with your tenants on making improvements that you don't just end up paying one of his/her friends to repaint the living room twice. But on the other hand, you could really save some money if you have good tenants with good intentions.home warranty
Some terms are already familiar to me. Yet some are new! Like Escalation Clause and Non-Compete Clause. Maybe because I'm still new to real estate! Thanks for sharing this and letting us know! I can now discuss other to others more effectively! Apartment for Rent Philippines

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