Below are frequently asked questions regarding the commercial real estate industry, as well as a glossary to help define terms you may see in NAI Miami | Fort Lauderdale’s property listings.
What does a commercial real estate broker do?
A commercial real estate broker is a type of professional who has been licensed to help various clients buy, sell or lease real estate properties. These properties are generally used for commercial purposes. If someone wants to use a property for their home, they will need to seek out a residential real estate broker instead. An easy way to understand what a commercial real estate broker does is to imagine that they are the “middle man” between a business and property or building they want to purchase for their business.
When and why should you hire a commercial real estate broker?
Hiring a commercial real estate broker can save time and money in your search because a good broker knows the properties, landlords, buyers, and sellers. You are involved in these transactions every now and then, while a broker does this every day. A good commercial real estate broker understands the total cost of the transaction and can help negotiate a deal that best suits your needs.
What is commercial real estate lending?
Commercial real estate lending is the process in which a buyer of commercial property acquires financing or mortgages necessary to make the property purchase. Without commercial real estate lending, a potential buyer would need to have all of the funds necessary to purchase the property. Instead, commercial real estate lending allows businesses and commercial entities to acquire financing (like a loan) to purchase their property and pay the lender back over time.
What should you ask your commercial real estate agent?
Knowing what to ask potential commercial real estate agents can help you to narrow your results to not only finding a qualified agent, but one you will feel comfortable working with. Below are a few questions you can use to help structure your inquiry to specific commercial real estate agents or their brokerages.
How much space does my company need?
The general rule of thumb is that you will need approximately 200 to 250 square feet per person. But remember that you will be signing a lease that could range in term from anywhere from 3 to 10 years. So you’ll need to add anywhere from 10 to 50 percent to the total square footage you’ve calculated in order to accommodate future growth.
Do I need a broker to look at properties?
Generally speaking, a broker (who is oftentimes part of a larger firm, called the brokerage) is needed to allow potential buyers access to view the property. While it’s not a strict requirement for a buyer to view properties, they may not be able to get the same levels of access to the property without them. A buyer could choose to view properties online, which does not require a broker. There may be difficulty in finding some of the properties online, however, and you won’t have as detailed of information as a broker can get. Alternatively, you could choose to talk to a seller directly to gain access to additional information or to be granted access to enter the building itself. While this is a possibility, not all sellers are going to be available at times that are convenient for you or may choose to only allow buyers to visit through their broker.
What is the difference between a commercial real estate deal and buying a house?
Generally, the biggest difference comes down to due diligence. Residential purchases deal with general inspections which are typically a quick one-day inspection. Residential purchases are also cheaper and are more likely a homestead. Residential deals are emotional purchases that can usually be closed within 30-45 days. Commercial property purchases involve property that is being used for business purposes, so there is more liability in the property and the land connected to it. The inspection process is extremely extensive, depending on prior usage, so the feasibility period is much longer and closing on commercial real estate deals can be a very long process.
What are some of the common pitfalls involving a real estate business deal?
Regardless of whether buying a home or a piece of investment property, there will always be risks involved. Your goal should be to lessen these risks as much as you can. Examples of potential problems that oftentimes lead to legal disputes include:
How are lease rates quoted for commercial property?
Commercial lease rates are usually quoted by price per square feet per month or per year.
What are CAM charges?
These are all of the NNN (referred to as Triple Net) charges such as taxes, insurance, and common area maintenance.
Is a letter of intent legally binding?
Typically, letters of intent are NOT legally binding. However, it is important to read everything you sign!
A 1031 Like-Kind Exchange is a transaction in which a taxpayer is allowed to exchange one investment property for another by deferring the tax consequence of a sale. The transaction is authorized by §1031 of the IRS Code. The IRS Code actually reads: "No gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like kind, which is to be held either for productive use in a trade or business or for investment."
A reduction or decrease; usually applies to the forgiveness of rent or a decrease of assessed valuation of ad valorem taxes after the assessment and levy.
The rate at which land or buildings will be sold or leased in the marketplace during a predetermined period of time, usually a month or a year. Also called “Market Absorption.”
