Real Estate Terms
If you are looking to understand terminology, or to define commercial real estate terms, the following definitions may be useful
A type of Lease requiring tenant to pay in addition to base rent all costs associated with the operation, repair and maintenance of the building, all real estate taxes, and utilities including repair and maintenance of the building's structure and roof. Often the tenant is directly responsible both for all such costs and for the active handling of the items themselves. This type of lease is more common for industrial properties then office properties in the Toronto Area.
The estimate of the rate at which commercial office, warehouse or industrial space will be leased or occupied in a given market within a specified period.
A relationship in which one party (agent) acts for or represents another (principal) under the authority of the latter. Agency involving commercial property should be in writing, such as listings, trusts, etc.
A person or entity that is licensed under the applicable real estate board(s) to represent a party in a real estate transaction.
AGREEMENT OF PURCHASE AND SALE
A written document where by both seller and buyer agree to the terms and conditions under which a property will be sold.
A set dollar amount provided by the Landlord under a lease to be used by the Tenant for a specific purpose. Examples include allowances for leasehold improvements, moving expenses design fees, etc. If the expense exceeds the allowance amount, such excess is the Tenant's responsibility. If the expense is less than the allowance, the savings are retained by the Landlord unless their agreement specifies otherwise.
Term embodies numerous concepts related to utilization of space including telecommuting, hotelling, office sharing and open office plans.
A feature of real property that enhances its attractiveness and increases the occupant’s or user’s satisfaction although the feature is not essential to the property’s use. Natural amenities include a pleasant or desirable location near water, scenic views of the surrounding area, etc. Human-made amenities include swimming pools, tennis courts, community buildings, and other recreational facilities.
The process of paying off a debt together with interest, usually with equal payments at regular intervals over a period of time.
To spread debt or leasehold improvement costs or other monetary inducements over a defined period of time at an agreed upon interest rate.
An estimate of value for an asset such as an office or industrial building based upon the opinion of a certified professional.
The increase in value of a real estate asset.
AS IS CONDITION
An agreement by a tenant or purchaser that a industrial or office property is accepted in its current condition as inspected, including any known or unknown defects or deficiencies.
A fee imposed on property, usually to pay for public improvements such as water, sewers, streets, improvement districts, etc.
An agreement conveying the leasehold interests, including the financial responsibilities, from one tenant to another tenant.
The existing shell of a building prior to tenant improvements. This condition varies from building to building.
The amount of rent to be paid by the tenant excluding operating costs maintenance, insurance, hydro etc. Base rent is synonymous with minimum, net or basic rent.
The 12 month period upon which a direct expense escalation of rent is based. Typically the calendar year the lease commences.
An improvement that increases property value as distinguished from repairs or replacements that simply maintain value.
(Building Owners and Management Association) A national association developed as a forum for building owners and managers and developers.
An international standard for the measurement of industrial, office, commercial or retail space often referred to in the lease agreement.
In good faith, without fraud.
A term equivalent to “agent”, being a party licensed to trade in real estate in return for a fee.
The construction or improvements of the interior of a commercial space, including walls, flooring, plumbing, electrical, paint, etc.
The construction of an office or industrial building to meet the specific requirements of a large tenant or purchaser.
CAM - COMMON AREA MAINTENANCE
The amount of additional rent charged to the tenant to maintain the common areas of an industrial, commercial or office building or property. These charges are shared by the tenants on a pro-rata basis.
A provision in a lease that confers upon one or both of the parties to the lease the right to terminate the lease upon the occurrence of the condition or contingency set forth in the said clause.
Improvements made by the landlord or owner of building or site that potentially increases the value of the asset. Capital Improvements should not be included in a buildings operating expenses.
The rate typically used to calculate or make an estimate on the underlying value of a property based on the Net Income derived from the property. Formula: Net Income divided by Cap Rate = Estimated Value.
CERTIFICATE OF INSURANCE
A written certificate verifying the insurance coverage, parties involved and term of coverage.
Items that are found within premises and are not affixed to the premises, which may be removed.
Moving people from one workspace to another within the leased premises. Usually involves relocation of furniture, phones, and the like and can be very expensive and time consuming. A high churn rate is to be avoided.
