September 29, 2022

Commercial Real Estate terms you must know

If you are planning to invest in commercial real estate, it’s very crucial that you acquaint yourself with some key terms linked to this segment. At the end of the day, a thorough knowledge of relevant terms in the domain of commercial real estate can only boost your return on investment. Here are some common but essential terms you might want to know about:

# Incidental expenditure: Whenever a commercial space is taken on rent, it involves certain extra costs over and above the base rent. These could include property tax, insurance, utilities, CAM charges, repairs, etc. These costs clubbed together are referred to as incidental expenditure.

# Gross rent lease: It’s a simple form of paying the rent and incidental expenses together either on a monthly or bi-monthly basis as per the agreement with the landlord.

# Altered gross lease: There can be a slightly modified or tailored version of the gross lease pact with the landlord amenable to picking up the tab for certain incidental costs, or part-paying insurance, property tax or CAM charges. The shared payment pattern must be agreed upon by both the parties.

# Option to buy: Sometimes, the lease is structured in such a manner that the tenant is given the option to buy out the commercial property at the expiry of the lease term.

# CAM (Common Area Maintenance) charges: CAM fees go towards operating expenditure of all the common areas of the commercial property, including elevators, stairways, lobby spaces, hallways, public washrooms, parking lots, etc.

# Usable square footage: This is the wall-to-wall actual amount of space being leased out to and reserved for the tenant. It’s extremely crucial to be aware of this usable space before inking the deal.

# Percentage rent lease: This is a mixed payment arrangement which has two components. One is the base rent which is constant for the lease period and the other is a fraction of a pre-agreed minimum-guarantee gross sales. This arrangement is very common in retail malls.

# Sops to tenants: The landlord might offer the tenant certain incentives like a rent-free period, reduced CAM charges or paying for any renovation/improvement work. These are referred to as ‘tenant inducement’.

# Trade fixtures: These are usually movable items like pieces of furniture, computers/laptops or any other equipment that you can take along without damaging the property in any manner when you are vacating the leased space. It is always advisable to properly delineate and mark out the ‘trade fixtures’ before the lease agreement is signed.

# LOI or Letter of Intent: The LOI is a document that incorporates the terms of the lease including lease time period, concessions, etc and is used for both leasing as well as purchasing commercial properties. This document is signed by both the parties before the deal is finalized.

# Turnkey improvements: These are modifications carried out by the developer to add value to the commercial property and make it more attractive to the tenant.

# Leasehold improvements: Such improvements entail modifications carried out by the landlord according to certain specifications laid out by the tenant to suit his/her type of business better. Such customized improvements usually become part of the property and can’t be removed, except in certain agreements where this clause has been built in.

# ROFR: The Right of First Refusal (ROFR) means that the tenant will be offered any extra space available on lease at any given point on a first-priority basis and has the right to either accept or reject that offer.

# Sublease cause: Sometimes there is a sublease clause built into the agreement by dint of which, the tenant can lease out a part of the property to another party for a certain duration.

# Escalation clause: This is a convenient tool to figure out the annual increase in rentals. The calculation is usually based on factors like operating costs, the consumer price index and property tax

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