A collection of legal documents that chronicle transactions associated with a particular parcel of land. Generally included are references to deeds, mortgages, wills, probate records, court litigations, and tax sales—basically, any legal document that affects the property.
(According to value) Used in reference to general property tax, which is usually based on the official valuation of the property.
Considered a loss factor, the percentage of gross rentable square footage which is lost to the tenant'’ physical occupancy.
One of three arrangements often used for financing tenant improvements (finishing out office space to accommodate a tenant such as walls, doors, carpeting, etc.) 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. Tenants may ask for a contingency in the event the actual build-out costs are less than the allowance, requiring the landlord to return the savings in the form of rent abatement or other concessions.
Premises accepted by a buyer or tenant in the condition existing at the time of the sale or lease, including all physical defects.
A transfer between parties of title to any property, real or personal, or of any rights or estates in the property. Common assignments include leases, mortgages and deeds of trust.
To turn over or transfer to another money or goods. To agree to recognize a new owner of a property and to pay him rent. See also “Letter of Attornment.”
A large principal payment that typically becomes due at the conclusion of the loan term. Generally, it reflects a loan amortized over a longer period than that of the term of the loan itself (i.e. payments based on a 25-year amortization with the principal balance due at the end of 5 years).
A set amount used as a minimum rent in a lease that also employs a percentage or other allocation for additional rent.
The year upon which a direct expense escalation of rent is based. See also. “Escalation Clause.”
A method of leasing property whereby the landlord builds a new building in accordance with a tenant’s specifications.
Buildings are categorized as either “A”, “B”, or “C”. A building classified as an “A” property is typically the best and most sought-after building type as they possess the finest construction elements has high-quality building infrastructure and normally has the best curb appeal. Class “B” is next in line as they are generally a little older but still have notable building infrastructure and distinguished property features. Class “C” is the lowest classification for buildings as they were built much earlier than other properties in the market and are located in less desirable areas that may be in need of extensive renovations.
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, telephone outlets, etc. May also specify the quantity and quality of the materials to be used which often carries a dollar value. See also “Workletter.”
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 cust9omize or upgrade material. See Also: “Workletter.”
The cost of configuring and finishing new or relet space in accordance with a tenant’s specifications.
Common Area Maintenance (CAM) charges refer to those areas within a building that are available for common use by all tenants such as lobbies and restrooms as well as landscaping and snow removal, etc.
The rate that is considered a reasonable return on investment (on the basis of both the investor’s alternative investment possibilities and the risk of the investment). Used to determine and value real property through the capitalization process. Also called “free and clear return.” See “Capitalization.”
A document presented by a local government agency or building department certifying that a building and/or the leased premises (tenant's space), has been satisfactorily inspected and is/are in a condition suitable for occupancy.
Property has an excellent location and access to attract the highest quality tenants. Property must be of superior construction and finish, relatively new or competitive with new buildings, and provide professional on-site management.
Property with good location, management, construction land tenancy. Can compete at the low end of Class A.
Generally an older property with growing functional land/or economic obsolescence.
An older property in need of extensive renovation as a result of functional obsolescence or deterioration.
Usually inserted in leases or conveyances whereby landlord or grantor promises that the tenant or grantee shall enjoy possession of the premises in peace and quiet without disturbance.
In order to determine the fair market lease rate for your property, a Listing Agent will assemble a list of comparable properties with similar characteristics to the subject property. Some of the features that are evaluated include size, construction quality, age, use, and typically located within the same sub-market as the subject property.
Cash or cash equivalents expended by the landlord in the form of rental abatement, additional tenant finish allowance, moving expenses, cabling expenses, or other monies expended to influence or persuade the tenant to sign a lease.
(1) Multiple suites/spaces within the same building and on the same floor which can be combined and rented to a single tenant. (2) A block of space located on multiple adjoining floors in a building (i.e., a tenant leases floors 6 through 12 in a building).
These are items that have to be met, changed, or remedied in order for a deal to close.
The general failure to perform a promised task or to pay an obligation when due. Some specific examples are (1) Failure to make a payment of principal or interest or other types of financial obligation when due. (2) The breach or failure to perform any of the terms of a note or the covenants of a mortgage or deed of trust.