CLASS "A" BUILDING
Classification system; defined by Building Owners and Managers Association as the most prestigious buildings competing for premier office users with above average rental rates for the area along with high-quality standard finishes, state of the art systems, exceptional accessibility and a definite market presence.
CLASS "B" BUILDING
Classification; defined by BOMA as buildings competing for a wide range of users with rents in the average range for the area. Building finishes are fair to good for the area and the systems are adequate, but the building does not compete with Class A at the same price.
CLASS "C" BUILDING
Classification; defined by BOMA as buildings competing for tenants requiring functional space at rents below the average for the area.
CLASS OF BUILDING
A method used to determine the desirability of one building over another using age, location and quality of improvements as determining factors. Usually defined as Class AAA, A, B, or C.
Expenses inccurred above the price of the property by Vendors and Purchasers in transferring ownership of a property. Closing costs normally include an origination fee, an attorney's fee, taxes, an amount placed in escrow, and charges for obtaining title insurance and a survey
An area of an office or industrial building that is used in common by tenants and their visitors and generally include areas such as lobbies, corridors, restrooms etc. This term can also be extended to include the cost of maintaining parking areas, sidewalks, landscaped areas, public washrooms, loading facilities and often form part of the tenant's pro-rata share of the buildings operating expenses .
Benefits granted by the landlord or owner to entice a new tenant to lease premises or an existing tenant to remain within their premises. Common concessions include free rent, lower rent, cash, cash for improvement work, moving expenses and any other item agreeable to both parties.
A real estate project in which each unit owner has title to a unit in a building, an undivided interest in the common areas of the project, and sometimes the exclusive use of certain limited common areas.
Architectural drawings with keyed notes detailing the work required and types of materials to be used in constructing the improvements. Synonymous with Working Drawings.
Space that is adjacent to another space or series of spaces. May also be used in describing space that is on a floor either directly above or directly below the vacant space in an office or industrial complex.
A condition that must be met before a contract is legally binding. For example, home purchasers often include a contingency that specifies that the contract is not binding until the purchaser obtains a satisfactory home inspection report from a qualified home inspector.
The percentage of net rentable square feet of a building devoted to common areas, such as washrooms, hallways, lobbies, etc. Calculated as rentable square footage divided by the usable square footage. Also known as R/U factor or loss factor.
Wording found in deeds that limits/restricts the use to which a property may be put (e.g., no bars).
Breaking any section of the terms contained within a lease document. Examples include failure to pay rent, using the premises for purposes not agreed upon in the lease or failure to perform any one of the agreed upon terms.
A term used to describe a location in a multi unit office, industrial or retail building individually divided by walls into a singe space.
Partitions or walls that separate one tenant's space from the buildings common areas, or from another tenant’s space in a commercial, office, or industrial or retail property.
A document that lists the price, conditions and terms under which the buyer is willing to purchase the property. (Each of these means the same thing: offer to purchase, or purchase offer, or earnest money agreement, or contract of purchase, or deposit receipt.)
Activities carried out by a prospective purchaser or mortgager of real property to confirm that the property is as represented by the seller and is not subject to environmental or other problems.
The right of use of the property by another as allowed through an agreement or necessary implication. Common examples include easement for the purposes of access to adjoining land and access to public utility equipment/services.
The minimal net rental rate that makes a property viable and profitable to the landlord after paying all expenses and debt servicing.
The actual rent per square foot or amount received by a landlord after deducting free rent, tenant allowance, realtor commissions, and landlord work.
EFFECTIVE USEABLE AREA
Excludes those areas within the industrial and office space that the tenant pays rent on but effectively cannot use such as columns and sharply angled spaces.
The difference between a property's current market value and the debt, mortgages and liens against it.
A provision within a lease stating the preset rate increases in operating costs increase over the term of the lease.
A written agreement among parties, requiring that certain property/funds be placed with a third party. The object in escrow is released to a designated entity upon completion of some specific occurrence.
An agreement between a tenant and landlord wherein the tenant certified that the lease is in force and effect, the date of commencement and expiration is correct, the landlord has performed its part of the Lease Agreement to the date of the certificate and there are no outstanding promises or agreements outside the lease.
