FAQs

BOMA stands for Business Owners and Managers Association, and this is an organization that creates floor measurement standards to keep all buildings consistent with one another. There are certain metrics for different types of buildings, so for those specifics, you can visit their website at www.boma.org. For general purposes, the rentable square footage, according to the BOMA standard, is calculated by taking the usable square footage – which is the square footage of the actual space between the four walls of your suite – and multiplying it by what is called the “load factor”. The load factor attributes the proportionate share of common area, such as shared hallways, lobbies, stairways, and bathrooms back into the footage, so that the entire area of the property is allocated for. However, the BOMA standard also wants to include the space in between the walls, specifically to the inside of exterior walls and halfway in between each demising wall. These measurements are also included in the load factor.

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A non-binding offer to lease a property, sent from the tenant to the landlord. The document outlines the most important lease terms for both parties to negotiate prior to drafting a lease. If both parties do not come to an agreement on the deal points in the LOI, then there is no sense in attorneys reviewing each clause in the lease itself.

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Another type of non-binding offer to lease a property, sent from the tenant to the landlord, which serves as an alternative to an LOI. The document also outlines the most important lease terms, but it is postured to allow the landlord to start the negotiations by filling in the blanks first as opposed to the tenant starting with a specific offer for each line item.

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FF&E stands for Furniture, Fixtures, and Equipment. These are things that go inside a space to make the space functional for the tenant. Some FF&E items may include:

• Office furniture, such as desks, chairs, bookshelves, and even specific cabinetry
• Art and decor
• IT equipment
• Restaurant kitchen equipment
• Medical or lab equipment
• Machinery, manufacturing equipment, and tools

Who these items belong to when a tenant moves out is not always obvious. To address any ambiguity, you always want an FF&E clause in your lease. FF&E are going to be things that are not included with the space or provided by the Landlord. In other words, these are out-of-pocket costs and you want the flexibility to take everything with you when you move out. However, if the landlord provides certain FF&E items, those items belong to the landlord and need to be left in the space. This includes items purchased with a Tenant Improvement Allowance.

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Nets are another term for the three major operating expenses to maintain a building, and there are three of them: Common Area Maintenance (CAM), property taxes, and the landlord’s insurance. The lease type will determine who is responsible for each of these expenses.

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The Triple Net lease gets its name, because the tenant is responsible for paying the three nets in addition to the base rent. The lease will state how each of these expenses are paid. A typical set up is that each net will be calculated to a per square foot, per year figure, and then the property manager will charge each tenant based on their square footage. If the property manager underestimates these costs, the tenant will receive a bill at the end of the year for the difference, or if the property manager overestimates, the tenant will receive a credit to go towards next year’s nets. The landlord or the property manager will be able to tell you what the projected costs are for each of these nets. However, keep in mind, you should ask for the approximate net costs during initial negotiations, because they don’t typically advertise the net rates, only the base rent figure.

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A gross lease includes all or most of the operating expenses with the base rent price, with the most inclusive type being Full Service Gross (FSG). These are most common with either very high-end properties to create an all-inclusive experience or with very small landlords who like to keep their leases simple.

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Relevant for Modified Gross (MG) leases, a base year is the year when the lease term officially starts. If you have a base year written inside the lease or “pass thru” it means the tenant is only expected to cover expenses for the amount over the base year. In other words, the amount that the expenses are at the time that your lease starts is the amount that is included with your base rent. However, if that amount increases year after year during your lease term, then you will be charged the difference in the current cost of expenses and the costs of expenses from the year you moved in, or the base year. This is simply a way for the Landlord’s expenses to stay in line with the costs of running the building.

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Derived from a Latin term, meaning “in proportion,” pro rata is used to describe the ratio between the amount of space occupied compared to the entire property. In other words, the size of the space divided over the entire building size. Property managers will often charge tenants for operating expenses based on their pro rata share to fairly divide up shared costs among all tenants, so larger tenants pay more than smaller tenants.

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May also be referred to as simply, “lease signing”, is the date the lease is officially signed by both parties. The tenant will sign the lease first, so this date is the date the landlord countersigns.