A system in which a single entity is responsible for both the design and construction of a facility, often involving the fast-track method of construction; also referred to as “design/construct.”
The monetary advance by a buyer of part of the purchase price to indicate the intention and ability of the buyer to carry out the contract.
A right to use the property of another created by grant, reservation, agreement, prescription, or necessary implication. It is either for the benefit of land “appurtenant,” such as the right to cross A to get to B, or “in gross,” such as a public utility easement.
Calculations or analyses to determine the market rental value of a property at any given time, even though the actual rent may be different.
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.
The number resulting from dividing the Usable Area by the Gross Building Area in an office building, providing a benchmark measurement for that building’s use as an office building.
A power of the state, municipalities, and private persons or corporations authorized to exercise functions of a public character to acquire private property for public use by condemnation, in return for just compensation.
Any right to, or interest in, real property that may exist in one other than the owner, but which will not prevent the transfer of fee title. A claim, lien, charge or liability attached to and binding real property.
The store at a corner of a strip mall-type development.
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.
A statement concerning the status of an agreement and the performance of obligations under the agreement relied upon by a third party, including a prospective lender or purchaser. In the context of a lease, a statement by a tenant identifying that the lease is in effect and certifying that no rent has been prepaid and that there are no known outstanding defaults by the landlord (except those specified).
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).
The “asking” or nominal rental rate published by the landlord.
A term usually found in appraisals that attempts to determine the cash price that would likely be negotiated between a willing seller and willing buyer in a reasonable amount of time. For a sale to be considered a reflection of “Fair Market Value, it must meet all the conditions of a fair sale whereby: (1) both buyer and seller act prudently, knowledgeably and under no necessity to buy or sell, i.e., other than in a forced or liquidation sale; (2) the property must be offered on the open market for a reasonable amount of time, taking into consideration the property type and local market; and (3) payment is made in cash or terms equivalent to cash. When a sale is unlikely, i.e., when it is unlikely to be completed within 12 months, the appraiser must discount all cash flows generated by the property to ascertain the estimate of Fair Value.
An estate of real property that the owner has unrestricted powers to dispose of and which can be left by will or inherited. Commonly used as a synonym for ownership.
A contractual obligation by the owner of an asset to a rights holder to negotiate the sale of an asset with the rights holder before offering the asset for sale to third parties.
A clause occasionally inserted in a lease that gives a tenant the first opportunity to refuse an offer, typically an offer to expand leased space or to purchase a property. The owner typically must have a legitimate offer that the tenant can match or refuse.
Fit out' is a term used to describe the process of making interior spaces suitable for occupation. It is often used in relation to office developments, where the base construction is completed by the developer and the final fit-out by the occupant.
In a commercial lease negotiation, a tenant improvement allowance (also referred to as a TA, TIA, TI allowance, and leasehold improvement allowance) is an agreement from the landlord to compensate the tenant for all or a portion of the funds required to construct the commercial space.
A one- or two-story building with little or no common areas, high ceilings, load-bearing floors, and loading dock facilities. Usually configured to allow a small amount of office space in combination with light assembly or warehouse/distribution uses.
A force that cannot be controlled or resisted. In other words, something beyond the control of the parties involved. Includes acts of God (e.g., flood, tornadoes, etc.) and acts of man (e.g., riots, strikes, arson, etc.).
Refers to an “all-inclusive” lease in which the pre-determined rental rate includes maintenance, upkeep, taxes, insurance and utilities, and other operating expenses for a property. A pure full-service lease is the best type of lease for a tenant as they can focus on growing their business without micromanaging additional fees and services.
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. See also: “Pass-Throughs.”
Absorption is a measure of the amount of office space leased over a period of time. Gross absorption is a measure of the total square feet leased over a period of time with no consideration for office space vacated in the same area during the same period. See also: “Net Absorption.”
The total floor area in an office building measured in square feet or square meters that is associated with that building’s use as an office building. The area extends to the outer surface of exterior walls and windows and includes an office area, retail area, and other rentable areas such as vending machine space and storage area, but excludes parking and roof space.
A lease that provides that the landlord shall pay all expenses of the leased property, such as taxes, insurance, maintenance, utilities, etc.
