Attornment – attornment occurs when a tenant acknowledges a new owner of the property as their new landlord. In the case of commercial property changing hands, an attornment clause in a subordination, non-disturbance, and attornment (SNDA) agreement requires the tenant to acknowledge a new owner as their landlord and to continue paying rent regardless of whether the property changes hands through a normal sale or a foreclosure.
Building Classifications – building classifications in most markets refer to Class “A”, “B”, “C” and sometimes “D” properties. While the rating assigned to a particular building is very subjective, Class “A” properties are typically newer buildings with superior construction and finish in excellent locations with easy access, attractive to credit tenants, and which offer a multitude of amenities such as on-site management or covered parking. These buildings, of course, command the highest rental rates in their sub-market. As the “Class” of the building decreases (i.e. Class “B”, “C” or “D”) one component or another such as age, location or construction of the building becomes less desirable. Note that a Class “A” building in one sub-market might rank lower if it were located in a distinctly different sub-market just a few miles away containing a higher end product.
Build-Out – a build out represents the construction activities executed to a commercial building space, to make it functional for a tenant. In this respect build outs can also be considered “tenant improvements” or TIs.
Cap Rate – short for capitalization rate. Unleveraged initial yield on the investment expressed as the annual Net Operating Income divided by the property price (or asking sales price).
Common Area Maintenance (CAM) – this is the amount of additional rent charged to the tenant, in addition to the base rent, to maintain the common areas of the property shared by the tenants and from which all tenants benefit. Examples include snow removal, outdoor lighting, parking lot sweeping, insurance, property taxes, etc. Most often, this does not include any capital improvements that are made to the property.
Concessions – in negotiations to attract tenants, a landlord will sometimes grant concessions. These most often take the form of free rent but may also include lease buyouts, moving allowances and above-standard tenant improvement allowances. In a hot real estate market concessions are difficult to negotiate.
Contingent Offer – a contingent offer is an offer to purchase property subject to certain conditions, including the buyer’s approval of income and expense statements, title commitment, physical condition of the property, loan commitment, etc. – being met. The specific amount of time allowed to clear these provisions is called the inspection or contingency period.
Demising Wall – a demising wall is a wall that separates spaces belonging to different tenants in an apartment building. It is even used to define the wall that separates tenants in a multi-tenant commercial building, such as a retail plaza, shopping mall, or office buildings.
Escalation Clause – an escalation clause in a lease providing for an increase in rent at a future time. This could be a fixed or pre-determined rate increase, or a cost of living increase that ties the rent to a cost of living index, or direct expense – the rent is adjusted according to changes in the expenses of the property such as a tax increase.
Estoppel Certificate – an estoppel certificate is a document signed by a tenant that states what the current status is on their lease. In the tenant estoppel certificate, the tenant will confirm certain details of the lease, such as the amount of their rent payment and security deposit, to assist a third party in their due diligence. In most cases, the third party is either a buyer or a lender.
Forbearance – a forbearance is an agreement between a lender and a borrower to temporarily suspend debt payments. For mortgages, lenders may opt to foreclose on borrowers who are unable to make payments. To avoid a costly foreclosure, the lender and the borrower can negotiate a forbearance agreement to allow the borrower to catch up on payments. For student loans, forbearance postpones payments under certain hardship conditions; however, interest continues to accrue on the principal balance.
Gross Lease – a gross lease of property whereby the landlord (i.e., lessor) pays for all property charges usually included in ownership. These charges can include utilities, taxes, and maintenance, among others.
Net Absorption – the net change in occupied space in a given market between the current measurement period and the last measurement period. Net absorption can be either positive or negative and must include decreases as well as increases in inventory levels. It is recommended to disclose the inclusion (Total Net Absorption) or exclusion (Direct Net Absorption) of sublease space in any calculation of net absorption.
Net Operating Income – net operating income also known as NOI. This is the annual net income remaining after deducting all fixed and operating variable expenses, but before debt service and income tax. The specific formula is: NOI = Scheduled rental income + other income – vacancy and credit losses – operating expenses
Percentage Lease – a percentage lease is when the tenant pays a minimum rent then also pays a percentage of the volume of the business done on the premises whichever is greater. The percentage paid differs according to the types of business.
REIT – (Real Estate Investment Trust) – a security that sells like a stock on the major exchanges and invests in real estate directly, either through properties or mortgages. REITs receive special tax considerations and typically offer investors high yields, as well as a highly liquid method of investing in real estate.
Zoning – zoning refers to municipal or local laws or regulations that dictate how real property can and cannot be used in certain geographic areas. Zoning laws can limit commercial or industrial use of land in order to prevent oil, manufacturing or other types of businesses from building in residential neighborhoods. These laws can be modified or suspended if construction of the property will serve to help the community advance economically.