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The date the terms of the lease are officially in effect and the lease term period officially begins. This can be several months after lease execution or immediately after.

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This is the date the tenant pays their first month’s rent. Due to the possibility of rent abatement, tenants can, but commonly do not, pay rent the same month as the lease commencement.

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An agreement between the landlord and tenant, signed along with the lease, which states an individual – often the owner of the tenant’s entity – will personally be responsible to carry out the responsibilities of the lease if the tenant is unable to do so. These are the most common with start ups or businesses without a long financial history. Keep in mind, if a landlord is mandating that you sign a personal guarantee for your lease, you need to be confident in your business, because if the business fails, your personal financial situation will suffer greatly, and your personal assets could be at risk.

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Sometimes called TIA or a TI package, Tenant Improvement Allowance is a negotiated concession, which is a designated amount of money provided by the landlord to the tenant to contribute to the construction costs of the tenant’s space build out. These funds can only be used for actual construction labor and materials – not equipment or furniture items.

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The official title of a free rent period. Commonly in commercial leases, the tenant will be granted a certain number of months which they will not owe the base rent. Like other concessions, this is negotiated, and the free rent period is most often at the very beginning of the lease term to offset the upfront costs of construction and moving for the tenant.

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Included within many leases, renewal options provide the tenant a right to extend the lease period past the lease expiration date. Renewal options are negotiated along with other primary terms and concessions and are officially included in the lease with their own clause.

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The term is used when a lease expires, but the tenant has not moved out. There is a clause in the lease that will outline the terms for this situation, but it almost always states the tenant will pay a higher rent each month, typically between 125-200%. However, more penalties may be charged to the tenant beyond the increased rent. Tenants usually find themselves in this position if they have not yet signed a renewal lease or are moving to a new location and the space is not yet ready.

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Also known as a non-compete, a clause in a lease which provides the tenant the right to a particular use, while denying all other tenants to operate in the same way or sell the same types of goods and services. This is an important request to some businesses, but not to others.

A lease clause which grants the tenant first priority to either purchase a property or lease other space at a building in the event it becomes available. Either or both scenarios can be included as opportunities in the ROFR clause and is most important to tenants who project future growth.

An assignment allows a tenant to transfer the lease to another tenant. In other words, it releases the tenant of any liability and responsibilities in the lease. Whereas, a sublease does not remove the tenant from the lease or its responsibilities, but instead adds another party, the subtenant. In a sublease, the tenant acts as the landlord or middleman to the subtenant. Both rights to an assignment and/or sublease can be negotiated and stated in the lease. A right to an assignment is especially important to healthcare providers, so they would be able to transfer the lease and walk away in the event they retire and sell their practice. Otherwise, in this scenario, the practice owner (who is the tenant) would still be liable for the new practice owner’s lease until the end of the term.

Stated in the PA, is upfront funds paid by the buyer to go towards the purchase price at the time of PA execution. The money is held with a third party – typically the title company – until transferred at either the closing or during a milestone event during the due diligence period where either the earnest money is refunded back to the buyer or paid to the seller.

A contract drafted during the due diligence period, which states the transfer in ownership of any personal property between the seller and owner. This is only applicable to existing buildings or condos where the owner will include items, such as furniture or equipment with the purchase.

An appraisal is a report which determines the value of a property by an objective third party, an appraiser, who is hired by the lender. The bank wants to be sure that the property is at least worth the value the lender is loaning to the buyer. There are three main methods of determining a property’s value, and the appraiser will decide which method is the most applicable for the property in question.

An inspection is an assessment of an existing building’s or condo’s condition, which is conducted by a third party, an inspector, who is hired by the buyer. This report will provide important information to the buyer regarding the property’s mechanics, systems, and materials to determine if the buyer is still willing to proceed with the purchase of the property under the same terms outlined in the PA. In other words, the inspection protects the buyer from buying a property with unknown issues.

Mandated by the lender and title company, and necessary for architects, a survey provides a complete analysis of not only the property’s boundaries, but all the physical details, agreements, regulations, and restrictions associated with the property. The type of survey needed will depend on the type of property, with an existing condo requiring the simplest report and land requiring the most complex evaluation.