A legal instrument executed by the one taking out the mortgage (i.e., mortgagor). The owner of a property may require an individual leasing a property to sign an estoppel certificate, which verifies the major points (e.g., base rent, lease commencement and expiration) existing lease between the landlord and tenant.
EXCLUSIVE LETTER OF REPRESENTATION
A tenant’s written authorization specifying a particular realtor as the tenant’s representative with respect to a lease or renewal or purchase of a commercial property.
A written contract that gives a licensed real estate agent the exclusive right to sell a property for a specified time, but reserving the owner’s right to sell the property alone without the payment of a commission.
A right granted by the landlord to the tenant whereby the tenant has the option(s) to add more space to their existing premises set out in the Agreement to Lease.
A fixed amount (typically per square foot) in a lease where the tenant is responsible for all building operating expenses and taxes in excess of said amount.
An agreed continuation of occupancy under the same conditions, as opposed to a renewal, which implies new terms or conditions. In a lease, it is a right granted by the landlord to the tenant whereby the tenant has the option to extend the lease for an ad.
The rental rate stated in the formal lease agreement without factoring in inducements or concessions.
A person who represents another on financial/property matters.
FIRST RIGHT OF REFUSAL
A tenants right to lease additional space that is often adjacent. Usually the tenant would be required to match whatever bona fide offer to lease is made by the third party.
FIXED RATE OPTION
The right for a tenant to renew their lease agreement at a predetermined net rate.
The period prior to the commencement date that the tenant uses to renovate or build-out the premises; usually free of base rent and operating costs but often including utilities consumed.
An area within a building, showing the partitions and improvements.
The total square footage of a floor in an industrial or office building.
FORMAL LEASE AGREEMENT
A legal document outlining and defining all terms and conditions of the leased space by the tenant from the landlord for a given period of time as referred to as the lease term.
A concession granted to a tenant that allows the tenant to carry on business within the premises for a specified period of time without the payment of net rent. In some cases this concession may include additional rent as well.
FULL SERVICE LEASE
A lease that requires the landlord to provide all services for the tenant’s occupancy throughout the lease term. The cost associated with providing such services are included in the base rent.
A lease in which the stated rent includes the operating expenses of the building. Same as Fully Serviced Lease. Opposite of Net Lease.
An adjustment made to operating expenses to account for the occupancy level in a building. When operating expenses are "grossed up", it means that the building's variable expenses have been adjusted upwards to the level that those expenses would be incurred if the building was fully occupied (typically 95%).
A lease involving the rental of land only, either vacant or exclusive of any buildings on it. Usually a net lease on a long term basis (20 years+).
If a business is relatively new (under five years), their financial statement is not real strong, or the landlord has some discomfort with the prospective tenant’s ability to last through the lease, he might ask for a personal or corporate guarantee. It is assurance that if the tenant defaults, the person or entity guaranteeing the lease will pay rent and continue to live up to all the terms and conditions of the lease.
An agreement promising that if the tenant falls into default the rent will be paid to the landlord and all other obligations in accordance with the lease will be performed by the guarantor named.
HEATING, VENTILATING, AND AIR CONDITIONING (HVAC)
The mechanical system of the building that heats provides fresh or conditioned air and ventilates it from the building. High-rise office buildings and shopping centers have one or two main HVAC systems that supply tenants cooperatively, while strip malls and industrial buildings tend to have individual rooftop HVAC systems for each tenant or occupant.
A provision of a lease that allows a tenant to maintain possession of its premises for a period of time beyond the expiry if the tenant does not renew its lease.
An allowance or benefit concession that is offered by the landlord to encourage the tenant to renew a lease or to sign a lease.
An concession, allowance or benefit offered by a landlord to a prospective tenant in order to encourage the prospective tenant to sign a lease commitment or renewal.
The fee or percentage charged for borrowing money
A property that is not occupied by the owner.
Ownership of real property by two or more individuals, each of whom has an undivided interest with the right of survivorship.
The owner of a property can be a group, an individual or a corporation.
Work and improvements carried out by the landlord for the tenant as according to a specified agreement.
