The commercial real estate industry has unique jargon, which can be difficult to understand. To better understand your commercial lease, the transaction managers at Menlo Group compiled eight common commercial real estate terms you should know as a tenant.
Before searching for commercial space, you and your stakeholders should identify desired property features and lease terms. You can compile a shortlist of your requirements into a request for proposal (RFP). Once you submit your RFP, landlords, building owners and property managers will know exactly what you’re looking for and can start negotiating with you if they have a space that fits your needs.
Usable square footage is the actual space within the office or building set aside for your business. Your usable square footage does not include common areas unless you are a tenant leasing an entire floor or multiple floors. As you select an office space, you should make sure the usable square footage will accommodate your business both now and in the future.
Rentable square footage includes your usable square footage and a portion of the square footage shared with other corporate tenants. These shared spaces could include fitness facilities, reception areas, restrooms, hallways, cafeterias and elevators. Your lease rate will be based on this number instead of on the actual square footage you’re occupying.
Landlords use load factors to determine how much common area square footage to assign to each tenant in a commercial facility. Typically, they calculate this number by dividing the total rentable square footage by the total usable square footage. Your landlord should provide an explanation of how the number was calculated, which can help you determine if your rent rate is fair. You may look for a lower load factor to stay within budget, or you may consider spaces with higher load factors if larger common areas benefit your business.
Common area maintenance (CAM) fees are the your share of the operating expenses for a building where you lease space. CAM fees can be variable or fixed and are often determined based on the square footage of your space. They may cover repairs, utilities, insurance or taxes. Landlords should be transparent about how CAM fees are calculated and exactly what they cover.
Your parking ratio is the number of parking spaces reserved for your business compared to the square footage of your space. If the parking ratio is 4:1000, you will receive four parking spaces for every thousand square feet of space you lease. Certain types of businesses require more parking, so don’t overlook this aspect of your lease.
Some leases may include a right of first refusal clause, which means your landlord is required to offer you more space to lease before putting it on the market. This clause provides you the opportunity to lease more space in an in-demand commercial facility once it’s available. Your business can benefit from this clause if you’re anticipating high growth in the coming years.
As your business expands, you may consider having a permanent location, so an option to purchase clause may work in your favor. Option to purchase clauses are often included when a tenant leases an entire building. The clause details the process of purchasing the space you’re leasing and should state that the purchase price will be at fair market value. Tenants usually execute this right at the end of their leases.
We hope that this glossary helps you better understand your lease. If you come across other commercial real estate terms you’re not familiar with, discuss them with your tenant representation broker.