Industrial Real Estate Terms to Know
Whether you are buying, selling or leasing real estate it is one of the most important (and costly) decisions you will make for your business. Therefore, it is imperative to understand some of the language in your contract/ lease. The more understanding you have during negotiations, the less room there is for the unexpected. With that in mind here are some real estate terms that all clients should know and understand:
Triple Net Lease (NNN Lease)
A Triple Net Lease, also known as a NNN lease, is where the tenant pays not only the fixed rent charge but also the expenses on the rented property. These expenses include all real estate taxes, property insurance, and maintenance fees. This differs from a Gross Lease where the landlord pays for all property charges associated with the property.
Common Area Maintenance Fees (CAM)
Common Area Maintenance fees are an additional charge to the tenant, on top of the base rent, to maintain common areas shared by multiple tenants. These charges can include landscaping, parking lot cleaning/ maintenance as well as property taxes and increases. These are typically charged in a “pro- rata” share, meaning the cost is based on the percentage of the property you lease.
Letter of Intent (LOI)
A Letter of Intent or “LOI” is an informal, non-binding agreement between a tenant and landlord or buyer and seller that states a serious intent to buy or lease a property. These are often used to simplify an offer during negotiations by sticking to the essential deal points that are often hard to find in a lease agreement or purchase contract.
Tenant Improvements (TI)
Tenant Improvements are the work that is required to be done, to a space, for a tenant. These improvements can be paid for by the tenant or landlord and can include office build out, bathrooms, or any other customized alterations made to the building and will be laid out in the lease agreement.
Net Operating Income (NOI)
Net Operating Income or “NOI” is an investment calculation used to analyze real estate investments that generate income. Net Operating Income is the amount of revenue from a property minus all operating expenses. Operating expenses are those required to run and maintain the property such as insurance, property taxes, management fees, utilities, and repairs.
Capitalization Rate (CAP Rate)
The Capitalization Rate or CAP rate is an investment calculation that shows the rate of return based on the income that property is expected to generate. The CAP rate is used to estimate an investor’s unlevered potential return on investment and is calculated by dividing the Net Operating Income by the sales price.
If you do not understand any of the terms being used during your property search you are encouraged to ask your real estate professional to clarify. And if you are not completely clear on any terms or language in your lease agreement or sales contract you should consult with a real estate attorney.
The world of commercial real estate is as intriguing as it is complex. When it comes to buying, selling, leasing, managing, or financing a commercial real estate project, the assignment could be as small as a retail shop or as large as a high-rise office building. No matter the size, however, there’s always a process to complete and common industry terms to know in order to be successful.
Here are 25 terms that we believe are important:
Broker: A person who represents another person or a company during a buying or selling process.
Build-to-Suit: A property developed specifically for a certain tenant to occupy, with structural features, systems, or improvement work designed specifically for the needs of that tenant.
Cap Rate: Short for “capitalization rate,” the cap rate refers to the ratio of Net Operating Income (NOI) to property asset value. (e.g. A building with a NOI of $10,000 valued at a 5% Cap is worth: 10,000/0.5 = $200,000)
CBD: Central Business District
Delivery/Delivery Date: The time when a building completes construction and receives a certificate of occupancy.
Full-Service (FS) Rental Rate: A rental rate that includes all operating expenses such as utilities, electricity, janitorial services, taxes, and insurance.
Landlord: The owner of a property that is rented or leased to a tenant.
Landlord Representation: When a broker represents an owner/landlord in a typical lease transaction between an owner/landlord and a tenant.
LOI: Letter of Intent
Modified Gross (MG) Rental Rate: A rental rate that includes some of the operating expenses such as electricity, utilities, taxes, janitorial services, and insurance, but not all. Often the tenant will pay for janitorial and utilities while the other operating expenses will be included in the rental rate. It is important to clarify this with the owner or broker.
Preleased Space: Space that has been leased to a tenant and announced for future development but is not yet under construction.
PM: Property Manager. An individual who oversees all operational aspects of a building. Once a tenant signs a lease, it is the Property Manager who will assist the tenant with any questions, the build-out of the space, and any on-going issues once they have moved in.
PSF: Per Square Foot
Punch List: A final checklist of work that needs to be done to a property before the end of construction.
RFP: Request for Proposal
ROI: Return on Investment
RSF: Rentable Square Feet
Second Generation Space: Space that has had a prior tenant and therefore has modifications (such as walls, doors, ceiling treatments, etc.) that can often be used by a subsequent tenant.
