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Commercial Real Estate Terms

We hope you find the following definitions of commercial real estate terms helpful and that you come away with a better understanding of the terminology used in commercial real estate. This is only a partial list; a more complete list is available by visiting our Documents and Forms section under the General category.

Abatement: Often and commonly referred to as "free rent" or "early occupancy" and may occur outside of or in addition to the primary term of the lease.

Build-Out: The interior construction of a tenant's space, whether new construction or the reconfiguration of existing space.

Capital Expenses: Most often defined by reference to generally accepted accounting principles (GAAP), but GAAP does not provide definitive guidance on all possible expenditures. Accountants will often disagree on whether to include certain items.

Design/Build: A system in which a single entity is responsible for both the design and construction. The term can apply to an entire facility or to individual components of the construction to be performed by a subcontractor. Also referred to as “design/construct.”

Escalation Clause: A clause in a lease that provides for the rent to be increased to reflect changes in expenses, such as real estate taxes, operating costs, etc., paid by the landlord. These expense increases may be accomplished by several means, such as fixed periodic increases, increases tied to the Consumer Price Index, or adjustments based on changes in expenses paid by the landlord in relation to a dollar-stop or base-year reference.

Full Service Rent: An all-inclusive rental rate 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. (See also Pass Throughs.)

Graduated Lease: A lease, generally long term, that provides that the rent will vary depending upon contingencies, such as a periodic appraisal, the tenant’s gross income, or simply the passage of time.

Guaranty: Agreement whereby the guarantor undertakes collaterally to assure satisfaction of the debt of another or perform the obligation of another if and when the debtor fails to do so. Differs from a surety agreement in that there is a separate and distinct contract rather than a joint undertaking with the principal. See also "Guarantor."

HVAC: The acronym for "Heating, Ventilating and Air-Conditioning."

Improvements: In the context of leasing, improvements made to or inside a building. May include any permanent structure or other development, such as a street, sidewalks, utilities, etc. See also “Leasehold Improvements.” See also “Leasehold Improvements” and "Tenant Improvements".

Indirect Costs: Development costs other than material and labor costs that are related to the construction of improvements, including administrative and office expenses, commissions, and architectural, engineering, and financing costs.

Just Compensation: Compensation that is fair to both the owner and the public when property is taken for public use through condemnation (eminent domain). The theory is that in order to be “just,” the property owner should be no richer or poorer than before the taking.

Letter of Intent: A preliminary agreement stating the proposed terms for a final contract. They can be "binding" or "non-binding." The threshold issue in most litigation concerns letters of intent. The parties should always consult their respective legal counsel before signing any Letter of Intent.

Lien: A claim or encumbrance against property used to secure a debt, charge, or the performance of some act. Includes liens acquired by contract or by operation of law. Note that while all liens are encumbrances, not all encumbrances are liens.

Market Rent: The rental income that a property would command on the open market with a landlord and a tenant ready and willing to consummate a lease in the ordinary course of business. Indicated by the rents that landlords were willing to accept and tenants were willing to pay in recent lease transactions for comparable space.

Net Lease: A lease in which there is a provision for the tenant to pay, in addition to rent, certain costs associated with the operation of the property. These costs may include property taxes, insurance, repairs, utilities, and maintenance. There are also “NN” (double net) and “NNN” (triple net) leases. The difference between the three is the degree to which the tenant is responsible for operating costs. (See Gross Lease.)

Operating Cost Escalation: Rent adjustment based on external standards such as published indexes, negotiated wage levels, or expenses related to the ownership and operation of buildings.

Operating Expenses: The actual costs - including maintenance, repairs, management, utilities, taxes, and insurance - associated with operating a property.

Percentage Lease: A provision of the lease calling for the landlord to be paid a percentage of the tenant's gross sales as a component of rent. There is usually a base rent amount to which percentage rent is then added. This type of clause is most often found in retail leases.

Quitclaim Deed: A deed operating as a release that is intended to pass any title, interest, or claim that the grantor may have in the property, but not containing any warranty or professing that such title is valid.

Renewal Option: Lease language that provides the means for the tenant to give the landlord notice of  intent to renew (extend) the lease.

Shell Space: The interior condition of the tenant's usable square footage when it is without improvements or finishes. While existing improvements and finishes can be removed, returning space in an older building to its "shell" condition, the term most commonly refers to the condition of the usable square footage after completion of the building's shell construction but prior to the build-out of the tenant's space. Shell construction typically denotes the floor, windows, walls, and roof of an enclosed premise and may include some HVAC, electrical, or plumbing improvements but not demising walls or interior space partitioning. In a new multi-tenant building, improvements to common areas such as lobbies, restrooms, and exit corridors may also be included in the shell construction. With a newly constructed office building, there will often be a distinction between improvements above and below the ceiling grid. In a retail project, all or a portion of the floor slab is often installed along with the tenant improvements to better accommodate tenant-specific under-floor plumbing requirements.

Tenant Improvements: Improvements made to the leased premises by or for a tenant. Generally, especially in new space, part of the negotiations will include in some detail the improvements to be made in the leased premises by the landlord. (See Leasehold Improvements and Workletter.)

Unencumbered: Description of title to property that is free of liens and any other encumbrances. Free and clear. (See Encumbrances.)

Variance: Permission for a property owner to depart from the literal requirements of a zoning ordinance that, because of special circumstances, cause a unique hardship. Special circumstances could include the particular physical surroundings, shape, or topographical condition of the property when compliance would result in a practical difficulty and would deprive the owner of the reasonable use of the property.

Warranty of Possession:  A warranty by the landlord of the legal ability to convey the possession of the premises to tenant; the landlord does not warrant ownership of the land. This is the essence of the landlord’s agreement and the tenant’s obligation to pay rent. The landlord's breaching of this warranty constitutes an actual or constructive eviction. (In older leases, the warranty of possession is the "quiet enjoyment" paragraph. In current leases, "quiet enjoyment" refers to noise in and around the leased premises.)

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