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Commercial Property Insider

Commercial Real Estate Glossary

11 Minute Read

City Commercial Real Estate

Key Terminology That Shapes the Commercial Real Estate Industry

Additional Rent

Also known as “operating costs,” it is the payment beyond the base rent that tenants must pay under the lease. It covers expenses related to the tenant’s right to occupy the premises, including property taxes, insurance, maintenance, and common area utilities.

Agent

A representation relationship between a business or property owner and a real estate associate. The types of relationships can include: a customer (non-representation relationship) or a client (representation relationship). It’s advisable to clearly define the level of representation in writing to avoid miscommunication and potential misunderstandings of the service of care owed by the real estate professional.

Amortization

The process by which a landlord recovers their financial investment in providing a tenant improvement allowance over a specific duration or the term of the lease.

Assignment

The transfer of the rights and responsibilities of occupancy, including rental payment, from one tenant to another. This typically requires prior written approval from the landlord.

As-Is

An agreement to accept the premises in its present condition without any alterations. This statement may limit future liabilities of the seller or landlord, unless otherwise specified in the agreement, often found in the warranties or exceptions section of the agreement.

Assessed Value

The value of real estate determined by a property assessor for the purpose of calculating property taxes. Although there is a correlation between the assessed value and the market valuation, these values are often different. 

Property taxes are determined based on a percentage of the municipalities assessed value, and are typically expensed back to a tenant who has a triple net (NNN) lease.

Base Rent

The rent paid for the right to occupy commercial premises, excluding additional costs.

Base Building Standard

The standard level of finishes offered by the landlord to all prospective tenants before occupancy. Additional finishes as requested by the tenant may be negotiated.

Base Year or Amount

The initial expense used as the base for calculating future operational increases. Increases can be based on a Consumer Price Index (CPI) or a pre-established percentage. 

The landlord may also put an expense stop as a risk mitigation measure to help protect themselves from operating cost increases, and as a way to protect their net operating income.  

Broker

The registered owner or operator of a real estate brokerage, overseeing agents or associates.

Note – it is common for commercial real estate associates to describe themselves as commercial real estate brokers. This phrase is often used in practice; however, it may not technically be accurate as described by the Real Estate Council of Alberta. 

Bubble (A Real Estate Bubble)

A period of speculative growth in property values followed by a sudden decline. A skilled real estate professional may be able to identify trends in transaction volumes and pricing in being able to recognize the early warning signals of an overheated market and the potential for a real estate bubble. 

Capitalization Rate

A financial metric used to determine the potential return on an investment property. The formula is ‘Capitalization Rate = Net operating Income / Property Value’. R= NOI/ V. 

The purpose of this calculation is that it is a quick calculation that allows investors to compare properties and their potential returns, however this is only one of several metrics we recommend an investor to utilize. 

In practice, we encourage our clients to align their investment strategies with their risk profiles, as choosing to purchase a property with a high or low capitalization rate is dependent on your investment objectives.

Carefree or Triple Net Lease

A lease where the tenant pays base rent and operating costs, transferring expenses such as property taxes to the tenant.

Collapse or Crash

A substantial decrease in commercial property values due to various factors including micro and macro economics, supply and demand fundamentals, as well as shifts in consumer purchasing habits or preferences.

Note – A significant decline in property values may require a building owner to do a cash injection in order to maintain the desired leverage ratios by a lending institution. 

Commission Calculator

A tool used to determine compensation owed to commercial real estate agents, in exchange for services rendered. Note that compensation is a negotiable item in Alberta, and it can be calculated using a variety of methods depending on the property type. 

For example, in office leasing, the commission may be calculated on a cost per square foot basis. Commission can also be calculated on a percentage basis of the sale value, or the value of the total lease term.  

Common Areas

Areas of a building not leased to specific tenants, shared among occupants, such as hallways. Note that ‘exclusive use common areas’ exist, such as balconies or parking stalls. These are common areas that are reserved for the tenant’s exclusive use.

Conditions Precedent

Requirements that must be met before an agreement proceeds. If these specific requirements aren’t fulfilled or satisfied in writing within the agreed upon time periods, the result is that the agreement can become null and void. 

Default

Failure to fulfill obligations of the lease, constituting a breach. Not paying rent by the agreed upon date is a common cause of a default or a breach of the lease agreement. 

In the event that default occurs, both the tenant and landlord should consult legal professionals as each may have respective rights and responsibilities in terms of the premises or its contents.

