10 Must-Know Terms for Commercial Real Estate
When starting out with commercial real estate in Austin or elsewhere, it’s helpful to know the basics. Whether you’re an owner, landlord, tenant or an investor, here are some of the basic terms and concepts you might encounter in a commercial real estate transaction.
Defining Your Space
Traditional Office Space
Although the traditional office continues to be redefined, you can still imagine a large, multi-story building with many shared tenants. People in traditional office space likely work a 9-5 schedule and have an office, administrative, or professional services job. Traditional multi-tenant offices have common spaces and shared amenities like a lobby, elevators, restrooms, and landscaped areas.
Industrial and Warehouse Space
Industrial spaces may include storage and distribution warehouses, manufacturing space, factory/office/research spaces and multi-use buildings. Industrial spaces tend to be simple, one-story buildings made of concrete or corrugated metal. Special features of industrial space include overhead loading doors, high ceilings, and wide open spaces.
Flex space is short for “flexible space”. It’s often an industrial space converted for office use. Flex space is ideal for co-working, if your business changes size seasonally or you have employees who work at home part time. There may be other tenants in the building but you’ll have your own dedicated space and restrooms. You may even score front door parking.
Ideally a ground floor space with large front windows, retail spaces are often located in business, mixed-use and shopping districts or any area with heavy foot traffic. The best retail spaces have ample sales floor space, adequate parking for customers, and an appealing overall image.
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Commercial Real Estate Space Classes
The Building Owners and Managers Association (BOMA) determined three categories for office space: Class A, Class B, and Class C. How classy are you?
Class A office spaces are well-located and have the highest standard for modernity, systems, accessibility, and amenities. Amenities may include covered parking, elegant décor, workout facilities, and onsite cafes. Class A office space attracts high-end tenants who want a definite market presence. As a result, class A spaces command the highest rents.
According to BOMA, Class B buildings have “fair to good” building finishes, systems and amenities for the area. A standard Class B space appears clean and professional, and commands average rents for the area. Thus, these spaces are in high demand from a variety of users.
Class C office buildings are often located in older properties. They may need updates or improvements, but as a result, the rents are lower than average for the area. Facilities rated Class C are ideal for budget-sensitive tenants, and for those businesses with little to no public-facing presence.
Lease Negotiations – Common Terms
Request for Proposal (RFP)
An RFP is a one-page document requesting the landlord to present a written lease proposal. It states the length of term and any finish-out desired by the tenant. The landlord will use this information to create the lease proposal with the tenant’s needs in mind.
This is a written document from the owner’s broker stating what the owner will accept. This includes all of the business terms of the proposed lease. The document is non-binding.
Letter of Intent (LOI)
A document from the tenant’s broker used to negotiate the terms of the lease. The document is non-binding, but states what the tenant will accept when it comes to things like rental rate, move-in date, lease term and tenant improvement allowance.
Commercial Real Estate Basics, Part II (coming soon!) will get you familiar with terms relating to space calculations and other things that might come in handy when dealing with improvements.