Both environmental assessments are studies conducted by an environmental consultant, hired by the buyer, to determine the amount of environmental damage or risk equated to a particular property. A Phase One is the initial assessment, which is less extensive and will either deem a property to be safe or will require additional testing – a Phase Two – to gather more information. A Phase Two will provide the most comprehensive data and require physical sampling and testing. If a Phase Two is done, this will add much more time to the due diligence period and potentially inform the buyer of the extent of the issues and whether costly remediation is required. A Phase One will be required by the lender, but it does provide value even if the business owner does not need funding. After all, a business owner would not want to occupy a space that may be dangerous to themselves, employees, and clients.

A 1031 exchange gets its name from section 1031 of the Internal Revenue Code (IRC) enforced by the IRS. In short, a 1031 Exchange is when a property owner or investor sells an investment property and then uses the proceeds to simultaneously purchase a new “like-kind” property for the same investment purposes, and therefore does not get taxed for the capital gains of the first property’s sale.The phrase “like-kind” is important, because the two properties involved in the exchange need to serve the same purpose and be used either for business or investment. Although there are loopholes, a property used as a primary residence or vacation home does not qualify for a 1031 Exchange. A 1031 Exchange can be a great deal for an investor, and can be done in infinite amounts of time. However, when you sell your final property, you will owe capital gains tax on it. Unless, due to the current estate laws, if you never sell your last property before you die, your heirs will never have to pay the capital gains taxes on the final property when they sell it. However, with 1031 Exchanges, there are a lot of guidelines you need to follow. First, the investor can never receive the funds from the proceeds of the sale. Instead, proceeds from the sale need to directly go to and stay held with a third party, formally called a “qualified intermediary”. Next, the investor must identify in writing to the qualified intermediary 1-3 properties they intend to buy for their exchange within 45 days of the closing of the sale – although they only need to close on 1 of those properties. Then, the investor has 180 days from the closing of the sale to close on the purchase of the new property. This is why with a 1031 Exchange, time is of the essence. It is also important to note that the 1031 Exchange is designed to upgrade your investment. Therefore, if the property you sold originally required a loan larger than the property you later purchased, you will still need to pay capital gains tax on the difference. Additionally, depreciation needs to be considered too. If your new property is land, but the old property had a building that you’ve claimed depreciation on in the past, then you will be charged income tax on the depreciation from the old property.

There are a few factors that would require more time or could cause delays. First is just simply being a larger organization with more opinions and approval needed, or needing a larger space, which will take longer to design and build. The use also matters, because requiring more sophisticated or specialized equipment needs more vendors and skilled laborers involved. Lastly, ground-up construction or even a very unfinished building drastically adds time to the construction period. In fact, ground-up construction will need at least 12 months just for construction alone.

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Timing is very important, and more often than not, the issue with timing is beginning too late. Unlike residential transactions, commercial transactions take several months from start to finish. If not enough time is available to work with, you may feel backed into a corner, either settling for a property you’re not particularly excited about or being forced to pay much more in rent or give up important concessions. The more viable options available, the more picky you can be to hold out for the perfect space and the perfect deal.

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The first step to our proven approach is a needs analysis. Its purpose is for the business owner to determine their space requirement and to know what type of space to search for exactly. Defining the non-negotiable items and prioritizing the level of importance of the remaining space components will provide clarification and definition of the ultimate goal.

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Besides your timing, or when you would like to move-in, the first key factor to consider is the size and growth of your business to ensure the space will fit your needs for the foreseeable future, since commercial leases are multiple years long. Additionally, the general design and layout of the space, as well as the building class type needs to be established. You’ll want a property that meets your brand’s aesthetic and choosing spaces with similar layouts will save on construction costs. Other factors, such as parking, signage, and visibility requirements should be determined in the beginning too, because these are mostly non-negotiable, so there is no need to look at properties that don’t meet these criteria.

