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Tenant Advisory
Real Estate Vocabulary 101
Tenants entering the market for space encounter a bewildering lingo peculiar to the architectural, real estate, and legal professions. Understanding some elementary terminology will enable you to ask reasonably intelligent questions. It will help you to understand three central aspects of a lease transaction:
- How many square feet will we actually get?
- What will the space look like on moving day?
- Forget the quote; how much will it really cost?
How many square feet will we actually get?
Unfortunately, your high school geometry definition of a square foot being 12'’ by 12" does not apply to real estate. A tenant wants to know how many square feet are available on which to put a desk and chair while the landlord wants to know how many square feet he is able to charge for. The difference can be as high as 33%. Often, a tenant will not know until the tenant’s space planner measures the space. Believe it or not, square footage in a perfectly square multi story office building will vary on a floor by floor basis. And there are reasons for that. The definitions may help you understand.
Carpetable Area: Space that is actually covered by carpet or flooring and can by walked upon within the exterior walls of the Demised Premises. For calculation purposes, it has already excluded those areas dedicated to building systems shafts, support columns, machine rooms, telephone rooms and building maintenance slop sink rooms. In addition, Carpetable Area does not include any partitioning, doors, walls or convection units for perimeter heating and air conditioning.
Usable Area: Space in Premises that reflect the actual area of a floor or an office suite that is suitable for occupancy. Under the Building Owners and Management Association International (BOMA) standards, the usable area is computed by measuring to the finished surface of the office side of a corridor and other permanent walls to the center of partitions that separate the office from adjoining usable areas, and to the inside finished surface of the dominant portion of the permanent outer building walls. There is no deduction made for columns and projections that are necessary to the Building.
Rentable Square Feet: Usable square feet plus a percentage (the core factor) of the common areas on the floor, including hallways, bathrooms and telephone closets. (And sometimes main lobbies, cafeterias, exercise facilities) Rentable square footage is the number of square feet on which a tenant’s rent is based.
Add-On Factor: Considered a loss factor, the percentage of gross rentable square footage which is lost to the tenant’s physical occupancy. To convert Usable square footage in a Premises into Rentable square footage by a formula that multiplies the usable figure by the Add-On Factor plus 100%. For example, an add-on factor of 15% would convert a 100,000 usable square foot (usf) Premises into a 115,000 Rentable square foot (rsf) Premises. (100,000 usf * {1.00 +0.15}=115,000 rsf).
Common Areas: Portions of a Building or Project such as plazas, parking lots, lobbies, stairs, elevators, landscaped areas and the like which are available to all tenants, customers, visitors and invitees for their access to and use of the Building or Project.
Core Factor: The percentage of common areas in a building (rest rooms, hallways) that, when added to the net usable square footage equals the net rentable square footage. May be a computed for a building or floor of a building. A "Loss Factor" or "Load Factor" is calculated by dividing the rentable square footage by the usable square footage.
Gross Building Area: The total floor area in an office building measured in square feet that is associated with that building’s use as office building. The area extends to the outer surface of exterior walls and windows and includes office area, retail area, and other rentable areas such as vending machine space and storage area, but excludes parking and roof space.
Net Rentable Area: Floor area of a building less any vertical penetrations of the floors. No deductions are made for necessary columns and projections of the building. (BOMA Standard)
Efficiency Factor: Method of measuring the effective use of a Demised Premises. Ratio of Usable to Rentable square feet.
What will the space look like on moving day?
It is unusual for a tenant to take a space on an "as is" basis. There is generally some construction work that will be required to customize the premises for that tenant’s particular usage. The tenant is interested in getting a space built to their requirements at minimal or no cost to the tenant. The landlord also wants to minimize costs. However, somebody must commit to pay the construction costs. At a minimum, you should know the initial cash outlay you must spend to construct the space to accommodate your requirements. This can be made more difficult if you are using the landlord’s team of brokers, architects and engineers.
"As Is" Condition: Premises accepted by a buyer or tenant in the condition existing at the time of the sale or lease, including all physical defects.
Buildout: The configuring and finishing of new or relet space in accordance with a tenant’s specifications.
Space Plan: Sometimes called the preliminary plan. A graphic representation of a tenant’s office space requirements, showing wall and door locations, room sizes, and some furniture layouts.
Tenant Improvements: Improvements to land or buildings to meet the needs of tenants. May be new improvements or remodeling, and may be paid for by the landlord, the tenant, or shared. Also referred to as "Leasehold Improvements;"
Work Letter: Memorandum usually attached as a Lease exhibit or letter that explains in detail the design and layout of the Premises and the construction that each party will do in the preparing the Premises. The Work Letter should also provide the mechanism for approving plans and specifications and other details with respect to construction the Premises. Work letters can involve complex issues and may take longer to negotiate than the lease.