LEASE BUY OUT
A payout (by a tenant or a landlord) to the other party, therefore relieving both parties of all obligations to each other in the lease.
The set out period of time that a lease is in effect and binding for both the landlord and the tenant for a leased premises.
Improvements or leaseholds made to the property as required by the tenant and approved by the landlord. These typically include items such as partitioning, door frames, doors, carpet, side lights, electrical, mechanical etc.
A person or company who provides the tenant with financing by lending money.
The tenant, as it pertains to a lease agreement.
The landlord or property owner, as it pertains to a lease agreement.
LETTER OF CREDIT
A commitment by a bank or other person that the issuer will honor drafts or other demands for payment upon full compliance with the conditions specified in the letter of credit. Letters of credit are often used in place of cash deposited with the landlord in satisfying the security deposit provisions of a lease.
LETTER OF INTENT
An informal offer to lease or purchase. This letter requests certain conditions to be allowed by the parties before entering into any formal agreements.
To impose or assess a tax on a person or property. The amount of taxes to be imposed in a given district.
A legal claim filed against a property for payment of a debt or obligation. If a property owner fails to pay a creditor, for example, the creditor can place a lien on the property. A lien can halt the sale of a property
An agreement between a property owner and real estate broker giving the broker the right to attempt to lease the property at agreed upon terms and conditions in return for a commission or fee.
The individual or real estate brokerage that has rights in listing and leasing space for a landlord or owner
The percentage of net rentable square feet of a building devoted to common areas, such as washrooms, hallways, lobbies, etc. Calculated as the rentable square footage divided by the usable square footage. Also known as R/U factor or loss factor.
A fee paid out to the company that manages a property for the landlord and included operating costs.
MARKET DATA APPROACH
The process of estimating the value of property through the examination and comparison of actual sales of comparable properties
The rent a landlord can reasonably charge within the current market area of the property.
The highest price that a buyer ready, willing and able but not compelled to buy, would pay, and the lowest a seller ready, willing and able but not compelled to sell, would accept.
The basic monthly rental rate for the property, usually excluding operating costs. Also called net rent.
MONTH TO MONTH LEASE/TENANCY
An agreement between the tenant and landlord to rent or lease space for no more than one month. Unless there is a letter of termination from either party, every month the term renews for an additional month.
A payment made by a landlord to a tenant offset for moving costs. The concession may be provided to move a tenant in or out of a location.
An area such as Toronto, Etobicoke, Mississauga, Vaughan, Markham, Scarborough, Pickering, Milton, Thornhill, Newmarket, North York, Unionville, Richmond Hill, Brampton, Oakville, or Burlington
The square feet leased over a period after deducting space vacated in the same area during the same period.
NET CASH FLOW
The income that remains for an investment property after the monthly operating income is reduced by the monthly housing expense, which includes principal, interest, taxes, and insurance (PITI) for the mortgage, homeowners' association dues, leasehold payments, and subordinate financing payments.
A lease which requires the tenant to pay in addition to base rent, the expenses of the office or industrial property such as taxes, insurance, maintenance, utilities etc.
NET OPERATING INCOME (NOI)
The net proceeds of income after first deducting a reasonable operating expenses and all vacancy allowance, but before the payment of any service or return on an investment or income producing property.
NET PRESENT VALUE (NPV)
The calculation of NPV takes into account both the netting of cost and benefits and the time value of money. See Present Value.
Net rent is often equated with triple net leasing: as most elements, taxes, maintenance and operating costs are subject to escalation and therefore netted out. Thus, a tenant would agree to pay a certain net rental rate plus their portion of taxes, maintenance costs and operating.
The term requiring that mortgage holder honor the terms of a lease agreement in the case of a foreclosure, provided all terms and conditions of the agreement are being met.
The clause that establishes the time frame and method each party must use to inform the other of matters that require notifications as outlined in a lease agreement.
Unless specifically stated otherwise in the lease, it is the date on which the tenant takes possession of its leased premises. (See also "Commencement Date").
The relation of space currently rented within a property in relation to the total space and the vacancies contained within.
OFFER TO LEASE
A formal document that creates an agreement between a landlord and tenant for a specified property.