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A conventional loan for your business is very similar to a conventional mortgage loan you would get for your house. An SBA loan is also provided by a bank or credit union; however, it involves the Small Business Association, who essentially guarantees the loan for you. In other words, they mitigate the risk for the bank, because depending on the specifics of the loan, they will back 50%-90% of the loan on your behalf. Therefore, if you do not pay the loan back, the bank will only lose out the remainder of the loan amount, making the loan much less risky. Generally, a conventional loan is best for established businesses with good financials, because they will have better interest rates, more options, and take less time to qualify. On the other hand, SBA loans are great for relatively new businesses without long or great financial histories, because they would not otherwise qualify for a conventional loan.

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To get the most out of a property tour, Business owners should thoroughly review the key property highlights of each property prior to touring and keep an open mind to options their agent suggests. Already knowing the main details of each location will provide more context to visiting spaces in-person and encourage the focus on physical details, rather than learning the facts on paper, which can be done at any time off-site.

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There are a few reasons why you’ll want to hire a real estate attorney, specifically for your transaction. First, a real estate attorney is already familiar with all the commercial real estate documents and can quickly navigate them and instantly spot any red flags. They also have the most experience with the language and various clauses to ensure the tenant or buyer is not exposed to any potential pitfall in the future. Lastly, a real estate attorney understands the steps of and sensitivity of the timeline of commercial transactions. Especially for purchases, they will track each due diligence milestone and work with the business owner’s real estate agent to communicate with all parties throughout the process.

No! Because the landlord/seller pays the total commission for both sides of the transaction, there is no money to be saved for tenants/buyers. In fact DIY real estate can easily cost money for the tenant/buyer, because they are not industry experts. Instead, they only expose themselves to making costly mistakes.

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An ETL is a contract signed between a tenant or buyer and a real estate broker. Its purpose is to legally recognize that the broker represents the tenant or buyer, labeling them as a client. This is important for a few reasons, and the first is to state that the broker has a fiduciary duty to their client; therefore, the broker must act exclusively in their client’s best interest. Another reason to have a signed ETL is to ensure that the landlord or seller will communicate directly with the broker on the client’s behalf and to compensate the broker once a transaction has closed. Lastly, an ETL solidifies a commitment. Commercial real estate agents work hard for their clients, so they do not have time to spare for tenants and buyers who do not want to officially be their clients.

Analyzing all options in the current market provides a holistic view of the current market conditions. Commercial transactions have a long-term impact, so with each opportunity, market conditions may change, which will determine what is considered a good, bad, or fair deal. Also, negotiating on at least two properties will create competition and provide you with more leverage to get a better deal. A landlord is not going to offer the best terms to a tenant who is staying at a property no matter what. Lastly, once the transaction is complete, you will have peace of mind that you made the right decision, because you already explored what the alternatives were and made the best choice for your business.

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There are three primary reasons. First, lease renewals are predictable. Landlords create projections for their properties predicting which tenants will renew and approximately what the terms will be, usually a modest improvement allowance and continued annual rent increases. Because the space is already being used by the tenant, they are assuming the tenant isn’t going to need any drastic changes to continue staying there, which leads to the next reason. Lease renewals are also easy, because not only is a tenant probably not going to change the space much, but they also already have a negotiated lease. Therefore, a common tactic landlords will use is to send their tenant a short, easy-to-sign lease renewal with an extended term and continued annual rent increases, hoping they will not hire a real estate agent to represent them and just sign it. If their plan works, this is not only really easy, but also makes them the most money, which is the third reason. If a tenant does not hire their own agent to represent them, then they will not have to negotiate against a professional in the field who knows what a fair deal is. They will also not have to pay any commission to the agent, which saves them money. In contrast, if the landlord has to list the space and find a new tenant, they will have to pay a commission to the tenant’s agent, and they are going to have to offer a more compelling deal with lease concessions, such as a tenant improvement allowance. Not to mention, it often takes several months or years for landlords to lease spaces, and vacant spaces do not bring in rent.

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Generally, an LOI should be used for lease renewals, because the current lease terms are already established. An LOI is also used for purchases, because there are no lease concessions or property management terms to negotiate. Also, an LOI should be used if there is less time, because starting with an established offer speeds up the process. On the other hand, if there is a lot of time and/or many good property options to consider, an RFP will work better, because it creates more competition. An RFP may also be better if you don’t really love a property, because it gives the landlord more pressure to make it more compelling.

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