Commercial Real Estate Leasing Buzzwords
#1 Triple Net Lease – Have you ever heard someone refer to “triple net” when discussing a commercial real estate lease? Triple Nets are the operating expenses that a tenant is responsible for paying in addition to base rent in a triple net lease. The three “nets” are property taxes (n1), property insurance (n2), and common area maintenance (n3). Typically the tenant pays their pro-rata share (proportionate share of tenant’s total leasable square footage in relation to the building’s gross leasable space) of these expenses in a triple net lease in addition to base rent. Triple Net Leases are common in retail leasing. We have seen a growing trend of triple net leases occurring in office and industrial as well.
#2 Add-on Factor – Have you ever wondered what the difference between “leasable” and “usable” square footage is? The “Add-on Factor” is the difference between the leasable and usable area of an office building commonly expressed as a percentage of the rentable area. An “Add-on Factor” is common in multi-tenant office buildings where there is a great deal of common area. Elevators, lobby area, community bathrooms, and hallways can all contribute to the “add-on” factor that a tenant pays for in addition to their “usable” square footage. Add-on factors are most common in office building leases.
#3 TI Allowance – “TI Allowance” or Tenant Improvement Allowance is an allowance that the landlord provides the tenant to build-out or modify the tenant’s lease space. TI allowances are negotiable much like rental terms.
#4 Second Generation Space – Second Generation Space is a term relating to office space that has had a prior tenant. The importance to the space having a prior tenant is that some (if not all) of the improvements can be reusable by the new tenant.
#5 Shell Space – Shell Space or 1st Generation Space is a term relating to office space that has not had a previous tenant. Unlike Second Generation Space, the tenant should expect to contribute a substantial amount of capital towards the improvements. Shell Space typically comes with a higher TI Allowance from the landlord than Second Generation Space.
#6 Grade Level vs. Dock High – These are common terms that you will hear when leasing industrial space. Grade Level refers to loading/unloading areas that are at street level. Dock High refers to industrial space that comes with a loading dock.