At an intersection, the hard corner is the lot that is right at the corner, with one edge on each road.
The reasonably probable and legal use of vacant land or an improved property, which is physically possible, appropriately supported, financially feasible, and that result in the highest value. The four criteria the highest and best use must meet are legal permissibility, physical possibility, financial feasibility and maximum profitability.
A renter who remains in a property after the expiration of the lease. If the landlord continues to accept rent payments, the holdover tenant can continue to legally occupy the property, and state laws and court rulings determine the length of the holdover tenant's new rental term.
The acronym for Heating Ventilating and Air-Conditioning. Refers to the equipment used to heat and cool a building.
Generally, the term refers to buildings, but may include any permanent structure or other development, such as a St, utilities, etc. See also “On-Site Improvements.”
Refers to space that is in a strip center, or side-by-side in a center fronting the parking lot or street (as opposed to an interior mall space or stand-alone building).
Several types of landlord’s liens are created by contract or by statute. Some examples are 1) a contractual landlord’s lien; 2) a statutory landlord’s lien; and 3) a landlord’s remedy of distress (or right of distraint), which is not truly a lien but has a similar effect.
An agreement whereby the owner of real property (i.e., landlord/lessor) gives the right of possession to another (i.e., tenant/lessee) for a specified period of time (i.e., term) and for a specified consideration (i.e., rent).
A letter from a grantor to a tenant, stating that a property has been sold, and directing rent to be paid to the grantee (i.e., the new owner). See also “Attorn.”
An engagement, pledge, or commitment by a bank or person, made at the request of a customer, stating that the issuer will honor drafts or other demands for payment upon full compliance with the conditions specified in the letter of credit.
A formal method through which a prospective developer, buyer, or tenant expresses his/her interest in the property. Depending on the language, a legal obligation may be created.
A waiver of mechanic’s lien rights, signed by a general contractor and his subcontractors, that is often required before the general contractor can receive a draw under the payment provisions of a construction contract. May also be required before the owner can receive a draw on a construction loan.
An agreement between the owner of a property and a real estate broker giving the broker the authorization to attempt to sell or lease the property at a certain price and terms in return for a commission, set fee, or other forms of compensation.
The rental income that a property would most probably command on the open market; indicated by current rents paid and asked for comparable space as of the date of the appraisal.
The highest price a property would command in a competitive and open market under all conditions requisite to a fair sale with the buyer and seller each acting prudently and knowledgeably in the ordinary course of trade.
A type of lease arrangement whereby certain operating expenses are included in the Base Rent but have an expense stopover which Tenant pays any annual increases.
Absorption is a measure of the amount of office space leased over a period of time. Net absorption is a measure of the total square feet leased over a period of time taking into consideration office space vacated in the same area during the same period. See also: “Gross Absorption.”
A lease in which the tenant pays, in addition to rent, certain costs associated with a leased property, including property taxes, insurance premiums, repairs, utilities, and maintenance. 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. See also “Gross Lease.”
Income that a landlord gets from a property after paying expenses.
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)
This clause prevents the Landlord from leasing space on the premises to a direct competitor of yours, or to those who own a business similar to yours. Although it is hard to enforce, the obvious reason to include this in your lease agreements would be to limit potential competitors near your business operations.
A provision in a lease whereby the landlord or mortgagee of the building agrees not to disturb the Tenant’s right of occupancy in the event of a sale, foreclosure or other events of ownership transfer.
Refers to the clause in a lease agreement used to adjust rents over the term of a lease.
The actual cost of operating income-producing property, including utilities and similar day-to-day expenses, taxes, insurance and reserves for the replacement of items that wear out.
A contract on a specific piece of real estate that allows the buyer the exclusive right to purchase the property. Once a buyer has an option to buy a property, the seller cannot sell the property to anyone else.
Upon the tenant's exercise of the option, the provisions of the agreed-upon option are adopted for another defined term. The terms of the option can include the length of the new term, a change in rent, and other modifications.
