By Mel Schultz Tenant/Landlord lease agreements, negotiation

10 Commercial Real Estate Terms You Need to Know Before Your Next Lease Negotiation

If you are new to commercial leasing, haven’t negotiated your lease in a while, or are in the middle of negotiations and don’t know how to read the agreement, we’re here to help. Here are 10 commercial real estate terms you need to know.

1. Triple Net Lease (NNN)

A triple net lease (NNN) is an agreement where the tenant is responsible for paying their share of the operating expenses of a property, including property taxes, insurance, and maintenance. These expenses are in addition to the base rent. The landlord typically retains responsibility for structural issues and non-operating expenses (leasing commissions, tenant improvements, legal, marketing, etc.)

2. Gross (Full Service) Lease

Unlike in a triple net lease, in a gross lease, the landlord is responsible for the property’s operating expenses such as maintenance, insurance, and property taxes. The tenant pays a single rent amount.

3. Base Rent

Base rent is the minimum rent required in the lease agreement. The base rent excludes expense recoveries such as utilities, property taxes, and maintenance fees.

4. Common Area Maintenance (CAM)

In a multi-tenant building with net or triple net leases, tenants pay a share of the cost of maintaining the common areas as part of operating expenses. A lease’s common area maintenance costs may cover the maintenance of the lobby, hallways, parking lot, and landscaping.

5. Escalation Clause

Escalation clauses allow landlords to raise rent. It is common for landlords to increase rent to keep pace with inflation. Periodic rent increases can be stated fixed percentages or dollar amounts, or variable tied to changes in the Consumer Price Index.

6. Tenant Improvement (TI) Allowance

Landlords may offer to pay for some or all of the costs to make the leased space suitable for the tenant’s business needs. Read more about tenant improvements here.

7. Percentage Rent

Percentage rent agreements are sometimes used in retail leases. In these agreements, the tenant pays the landlord a base rent plus a percentage of their gross sales once sales pass a stipulated threshold.

8. Usable v. Rentable Square Footage

A commercial lease typically outlines usable and rentable square footage. Usable square footage includes the space that is exclusively for the tenant. Rentable square footage is the usable square footage plus a prorata portion of the building’s common areas.

9. Right of First Offer (ROFO)

When a lease provides a tenant the right of first offer, the tenant has the opportunity to lease additional space or purchase the property before the landlord offers it to another party.

10. Holdover Tenant

Leases often include clauses that govern what happens when a tenant’s lease term is expired. A holdover tenant is a tenant who remains on the property after the lease term expires without the landlord’s consent. The lease clause stipulates the rent rate and conditions that govern any holdover period, typically at a higher/punitive rent. This ensures the landlord is compensated in the event that a tenant remains past their lease term, and encourages the tenant to renew or leave.

10 Commercial Real Estate Terms You Need to Know | Clarity Commercial

If you’re in the middle of lease negotiations or searching for your next tenant, Clarity Commercial can help you negotiate favorable terms. For professional commercial real estate management support, contact Clarity Commercial today.

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In addition to our affiliations, our team also holds relevant certifications in real estate management. This includes certifications such as CPM (Certified Property Manager), ARM (Accredited Residential Manager), and CAM (Certified Apartment Manager). These credentials showcase our expertise,

July 18, 2024

By Mel Schultz Tenant/Landlord diversification, lease agreements, tenant retention

10 Ways to Maximize Your Commercial Real Estate ROI

Commercial real estate in the Twin Cities has been on a rollercoaster ride since 2020. The impacts of the pandemic continue to affect many commercial real estate markets in Minneapolis and St. Paul. Here are a few ways savvy property owners can maximize the ROI of their CRE portfolios.

1. Do Your Research on Commercial Real Estate ROI

Before you make adjustments to your lease terms or update your buildings, be sure to do your research. Complete a competitive analysis to understand what surrounding properties are doing to attract tenants and adjust your strategy as needed. If you’re hoping to attract a specific type of tenant, such as a medical device manufacturer or healthcare provider, take the time to learn more about these potential tenants and their specific needs.

2. Optimize Your Lease Agreements

When’s the last time you took a look at your lease agreement? If it’s been a year (or a decade), it’s time to review and optimize your agreements. If you do not already include regular rent reviews in your agreement, consider adding a clause that allows you to adjust rents according to market conditions. You may also want to consider adding flexible leasing options to your agreements to attract a wider range of tenants.

3. Improve Property Appeal

If it’s been several years since you’ve invested in upgrades at your property, now’s the time to make a few updates that can help you make more money in the future. Spruce up your landscaping, update your interior design, and stay on track with your maintenance plan. Cost-effective updates can make a big impact in what you’re able to demand in rent and maximize your investment in improvements.

4. Retain More Tenants

Retaining tenants is a lot more cost-effective than attracting new tenants. To retain more tenants, make sure you’re providing an exceptional tenant experience. Keep the lines of communication open and address their concerns promptly. Consider offering incentives for tenants to stick around, such as improvement allowances, flexible renewal terms, or property amenities.

5. Invest in Sustainability

Your portfolio’s sustainability plan is a great place to increase your portfolio’s ROI. Smaller projects such as installing energy-efficient lightbulbs and water-saving fixtures can help you save money on energy costs. You may also choose to install more efficient HVAC equipment to cut your energy bill further. Not only do these updates help you save money, they can attract environmentally minded tenants.

6. Diversify Your Revenue

If rent makes up 100 percent of your portfolio’s income, it’s time to diversify. Diversifying your portfolio helps you weather downturns in the market and makes your income more predictable. One way to diversify your revenue is to offer additional services, such as event space rentals, rentals for pop-up storefronts, or storage space. Consider adding advertising and retail to common areas to additional revenue to your portfolio.

7. Invest in Technology

Smart building technology, access control, and property management software can all help you work more efficiently and increase your revenue. Smart building technologies optimize energy use and maintenance tasks. Smart access control systems track visitors to your property in real time so you can improve security. Property management software gives you a bird’s-eye view of your portfolio so you can draw insights from tenant behavior and your properties’ performance.

8. Expand Your Portfolio

A strategic acquisition can help you grow your portfolio’s revenue. The ideal property complements your existing portfolio and has the ability to grow with minimal improvements. Looking in another market can help you diversify your portfolio and capitalize on opportunities outside of your current area.

9. Review Your Finances

A simple budgeting and forecasting exercise can help you understand if your budget is on track and forecast future expenses and income. A little financial checkup can help you uncover areas where you’re spending too much and reduce unnecessary expenses.

10. Outsource Your Property Management

One way to optimize your time and ensure that you’re making smart choices in regard to vendors is to work with a property management company like Clarity Commercial. Our professional team can help you with everything from budget forecasting to fixing a lightbulb. We work with the best vendors in the area to ensure projects are completed at your properties on time and for the best value possible.

Like we mentioned last month, the CRE market is on the upswing in many areas, but we’re not out of the woods yet. Clarity Commercial can help you make smart investments that will maximize your revenue and diversify your portfolio. For professional commercial real estate management support, contact Clarity Commercial today.

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