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BUYER'S GUIDE

Important Commercial Real Estate Lease Terms

If you are going to negotiate a commercial real estate lease for your own business, it would be wise to prepare yourself by learning some of the commonly used terms. By reading up on some of the jargon and vocabulary, you will be able to read the lease agreement and interpret what is being stated. Here are some of the most common terms used in commercial real estate leases.

  • Commercial Real Estate - the business of selling or buying properties such as office complexes, industrial plants, apartment complexes, and retail properties.

  • Use Clause - The Use Clause specifies how the area can be used and rules about what can and cannot be done in the space. This particular clause is always written by the landlord.


  • Premises - The Premises section defines specifically the area that will be leased.


  • Annual Percentage Rate (APR) - This is the annual interest rate that your loan will have.


  • Assessed Value - The tax assessor assesses the area and will give it a value, primarily for the purpose of real estate taxes.


  • Basis - The basis will be the total amount you are paying for the area, with all debts and equity capital included in the total.


  • Cash Flow - The cash flow is a total of all of the net cash received in any one period.


  • Competition - Competition is a situation where multiple businesses are competing for buyers in the same areas.


  • Cost Of Occupancy - The cost of occupancy will give you all of the costs that you will incur if you choose to occupy the space. This may include costs such as taxes, rent / mortgage costs, and operational expenses that may occur, including any repairs.


  • Depreciation - Unfortunately, all properties depreciate in value. Depreciation is the decrease in the value of the property over a period of time.


  • Demographics - Demographic statistics will give you information about the people in the area where the property is located. These statistics could include Census data, socio-economic statistics, and general information about gender, ethnicity, and education levels in the area.


  • Expansion - In an expansion phase, all aspects of the business will begin to increase, most likely because of a dramatic increase in demand or other reasons.


  • Financial risk - This amount will dictate the amount of money that may be lost if the investment does not become profitable.


  • Fixed Expenses - These particular expenses (which usually include taxes, maintenance fees of some sort, and insurance) do not change, no matter how high the occupancy rate rises.


  • Generic Space - This type of space can be used for a multitude of business ventures.


  • Growth Patterns - The growth patterns will predict any increase in the population in the area of the property.


  • Industrial Property - These particular properties may be used for distribution services, production services, or manufacturing services.


  • Initial Investment - This is the amount of up-front money that will be required for investment.


  • Investment Value - This is the value that the investor could potentially get for the investment, depending on the rate of financing and taxes along with the requirements of the investor himself.


  • Lease - This is the contractually binding document that specifies rights for the property and rights of the different parties involved in the agreement.


  • Leasing - This is a way to gain partial use of a property for a period of time without owning the property right out.


  • Lessee - If the lease is a rental property, the lessee is the one who rents or leases.


  • Lessor - If the lease is a rental property, the lessor is the person who rents or leases to another person.


  • Residential property - These are housing units used for living quarters.


This is only a small list of the common terms used in commercial real estate. If you are going to be a party involved in a commercial real estate agreement, it would be best to read it over carefully and research any portions you do not understand. You should also consult an attorney or a commercial real estate professional for assistance.

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