Real estate investing can be intimidating. However, an educated real estate investor who understands the terms and provisions of a real estate document before signing has a better chance of long-term success.
Commercial real estate leases contain general terms and more nuanced terms. It is important to know the meaning and significance of such terms when signing a lease.
Below are 10 terms to understand before you sign the dotted line.
- Tenant Representative: A tenant representative negotiates the office space needs of the tenant with the landlord or landlord representative. They help resolve tenant-landlord disputes and serve as the tenant's intermediary.
- Landlord Representative: This person often serves as the property leasing agent. Their goal is to represent the wishes of the landlord or owner, to close on leases while maximizing the amount of rent and minimizing expenses and risk.
- Co-broker: Pay close attention to the section of the lease or sublease that states whether you'll be dealing with the leasing agent, broker or someone else. If the person is a co-broker, they will not be able to provide you a better deal or sweeten it, in any way, without first talking to the listing broker. This is because the initial broker has invited the co-broker to view and rent the property and split the commission if it's leased.
- Building classifications: To understand commercial real estate opportunities is to understand what kind of building you're buying into. There are three general categories: A, B and C. A Class A building refers to high-end office spaces or new/very well-maintained high rises with excellent amenities in prime locations. Class B buildings are average, have non-prime locations and/or fewer amenities, and are often no more than four stories tall. Old Class A buildings are often downgraded to Class B due to wear and tear that hurts their value. Class C buildings and very dated, usually more than 20 years, and scream for renovations. Class C properties are also in less-desirable locations; however, with the proper care, they can become Class B properties.
- Usable square footage (USF): USF represents the space available to occupy in a rented commercial property. Unless you rent an entire floor, the shared building spaces like lobbies, restrooms, stairways, hallways and storage rooms are unavailable as USF. If you rent an entire floor, restrooms hallways can be counted. The calculate USF, subtract the shared square footage from the total floor area.
- Rentable square footage (RSF): RSF includes the total USF plus the shared building spaces. Calculate the RSF by dividing the total floor area by the USF to find the "common area factor." This area is often between 10% to 20%.
- Letter of intent (LOI): An LOI, as it's commonly referred, strengthens your commitment to renting the property. You will sign the LOI before signing the lease agreement. Also, the LOI could be binding, and if so, it will be hard to relinquish intent. A non-binding LOI includes clear language that ensures you aren't bound to the property. If there is no such language in the LOI, seek an attorney to represent your interests.
- Triple Net Lease: This is a term some investors and tenants are unaware of. Also refereed as NNN, a triple net lease means the tenant is required to pay all operations costs, which includes maintenance, repairs, property taxes and property insurance.
- Sublease clause: If you and your landlord agree to a sublease clause, you can offset your expenses by leasing some or all your office space to another tenant, called the sub-tenant.
- Escalation clause: This clause states that that rent will increase annually. A Consumer Price Index (CPI), property tax or operating expense increase could account for the rising rent price.
Despite the risks of real estate investing, real estate transactions can be very beneficial. The best thing you can do to ensure you are getting the best deal is to continually educate yourself on the ins and outs of the industry and work with an attorney prior to signing to protect your interests.