A listing given to any broker without liability to compensate any broker except the one who first secures a buyer who is ready, willing, and able to meet the terms of the listing, or secures the acceptance by the landlord of a satisfactory offer; the lease of the property automatically terminates the listing
The cost for property taxes, maintenance, insurance, salaries, utilities, and similar items paid in connection with the operation of a commercial , office, industrial or warehouse property by the landlord.
The actual costs associated with operating a property including taxes, repairs, management, utilities, and insurance; which is proportionately charged back to the tenants.
OPTION TO CANCEL
A lease clause that gives either a tenant or a landlord the right to cancel the remaining term of the lease based previously agreed upon conditions.
OPTION TO PURCHASE
A lease clause that gives a tenant the right to purchase the building if certain previously agreed to conditions within the lease agreement are met.
OPTION TO RENEW
A lease clause that gives the commercial tenant the right to renew the current lease for an additional term subject to clauses and conditions as set out in the lease.
The portion of a lease agreement stating the basic rental terms should the lessee remain in occupancy of a suite or building without a lease renewal.
The individual or entity in legal possession of a property.
PARKING AREA RATIO
The size of the parking area in relation to the size of the building. Often Calculated as the number of parking spaces per 1000 square feet of Gross Lease able Area.
The provision in a lease naming a guarantor who is held personally responsible for the payment of all the amounts for rent and additional rent and other terms as set out in the lease.
Individuals employed by municipalities and other levels of government who are trained in urban planning and advice governments with respect to zoning and planning matters .
The leasing of a real estate property before construction is completed.
The present value is the amount that must be invested now to produce the known future value. For any sum invested at a given interest rate, the amount one would receive at the end of the period can be determined by taking the investment times one (1) plus the interest rate of the period to the power of the period. For example, if $10 is invested in an interest rate of 10% for one year, the investment would grow to $11 at the end of the year. It follows, then, that $11 one year from now is worth $10 today; that is $10 is the present value of $11.
PRESENT VALUE ANALYSIS
A method used to determine the present value of money for the payment of future rent.
PRINCIPAL AND AGENT
The relation created by express or implied contract or by law whereby one party delegates the transaction of some lawful business, with more or less discretionary power, to another who undertakes to manage the affair and render an account thereof.
PRO FORMA RATE
The original projected rental rate as estimated by the landlord.
PRO RATA SHARE
The leased area of the tenants premises divided by the total gross lease able area for the premises, the resulting fraction being used to compute the tenant’s share of operating expenses, taxes, common area maintenance fees, HVAC charges, and insurance.
The individual who manages and supervises all day-to-day operations of a property.
A covenant inserted in a lease promising that the tenant shall enjoy possession of the premises in peace and without disturbance.
Rentable/usable – also commonly referred to as the “Loss Factor”.
Land and generally whatever is erected or affixed to the land that would be personal property if not attached
A clause within a lease agreement allowing the option to extend the term of the lease, for a term and rate usually based on then current market conditions.
Free rent provided by the landlord to the tenant. May or may not be included in the terms of lease, such as early occupancy.
A concession to the tenant in the form of reduction of payable rent.
Period in which tenant is not required to pay rent, as contained in the lease.
The area of the leased premises computed by measuring to the inside finished surface of the dominant portion of the permanent outer building walls, excluding any major vertical penetrations of the floor. No deduction shall be made for columns and projections necessary to the building. The rentable area of an office on the floor shall be computed by multiplying the usable area of the office by the quotient of the division of the rentable area of the floor by the usable area of the floor resulting in the R/U Ratio.
RENTABLE SQUARE FOOTAGE
Calculated as the usable square footage plus the pro rata share of the buildings common areas, using the R/U factor.
RENTABLE/USABLE (R/U) FACTOR
The percentage of net rentable square feet of a building devoted to common areas, such as hallways, washrooms, lobbies, etc. Calculated as the rentable square footage divided by the usable square footage. Also known as loss factor or core factor or gross up.
Annual cost per square foot to be paid by the tenant to the Landlord for leased premises.
REQUEST FOR PROPOSAL
Written request from the tenant or real estate broker to the landlord for information on leasing the building.
