10 Commercial Real Estate Terms You Need to Know

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

• 6 Tips for Negotiating a Commercial Property Lease without Getting Burned
• SBA Guide to Leasing Commercial Space
• Tips for Choosing a Business Location

About the Author

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