Figure representing the number of parking spaces available per 1,000 square feet of gross leasable area. The intent of this ratio is to provide a uniform method of expressing the amount of parking that is available at a given building. Dividing the total rentable square footage of a building by the building’s total number of parking spaces provides the amount of rentable square feet per individual parking space (expressed as 1/xxx or 1 per xxx). Dividing 1000 by the previous result provides the ratio of parking spaces available per each 1000 rentable square feet (expressed as x per 1000).
Building and operating expenses that are paid by the tenant under the terms of a lease.
Phase I Environmental Site Assessment (ESA) reports are prepared for real estate and business transactions such as land purchases, building purchases, leases, business purchases, new residential developments and bank loans. The analysis typically addresses both the underlying land as well as physical improvements to the property.
A map dividing a parcel of land into lots, as in a subdivision.
The right of a tenant to renew (i.e., extend the term of) a lease for a stated period of time and rent at an amount that can be determined.
Compensation or fee paid, usually periodically (i.e. monthly rent payments, for the occupancy and use of any rental property, land, buildings, equipment, etc.
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.) Rentable square footage is the number of square feet on which a tenant’s rent is based.
The number resulting from dividing the Total Rentable Area in a building by the Usable Area. The inverse of this ratio describes the proportion of space that an occupant can expect to utilize.
See “First Refusal Right.”
A financing arrangement in which a property owner sells all or part of the property to an investor and then leases it back. Although the lease actually follows the sale, both are agreed to as part of the same transaction.
Generally, a deposit of money by a tenant with a landlord to secure performance of a lease.
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, thus 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 enclosed premises and may include some HVAC, electrical or plumbing improvements but not demising walls or interior space partitioning. In a new multi-tenant building, the common area improvements, such as lobbies, restrooms and exit corridors may also be included in the shell construction.
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.
An agreement by which the priority of a mortgage lender is relinquished in favor of that of a lender that would otherwise be junior in status.
(1) A holder of property under a lease. (2) Originally, one who had the right to possession, irrespective of the title interest.
One who holds possession of premises by permission of the owner or landlord, but without an agreement for a fixed term.
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. See also “Leasehold Improvements;” “Workletter.”
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.
Rent stipulated in a lease in which the tenant agrees to pay a share of the landlord’s operating expenses or real estate taxes for the building proportionate to the amount of space it occupies. See also “Full-Service Rent.”
Simply means that the space being rented or purchased is move-in ready for immediate use. Specifically, all of the wiring, fixtures, flooring and superficial decorative items are already in place.
Describes title to property that is free of liens and any other encumbrances. Also refers to encumbrances on lease space such as expansion or renewal rights held by third parties.
The actual usable square feet contained within the walls of the leased premises. This figure does not reflect an area outside the leased premises that can be used in common with other tenants/occupants.
The total amount of available space compared to the total inventory of space and expressed as a percentage. This is calculated by multiplying the vacant space times 100 and then dividing it by the total inventory.
A term that refers to a landlord or seller delivering space to a tenant with the basic finishings. The finishings typically include fire taped walls ready to paint, electrical panel and outlets, sealed concrete or finished floor, finished ceiling with lighting, HVAC including ductwork and controls, finished bathroom (if there is no common area bathroom), and sprinkler system, if required by code.
A warm vanilla shell is essentially the same as a vanilla shell building with an HVAC system installed. A warm vanilla shell is a commercial or residential building with a minimally finished interior, usually with ceilings, minimal lighting, plumbing, heating and cooling (HVAC), interior walls (painted or unpainted), electrical outlets around the perimeter and to code, an elevator (if applicable), restroom(s), and a concrete floor.
The set of plans for a project that, in combination with a set of specifications, comprise the contract documents indicating the exact manner in which a project should be built. See also “Contract Documents.”
The standard building items that the landlord contributes as part of the tenant improvements. Examples of standard building items are: doors, partitions, lights, floor covering, telephone outlets, etc. The Workletter may specify the quantity and quality of the materials to be used and often carries a dollar value.
Each city is divided into zones, which have specific regulations regarding structural and architectural design and intended use of buildings respectively. For example, a commercial building cannot be built in a residential area and vice versa, unless there is a modification in zoning ordinances. Similarly, if you are a tenant needing manufacturing space, you will need to find an area that is zoned industrial as these places usually present environmental concerns, like noise, water, or air pollution.