Tenant Improvement Allowance: Monies, labor, supplies or other consideration given by a Landlord to a Tenant to Construct the Premises for occupancy. Allowances address the improvements to be done "above the ceiling" (e.g. HVAC, ducts, electrical lines) and "below the ceiling" (e.g., doors, walls, floor covering). Also called "T.I. Allowance", "TI’s", or a "Construction Allowance".
Building Standard: A list of construction materials and finishes used in building out office space for a tenant that the landlord contributes as part of the tenant improvements. Examples of standard building items are: doors, partitions, lights, floor covering, paint, etc. May also specify the quantity and quality of the materials to be used and often carries a dollar value.
Building Standard Plus Allowance: One of three arrangements often used for financing tenant improvements (finishing out office space to accommodate a tenant such as walls, doors, carpeting, etc." Under this arrangement the landlord lists in detail all materials and costs to make the premises suitable for occupancy and provides a negotiated allowance for the tenant to customize or upgrade material.
Allowance Over Building Shell: Often used in a yet-to-be-built building, this arrangement caps the landlord’s expenditure at a fixed dollar amount over the negotiated price of the base building shell. This arrangement is most successful when both parties agree on a detailed definition of what construction is included and at what price.
Turnkey: Work Allowance or Tenant Improvement package in which the Landlord does all the construction and assumes all the expenses for the Tenant’s initial improvements. All the tenant theoretically has to do is "turn the key" and open the door to a fully constructed Premises and begin occupancy.
Contract Documents: The design plans and specifications for
construction of a facility. Working drawings that detail for the contractor the
exact manner in which a project should be built. May also be referred to as
"Specification’s;" "Working Drawings." Or "Plans
and Specs."
Forget the quote; how much will it really cost?
Some landlords try to attract tenants by quoting as low a price as possible. Landlords increasingly seek to pass as many costs and risks onto the tenant. For the tenant, the experience can be like buying a new car and then discovering that you must pay extra for tires, a radio, and automatic transmission. To make an intelligent decision, the tenant should know what it will cost to occupy a space before selecting a building in which to relocate. These terms should help in determining exactly what may or may not be included in the "Rent."
Gross Lease: A Lease in which, for a specified Rent, the Landlord provides all Services and Repairs and pays all expenses of the leased property, such as taxes, insurance, maintenance, utilities, etc.
Full Service Rent: A rental rate that includes operating expenses and real estate taxes for the first year. The tenant is generally still responsible for any increases in operating expenses over the base year amount.
Net Lease: Lease in which the Tenant is responsible for payment of Rent, plus some or all Operating Expenses such as taxes, insurance premiums, repairs, utilities, etc.
There are also "net-net" (double net) and "net-net-net" (triple net) leases, depending upon the degree to which the tenant is responsible for operating costs.
Triple Net (NNN) Rent: Rent stipulated in a lease in which the tenant agrees to pay a all of the landlord’s operating expenses and real estate taxes for the building.
Base Rent: A set amount used as a minimum rent in a lease which also employs a percentage or other allocation for additional rent.
Operating Expense Clause: Lease provision identifying costs, charges and expenses that are related to the provisions of Services, nonstructural repairs and general operation and maintenance of the Building or Project and that are generally a proportionate charge based on a tenant’s leased area as a portion of the total leasable area of the building, usually over a base amount or year or stop.
Operating Cost Escalation: Refers to the clause in a lease agreement used to adjust rents over the term of a lease
Expense Stop: Provision in a lease establishing the maximum level of operating expense(s) to be paid by the landlord. Expenses beyond this level are to be reimbursed by the tenant. May be applied to specific expenses only (e.g., property taxes or insurance).
Base Year or Base Amount: The year or amount upon which a direct expense escalation of rent is based.
Pass Throughs: Building and operating expenses that are directly paid by the tenant under the terms of a lease.
Escalation Clause: A clause in a lease providing for increased rent at a future time. May be accomplished by several means such as (1) Fixed increase—A provision that calls for a definite, periodic rental increase; (2) Cost of living—A clause that ties the rent to a government cost of living index, with periodic adjustments as the index changes; or (3) Direct expense—Rent adjustments based on changes in expenses paid by the landlord, such as tax increases, increased maintenance costs, etc.
Straight Lease (Flat Lease): A lease calling for the same amount of rent to be paid periodically (usually monthly) for the entire term of the lease..
Step-Up Lease (Graduated Lease): A lease calling for set increases in rent at set intervals.
Effective Rent: The rental rate actually achieved by the landlord after deducting the value of concessions from the base rental rate paid by a tenant, usually expressed as an average rate over the term of the lease.