Do you understand the language in a commercial real estate lease? Learning basic commercial real estate lease terms will help you build your knowledge in the commercial real estate investing arena. Check out this article for some key terms you should now.
Learning basic commercial real estate lease terms will help you build your knowledge in the commercial real estate investing arena. The following terms should be understood before signing a commercial lease:
Common Area Maintenance (CAM)
This is a very important commercial real estate lease term to know. Most of the time when you have a multi-tenant building, you factor in charges for CAM. Usually tenants pay $12 a square foot for annual rent, plus a certain percentage for CAM. So CAM for a building is passed on to tenants.
Many of the issues considered in the commercial arena are not even available in residential leasing. For instance, if your commercial real estate investment target is small office warehouses, strip malls, or strip retail centers, CAM is one of the items you need to research.
Before you start renting or buying those types of facilities, you should know what the standard CAM is for your type of property. Sometimes in some smaller properties, there is no CAM, since the landlord pays it.
That’s all part of your costs as a landlord in this type of property. It’s not a pass-through, because you can’t legitimately pass through CAM expenses to your tenants, if no one in the area who owns a similar property is having their tenants pay it.
Percentage Leases
When you pay a fixed rent plus a percentage of sales over and above the fixed rental, you have a percentage lease arrangement. You will probably not run into percentage rent situations very often as a landlord. Most of the time, percentage rents are used in retail businesses located in large shopping centers and other similar areas.
You might charge percentage rent, if you had a $2,000,000 shopping center with a JC Penny’s, Sears, or Dillard’s, and the attraction of those mega stores brought traffic to your store. Therefore, they want to become your partner, in effect, by charging you a percentage. This is not common in small to moderate businesses.
Ground/Land Leases
This type of arrangement is where the tenant rents the land and builds on the property. Any way in which you improve the grounds, including any buildings, usually belong to the landlord when the lease ends. This is actually a form of financing.
You’ll find many ground tenants in high-cost land areas, like New York City. People don’t want to tie up personal capital in owning a piece of land when they could be putting that money into business operations. The standard land lease is a very long-term lease.
Sublease
A sublease is when you lease the whole property and then sublease a portion of it to someone else. For example, you might rent 10,000 square feet from a landlord. If you don’t need all that room, you have the right to put your own tenant onto the property using a sublease.
Assignment
An assignment is very similar to a sublease, in that you initiate the rental lease. However, you become a landlord by assigning the entire property to one or more tenants whom you manage.
There was a time when real estate investors would lease property and negotiate a very low rental rate. Then they would assign that same property to tenants at a much higher rate. Their real estate business consisted entirely of collecting money from their assignment.
Assignment Not Allowed
In some commercial leases, there’s a sublease clause stating that you are allowed to sublease the entire property, subject to the landlord’s approval. This clause, in effect, means that you cannot assign the lease. Particularly when you get into larger properties, you’ll want to be sure to personally check personally the credit of everybody who expresses interest in leasing your property.
Tip: Assignments can get you into trouble. If you don’t know whether the assignee is credit worthy, don’t assign under any conditions.
Understanding commercial real estate lease terms will benefit you in the long run, and remember always have your commercial real estate leases reviewed by a real estate attorney.
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