Basic Terms in Commercial Real Estate

Textbook terms can be used to describe various types of leases, categories of buildings, and ways to measure space in commercial real estate, but in practice, there are few standard definitions. The multitude of terms and conditions can create confusion and costly repercussions for prospective tenants.

For example, there is no regulated legal form of measuring space. The typical measurement is known as “building owners and managers association (BOMA) standards.” However, if you ask more than one architect to give you a definition of BOMA standards, you will quickly learn that different architects have different interpretations of what should and should not be included in making a BOMA space calculation. Should lobby square footage should be included in a rentable calculation? Some say it should, some say it should not. Including lobby space could make a big difference in how much a tenant is charged for space that is physically not in a suite. Load factors—the physical space that tenants pay rent for that includes their share of the common areas of the building—in multitenanted floors range from 15% to more than 30%. BOMA standards also call for an inside measurement that includes half the distance between the inside wall of a tenant’s space and the outside wall of the building. This could represent another six inches or more around the entire space a tenant plans to occupy. Taking a measuring tape to gauge how much space is available will not give a prospective tenant any idea of how much actual space he or she is paying for.

Another example is the classification system of A, B, and C. The original system was based on size and services provided by a building. However, classification of buildings varies by city and even within a city. In San Francisco, class A typically indicates buildings newer than 1965, having more than 100,000 square feet with a security guard. Class B buildings are generally older than 1965 and larger than 50,000 square feet. Class C buildings usually have no security guard or are less than 50,000 square feet. Yet, class C buildings often promote themselves as class A buildings. The classifications have become indicators of quality standards—not the original intent of the system.

Yet another example is types of leases. San Franciscans tend to use fully serviced or industrial gross leases. Net leases are more common in other markets. A fully serviced lease means that all the basic services, including utilities, janitorial, maintenance, and management of the building, are covered in the rent payment. This type of lease calls for a base year. Any increases that occur during the base year are charged as additional rent based on the tenant’s percentage occupancy of the building. This increase is above any rental increase that may also be built into the lease. Confusion arises because some people view a gross lease as being a “fully serviced lease,” whereas others look at a gross lease as being an “industrial gross lease.” An industrial gross lease means that the tenant pays rent plus a share of services. Taxes and insurance are included in the base rent; however, at the end of the year any increases in taxes and insurance are passed on to the tenant as additional rent. If someone is confusing a gross lease for a fully serviced lease when in fact it is an industrial gross lease, that tenant may be looking at 20–25% added costs in paying for services assumed to be included in rent.

What can a tenant do to protect himself or herself against the financial repercussions of the varying phrases and terms? The best way is to hire an experienced commercial real estate broker who can guide you through this maze. How do you know who to pick? Ask a prospective broker questions to determine how well he or she understands basic terms and conditions. If the broker appears confused, find someone who is more knowledgeable; it could save you a lot of money in the long run.