RIGHT OF FIRST OFFER OR FIRST OPPORTUNITY
A right, usually given by an owner to a tenant, which gives the tenant a first chance to buy the property or lease a portion of the property if the owner decides to sell or lease. Unlike under a Right of First Refusal, the owner is not required to have a legitimate offer which the tenant can then match or refuse. If the tenant refuses to make an offer or if the parties cannot agree on terms, the property can then be sold or leased to a third party.
RIGHT OF FIRST REFUSAL
A right granted to a party to enter into a contractual arrangement on terms identical to those offered by some third party.
RIGHT TO RENEW
A clause which allows the tenant the right to remain in possession of premises beyond the lease expiry, at agreed upon terms and conditions.
RIGHT TO TERMINATE
A special clause in the lease agreement giving one of the parties (usually the tenant or lessee) the right to cancel the lease.
A systematic approach to identifying and separating insurable risks from non-insurable risks, and evaluating the availability and costs of purchasing third-party insurance
A transaction in which an owner sells a property to an investor, who then leases the property back to the original owner under prearranged terms. Sale-leaseback deals offer the original owner freed-up capital and tax breaks and the investor a guaranteed return and appreciation
An amount of money the tenant pays the landlord before the tenant takes up occupancy in the new leased space.
The condition of a vacant space before any leasehold improvements have been constructed.
An organization or individual that is retained by the building owner to develop drawings for the design of tenant space.
This is office space that is built out prior to being leased to a particular tenant. The space is considered speculative in nature.
Space that is built on the speculation there will be tenants or buyers interested in leasing or buying upon the developer’s completion of construction of the building.
Length times’ width, measured in feet.
The number of square feet within the demised premises as determined in accordance with the applicable standard measurement.
A method used to formulate a rent agreement, with a lesser amount, paid at the beginning of the tenancy and great amount paid toward the end of the tenancy.
An agreement between a tenant and a sub-tenant that requires the tenant to remain responsible for the performance of the lease to the head landlord.
Space that is available to rent from an existing tenant therefore not from the building owner.
The procedure in which a tenant rents out their premises and allows another entity to take over their space.
Typically referring to property taxes assessed against a tenants premises and a proportionate share of the property taxes assessed against the common areas of the property.
The entity responsible for paying rent to the landlord developer in order to occupy a site location for a specific term.
TENANT IMPROVEMENT ALLOWANCE
An amount of money paid or credited by the landlord to a tenant to assist the tenant in the cost of the improvements needed to the leased premises.
Improvements to be carried out within the premises.
The duration of time for a tenant’s lease.
The right to ownership of a real property, and the document of verification.
Acronym for Taxes, Maintenance and Insurance. This is used interchangeably with Common Area Maintenance – CAM .
TRIPLE NET LEASE
A lease that requires the tenant to pay all expenses of the property being leased in addition to rent. Typical expenses covered in such a lease include taxes, insurance, maintenance and utilities. Commonly referred to as "NNN" lease or "3N". Also see CAM charges.
Space which has been newly completed with leasehold improvements to allow a tenant occupancy.
The area of the leased premises computed by measuring to the finished surface of the office side of corridors 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 that occupies more than 50% of the wall space. For example: If your are measuring an office and one of the walls has a window that occupies more than half of the surface of the wall, you measure to the surface of the glass.
A lease provision that restricts a commercial tenant’s use of the rented space by indicating what business activities are allowable by the tenant.
The total amount of available space compared to the total inventory of space and expressed as a percentage.
Used by, investors, brokers, developers and lending institutions as a method of determining the current or potential market value of a new or existing property.
An office that moves with the person. Typically used in a sales organization where the salespeople are given portable computers, modems, and cellular phones in return for having their offices taken away.
That part of the lease stated in detail pertaining to all work that is to be done for a tenant by a landlord.
Architectural drawings with keyed notes detailing the work required and type of materials to be used in constructing the improvements. Synonymous with Construction Drawings.
The division of a city, town or municipality into districts in which construction and use is limited to a stated type of building and land usage, in accordance with legislative act.
A law by a local governmental authority (e.g., city or county) that sets the parameters for which the property may be put to use.