Shell Space: A building space that has an unfinished interior and requires improvements.
Sublease/Sublet Space: Space that has been leased by a tenant and is being offered for lease back to the market by that tenant.
Tenant: A person, business, or group that pays rent to an owner or landlord for the right to use/occupy a property or space.
Tenant Representation: When a broker represents a tenant in a typical lease transaction between a tenant and an owner/landlord.
TI: Tenant Improvement
Triple-Net (NNN) Rental Rate: A rental rate that excludes all operating expenses such as electricity, utilities, taxes, janitorial services, and insurance. These expenses are expected to be paid directly by the tenant.
Vacancy Rate: The percentage of physically vacant space divided by the total amount of existing inventory.
Glossary of Industrial Real Estate Terms
Below are some common real estate terms pertaining to warehouse space in Denver. You may also want to visit our Frequently Asked Denver Industrial Real Estate Questions page for more information. Or please feel free to call our office and one of our industrial real estate and warehouse specialists will be happy to help you – 303-295-2525.
- Base Year – the calendar year in which the lease begins. This terminology usually refers to expenses that are included in the rent for the first year of the lease. If costs go up in subsequent years, the lease will provide that the tenant will pay its share of increases over the (first year) base year expenses, which usually include taxes, insurance, and common area maintenance.
- CAM or CAC– these letters stand for Common Area Maintenance or Common Area Costs, which usually includes all exterior maintenance and repairs such as parking lot cleaning, exterior lighting, snow removal, exterior painting and cleaning, landscape maintenance, etc. Sometimes people use the term “CAM expenses” to refer to common area maintenance plus taxes and insurance, which are the three categories of expenses for a triple net (or NNN) lease.
- Clear Height – The usable height in the building, clear of any obstacles, from the floor to the bottom of the lowest roof joist.
- Dock High – Overhead door and loading at the level of a semi-truck bed.
- Drive In – Ground level access and loading.
- Eminent Domain – No matter who legally owns a property, any city, state, county or federal government has the right to take the property for a public use, so all industrial leases in Denver have a provision covering that possibility. However, it is very rarely used.
- Gross Lease – Denver warehouse space leases that are considered “gross leases” include all expenses in the monthly rental rate with no additional expenses billed back to the tenant. With a gross lease, as with all industrial leases, the tenant is responsible for its own utilities.
- High Cube – High cube warehouse space is industrial space designed to maximize storage capacity with open floor plans and high ceilings, typically at least 20 feet in height.
- Modified Gross Lease – With a modified gross lease, in addition to base rent, the tenant participates in its share of building expenses such as taxes, insurance and common area maintenance if these expenses go up over the base year, which is the first year of the lease.
- Rail Served – the building is adjacent to a rail line with a spur to the building, providing the ability to load and unload rail cars from the building.
- Right to Relocate – Many warehouse leases include a provision that gives the landlord the right to relocate a tenant –– usually within the same complex — at the landlord’s expense. This provision is rarely exercised but it may become necessary if, for example, a smaller tenant occupies space between two vacant spaces, which interferes in the ability to combine the spaces for a large user.
- Subrogation – This is an insurance term that allows an insurance company to pay a loss to the covered party but pursue reimbursement from a third-party who might have been at fault.
- Triple Net or NNN Warehouse Leases provide that the tenant is responsible for all costs associated with their warehouse space or building including taxes, insurance, and maintenance. For a multi-tenant building, these expenses are apportioned to the tenants based on their square footage.
GLOSSARY OF PROPERTY TERMS
In all dealings in property, participants need to be familiar with a wide range of technical terms and jargon. All sectors of commerce have their own industry specific terminology; the property industry is no exception. Some of the most commonly used property terms are:
Sale and Purchase
The status of an agreement for sale and purchase which is subject to specified conditions to be satisfied to make it binding.
The process by which careful consideration of every aspect of a proposed asset purchase or lease is reviewed including in-depth financial, legal and physical investigation. Because the purchase or lease of an investment property can be complex, sale and purchase agreements and lease agreements are often conditional upon the completion of due diligence within a specified period to the satisfaction of the purchaser or prospective lessee.
The point at which all conditional clauses within a sale and purchase or lease agreement have been satisfied or dispensed and the transaction is contractually binding on both parties.
