Basic glossary of real estate terms
Brokerage commission. This compensation for a real estate broker is factored into the rent you pay, just like the landlord's other costs of doing business. Thus, you pay a brokerage commission whether or not you work with a broker, and whether you retain a landlord broker or a broker who represents tenants exclusively. Doesn't it make sense to have your commission work for you by retaining a broker who serves tenant interests exclusively?
Business issues. Lease costs which arise from the dynamics of building operations or other economic factors normally considered beyond a lawyer’s expertise. For instance, some methods of charging for electricity tend to be more costly than others. Using one type of CPI will lead to higher rent escalations than if another type of CPI were used.
Carpetable area. A measurement, typically developed by a tenant’s architect, for a given unit of space or building that describes the area in which personnel can actually occupy space and perform tasks. This involves some subjective judgments and might vary from architect to architect.
Electricity. Electricity supplied to tenants for tenant use under commercial office leases is typically billed to tenants in one of three ways.
Hidden costs. Landlord draft leases typically include many terms which will mean higher costs for tenants, even though these costs aren’t spelled out. For instance, if a lease fails to specify that a landlord is to provide certain services or to provide them at certain hours, then the tenant will probably have to lay out additional money to get those services. This kind of cost arises not because of what’s said but what’s not said, which is why many lawyers miss it.
HVAC. Heating, ventilating and air conditioning system. Although these systems tend to last many years, costs of operating them tend to go up over time. The failure to adequately analyze HVAC costs is an important reason why operating expenses often go much higher than tenants bargained for.
Landlord broker, or leasing agent. A person or firm which represents landlords and is contractually obliged to help maximize landlord revenue. Landlord brokers help maximize landlord revenue by steering tenants into buildings which such brokers represent or hope to represent. Landlord brokers invariably present a landlord draft lease to a tenant without marking it up to identify hidden costs, because raising such issues could get in the way of a deal and would, if pursued, reduce landlord revenues. Today the largest landlord brokers represent over 40 million square of space for landlords.
Lease. A legally binding, written agreement by which a tenant, in exchange for payment, gains the right to occupy a space, land or a facility for a specified length of time. The owner of the property gives up certain rights during the term o the lease.
- Net lease. A lease in which the tenant, in addition to rent, is responsible for paying directly for all or most (1) taxes, (2) utilities, (3) services and (4) insurance required for or associated with the facility.
- Gross lease. A lease in which the tenant’s base rent includes an amount for current operating expenses and real estate taxes. A tenant under such a lease may or may not pay additional amounts, often called "escalations" to reimburse building ownership for certain increases in operating expenses and taxes.
Lease mark-up. A good tenant broker marks up a landlord’s draft lease, identifying hidden costs, excessive liabilities, inadequate landlord performance standards and other issues. Because the aim is to cut occupancy costs, which means reducing landlord revenues, it’s unheard of for a landlord broker to mark up a lease.
Lease, "standard." A lease drafted by a landlord with the aim of protecting the landlord’s interests. Calling a landlord’s draft lease "standard" is one way that landlord brokers promote such leases to tenants. In practical terms, though, there is no such thing as a "standard" lease because a good tenant representative can negotiate a far better deal for a tenant.
Leasing agreement, exclusive. A written agreement by which a tenant retains a broker to act as the tenant’s exclusive representative. The broker agrees to provide specified services, and the tenant agrees to work with that broker during the term of the agreement. Exclusive agreements can be entered into on a project, regional or portfolio basis, and for varying lengths of time. An exclusive assignment for a single project is usually 12 months in duration. An exclusive assignment on a portfolio or regional basis may last two to three years. There are several critical advantages to a tenant in retaining a broker on an exclusive basis.
Loss factor. The difference between rentable area and usable area. In many kinds of buildings there is a legitimate difference between rentable and usable area attributable to common areas and facilities, such as machine rooms, bathrooms, corridors, etc. However because a landlord’s determination of rentable area is largely market driven the loss factor reflects this. Some buildings have much higher loss factors than others meaning that for a given nominal area, less usable space is actually available for a tenant to occupy. A space with a high loss factor is more expensive than a comparably sized and priced space with a lower loss factor.
Managing agent. A person or firm retained by a landlord to manage the ongoing operations of a building, and often to act as an asset manager. The managing agent’s duties include preparing rent statements, preparing escalation statements, billing tenants for sundry services and in other ways acting to maximize building revenue. The managing agent is privvy to the books and records for the building, in fact often maintains these books and records, and acts as a fiduciary for the landlord.
Operating expenses. The actual, current costs to run a building. Operating expenses typically include such items as normal repairs and maintenance, salaries of on-site staff, cleaning costs, utilities for common areas and facilities and similar costs. Operating expenses should exclude such items as capital expenditures, leasing costs, costs of special services provided to individual tenants, salaries of personnel above the level of building manager, costs to build or operate specialty functions, such as newsstand, lunch club, etc. Landlords often include in operating expenses many non-operating expense items such as capital expenditures, salaries and perks for high-level staff, costs of special services provided to individual tenants, multiple charges for the same item, etc., so that operating expenses, rather than being a reimbursement, become a substantial profit center. Avoiding this result requires knowledgeable effective lease negotiation and audits of landlord billings.
Porter’s wage escalation. An indexed escalation formula, used primarily in New York City or by New York area landlords. Used instead of or sometimes in addition to operating expenses. The porter’s wage escalation is based on the contract entered into every three years between Local 32B/32J building services union and a coalition of New York building owners. Many variations of the porter’s wage escalation are in common use, including:
- Penny-for-penny fringe
- Average of porters and cleaners, penny-for-penny fringe
- Cleaners, penny-for-penny with fringe
- Penny-for-penny, no fringe
The most commonly used porter’s wage variations enable building ownership to recover substantially more than they would by billing direct operating expenses. Typically the porter’s wage escalation becomes a significant profit center for a landlord. Porter’s wage clauses can be constructed to avoid this and to provide to the landlord an amount roughly equivalent to a well negotiated and audited direct operating expense clause.
Rentable area. The area (in square feet) quoted by building ownership when a building or unit of space is offered for lease. The rentable area has no necessary relationship to the actual physical area of the space offered. Pundits sometimes say that landlords use a "rubber ruler" in measuring space.
Usable area. The area (in square feet) of a building or unit of space measured in accordance with some agreed upon standard, such as BOMA, WABR or REBY. Typically these standards articulate conventions for whether to measure from the inside face of a wall or its imaginary center line, how to treat air shafts, stairwells, how to allocate corridor and bathroom areas among tenants on a multi-tenanted floor, and so on. Usable area, measured by such a standard frequently includes an allocation of common areas and spaces that are not actually usable.