Terms You Need to Know in Commercial Real Estate

Professional jargon can be intimidating no matter what industry you are in but commercial real estate terms can be especially tough to learn.

If you’re like many, learning this new “language” can be challenging – it’s possible that you may know certain commercial real estate terms but you might not understand some common phrases.

Below you will find a list of common industry terms we think are worth learning.

Assignment Clause

An assignment clause spells out which contractual obligations, rights, and duties may be transferred from one of the contractual parties to another party. The assignment may be in whole or in part, and the clause also details the conditions under which a party can assign these duties.

Capitalization Rate

The capitalization rate, often just called the cap rate, is the ratio of Net Operating Income (NOI) to a property’s value. For example, if a property recently sold for $1,000,000 and had an NOI of $100,000, the cap rate would be $100,000/$1,000,000, or 10%

Common Area Maintenance (CAM) Fees

Common Area Maintenance (CAM) expenses are fees paid by tenants to landlords to help cover costs associated with overhead and operating expenses for common areas

Escalation Clause

An escalation clause is a clause in a lease or contract that guarantees a change in the agreement price once a particular factor beyond control of either party affecting the value has been determined

Option to Buy

The option to buy is an agreement that gives an investor the right to buy a particular number of shares, or other financial assets, at a fixed price and before a fixed date.

Parking Ratio

Total rentable square footage of a property divided by the number of parking spaces; typically expressed as a ratio of spaces per 1,000 square feet. As an example calculation, a 40,000 square foot office building with 180 parking spaces has a parking ratio of 4.5 spaces per 1,000 sf.

Rentable Square Footage

Rentable square footage is defined as usable square footage plus a portion of the building’s common areas. As mentioned above, common areas outside of your occupied space that is of benefit to you (lobbies, restrooms, hallways, etc).

Rent Concession

A rent concession is essentially a rebate, a price reduction or some other form of benefit offered by landlords for inducing a prospective tenant to move into their property.

Right of Expansion

The right to expand clause is included in Leases where a Tenant has an option to add additional space in the Landlord’s Property to the current Premises. The clause should include deal-specific information about the nature of the Expansion Premises, as well as any restraints on the Tenant’s right to expand.

Right of First Refusal

Right of first refusal (ROFR or RFR) is a contractual right that gives its holder the option to enter a business transaction with the owner of something, according to specified terms, before the owner is entitled to enter into that transaction with a third party.

Sublease Clause

A Sublease is a legally binding contract made between the original tenant of a rental property (sublandlord) and a new tenant (also known as a subtenant or a sublessee). The sublease gives the subtenant the right to share or to take over the rented premises from the original tenant.

Usable Square Footage

Usable square footage is the actual space you occupy from wall to wall. Usable square footage does not include common areas of a building such as lobbies, restrooms, stairwells, storage rooms, and shared hallways.