Commercial real estate jargon is second nature to practitioners, but it probably sounds like a foreign language to occupants who are negotiating their first lease or purchase.
This column is designed to provide a “one-stop glossary” for those terms most commonly used in “the trade.”
NNN: Also called “triple net,” this refers to the way property taxes, property insurance, and maintenance of the foundation roof and walls are paid by the tenant. Generally, these sums are paid as due and are “net” of the base rent – in addition to – but in some cases, the owner will collect a monthly estimate of the annual expenses in addition to base rent.
Modified Net: Similar to NNN but one or two of the “n’s” are included in the base rent.
Gross: Property taxes, property insurance, and maintenance of the foundation, roof and walls, and other maintenance of the property are included in the base rent. Gross lease rates are generally higher than NNN lease rates.
Industrial gross: Similar to “gross,” but in this case the tenant is generally responsible for some property maintenance in addition to base rent. These leases include a “base year.”
Modified gross or MG: Property taxes, maintenance of the foundation, roof and walls, property insurance, or other maintenance of the property are paid in addition to base rent.
Full service gross or FSG: This is generally an “office” term and refers to the gross expenses plus janitorial and utilities included in the base year. These leases have an “expense stop” and a “base year” for expenses.
Base year: Used in FSG, MG, and industrial gross leases, this is the first full year of the lease. The tenant pays increases in expenses over the base year.
Expense stop: Used in a FSG lease, the expenses of the base year (first full year of the lease) are calculated and the tenant pays increases above this “stop.”
Lessor: Landlord or property owner
Lessee: Tenant or entity that leases or rents the location
Master lessor: Property owner
CAM: Refers to common area maintenance and is generally in addition to base rent and commonly found in MG, or industrial gross leases
TIs: Tenant improvements
Bumps: Increases in the base rent that occur throughout the term of a lease
COLA: Cost of living adjustment
ROFR: The right of first refusal is a tenant’s right to buy the property in the event an acceptable offer (from another party) is received by the owner.
ROFO: The right of first offer is the tenant’s right to submit an offer in the event an owner decides to sell the property.
Option to renew: A tenant’s right to extend the term of the lease at pre-negotiated points.
Option to purchase: A tenant’s right to purchase the property at pre-negotiated points.
LOI: A letter of intent expresses, in a nonbinding fashion, the occupant’s desire to lease or purchase the property.
Due diligence: A period of time negotiated in a purchase and sale agreement for the purpose of studying the property to determine its suitability for financing, occupancy, title, etc.
Loan contingency: A period of time used for securing financing.
Prelim: A preliminary title report outlines matters of record – loans, ownership, recorded easements, liens, etc.
Free rent: A period of a lease that is free.
Abated rent: In the event of tenant default, an owner can sue for repayment of abated rent.
NOI: Net operating income is the rent on the property, less any expenses stated on an annualized basis.
Cap rate: The NOI divided by the purchase price.
Congratulations! You now can speak commercial real estate.