The party borrowing funds whose property assets are mortgaged as security in favour of the lender.
The lender of funds who takes mortgage security over the assets of the borrower.
The seller of the property who holds the relevant title.
One who holds title to, and conveys the rights to use and occupy a property under a lease agreement. Commonly termed a landlord.
One who possesses the right to use or occupy a property under a lease agreement. Commonly termed a tenant.
A lease whereby the tenant pays a gross rent and the lessor pays out of that the operating expenses incurred through ownership. In such a lease the lessor bears the risk that the expenses may increase over the period of the lease.
A lease where the rent paid is the net return to the lessor because in addition to the rental stipulated, the lessee (tenant) assumes payment of all property charges, such as certain maintenance charges, service charges and insurance etc. In such a lease the lessee bears the risk that expenses may increase over the period of the lease.
OPEX (Operating Expenses)
The ongoing, generally periodic, operating expenses or outgoings associated with the occupation of space over and above the base rent. Operating expenses generally consist of the likes of rates, insurance, air-conditioning, lighting, lifts, cleaning, security and servicing charges etc.
In a net lease, such expenses are charged on a proportionate basis to individual tenants according to either a proportionate share of the rent or space occupied.
The right to review rental under a lease. Commonly in occupational leases (buildings) this is a 2 to 3 year period, while in the case of ground leases 5, 7, or 21 years are normal.
A clause in a lease whereby the rent payable by the tenant can increase or remain static at review but not fall. There are two general forms of ratchet clauses, full or modified. A full ratchet stops the rental falling below the previously reviewed rental level while a modified ratchet stops the rent falling below the initial contracted rental.
Right of Renewal
A clause within a lease giving a lessee the right, or rights, to renew an existing lease for a specified term on specified conditions.
An arbitrator is appointed by each party to a dispute in an attempt to resolve differences, typically in rent reviews. In the event of continued non-agreement, the parties then respectively refer differences to a pre-appointed umpire who makes a binding award.
The transfer of the whole of the tenant’s interest in a property to another, whereby the other person
becomes the immediate tenant to the landlord in place of the original. The tenant who assigns the lease is called the ‘assignor’, and the party to whom it is assigned is called the ‘assignee’.
A ground lease is a specialist form of tenure in which the lessor (the fee simple owner of the land) grants occupancy of the underlying land to a lessee. The main feature that differentiates ground leases from conventional leases is that the lessee normally has the right to construct or upgrade buildings on the land. A common form of ground lease in New Zealand is the Glasgow lease. Distinguishing features of this form of lease include:
- Established for a fixed term, usually 21 years
- Rent reviews are usually perpetual rights of renewal to the lessee at the end of each term
- Occupation of the land can go on indefinitely, provided rental payments are met and the ground lease is renewed at the appropriate time
- If the lessee does not renew the lease, the rights of the lessee revert to the lessor including all the improvements to the land with no compensation paid to the lessee.
A separate lease granted by a lessee of the whole or part of a leasehold interest to a sub-lessee.
The length of the sub-lease must be less than the unexpired term of the lessee’s own lease of the property.
A lease between a landlord and a tenant which gives overall contractual responsibility to one particular tenant (head lessee). A head lease usually relates to an entire, multi-tenanted, subleased building and is usually for a longer term than the sub-leases.
In situations where an owner grants an estate in property that is less than their own, eg a lease or licence, their remaining interest is termed a reversion because the full interest in the property will eventually revert back to them.
Step up Lease
A type of lease where the rental increases at pre determined periods, usually annually. The rental levels maybe predetermined or fixed according to a particular index or percentage increase.
A lease whereby all or part of the rental is derived as a percentage of turnover. This type of lease normally also incorporates a minimum or base rent and is generally restricted to retail premises.
Auckland District Law Society Lease
A standard form of lease drafted by the Auckland District Law Society. Regarded as a concise popular form. Widely used in the commercial office sector.
A standard form of lease drafted by the Building Owners and Managers Association (BOMA). Generally regarded as more onerous from a tenant’s perspective.
Inducements made on behalf of a lessor as a means of attracting tenants to lease space. More prevalent in periods of depressed market conditions. Common incentives include rental holidays and lessor supplied fitout.
A lump sum payment obtained by a lessor or assignor from a new lessee for the right to occupy premises. Derived from the right to obtain the key to open the premises. More common in highly sought after retail locations where vacant premises rarely become available.