Demising Walls

Walls separating leased premises from other tenants or common areas, meeting specific code requirements. These walls may require a specific fire or insulation requirement, to reduce the extent of damage as a result of a fire, or insulation to dampen the sound between potentially noisy tenants.

Deposit 

Money paid at the time of signing a purchase or lease agreement. A deposit is typically held in trust by the real estate brokerage or law firm. Although deposits commonly are a specific percentage of the value of a property or lease term, deposits are a negotiable item and are often dependent on the strength of the tenant or purchaser.

Double Net Lease (NN)

A lease where the tenant pays base rent plus two incidental expenses such as property taxes, insurance, maintenance, management fees, and common area utilities.

Estoppel Certificate

A statement confirming tenant details and lease terms, often required during property sales or refinancing.

Fixturing Period

A period for tenants to prepare leased space for business operations before the lease commencement date. This is typically base rent and additional rent free, and it is a negotiable item between a landlord and tenant. It is very common that insurance and a signed lease are two of the landlord requirements before a fixturing period commences. 

Free Rent

A type of tenant inducement. Free rent is a period where tenants have possession of the premises without paying base rent, and it is a negotiable item between a landlord and tenant. It is very common that insurance and a signed lease are two of the landlord requirements before a fixturing period commences. 

Gross Lease

A lease with a fixed rental rate where the landlord assumes operating expense risks. Compare this lease type next to a Net Lease. Note that the type of lease has different benefits to the landlord or tenant, depending on their preferences for the level of control over the rental rates. 

In our experience, some business owners like to think of leases in terms of gross leases as it allows them to pre-establish the monthly costs of renting space.  

Leverage

Using financing to acquire commercial real estate, potentially increasing returns or losses. It is one of the key benefits of real estate, as it allows a purchaser to control an asset with a smaller investment. Applying leverage has quantifiable impacts to a financial return. 

Positive leverage, when the returns are magnified by financing, occurs when the returns from a property are greater than the cost of capital. Negative leverage, when returns are reduced by financing, occur when the returns from a property are less than the cost of capital. 

Indemnity

Protection from loss and damage claims, often included in lease agreements. Many leases include an indemnity term that states that the landlord won’t be held liable for damages in the event of a lawsuit from the tenant’s employees, or customers. 

Insurance

Coverage required to protect landlords and buildings from loss or damage. The landlord or financial institution may have a specific insurance requirement in terms of dollar amount and types of coverage for natural events or vandalism. This is a key component to a risk mitigation strategy, and is often an area with limited negotiation. 

Leasable Square Feet or Rentable Area

Square footage used to calculate base rent, including common area proportions. This calculation is important because it allows common area expenses to be shared among tenants. The formula for a the leasable or rentable square footage is: Usable SF x Gross Up Factor= Leasable SF.

Lease Commencement

The start date of a lease term. Note that the Lease Commencement date is not always the same as the possession date, due to free rent or fixturing. 

Lease Expiration

The end date of a lease term. When a lease expires, the rights associated with occupancy end as well. There are often provisions in lease, such as hold over agreements, to protect a landlord in the event a tenant occupies a space past the lease end date. 

Lease Term

The duration of a lease agreement, such as a 5-year term. 

Legal Description 

A technical property identification used for legal purposes. In municipalities, this is typically referred to in a Lot; Block; Plan format. 

For example, the municipal address of 6328 104 Street, Edmonton, Alberta would be legally described as Lot 2; Block 34, Plan 3553P.

Net Lease (N)

A lease where the tenant pays for base rent plus one incidental expense, such as property taxes, insurance, maintenance, management fees, or common area utilities. There are different benefits to a landlord or tenant dependent on the lease type. 

Non-Disturbance

The right to quiet enjoyment of premises. Note the zoning may influence the determination of what quiet enjoyment of the premises entails. 

Possession Date

The date tenants or purchasers gain access to the space. Possession is often established in advance, after providing requirements such as providing the landlord with a copy of the insurance and an authorized lease agreement.

Property Taxes

Taxes levied on property owners by municipal governments. Property taxes are determined by applying the annual mill rate by the buildings assessed value. 

Renewal Option

An option allowing tenants to extend lease terms if they are not in default. There is often a requirement for the tenant to put their intent to renew a lease in advance in writing, within a specified time period. For example, 6 months before the end of the lease term. 

Rent Abatement

This clause may be utilized if the tenant was not able to conduct business (for example, due to fire or flood), and the rent would not be payable until the premises were restored to full operating order. 

It is important to note that rent abatements may not be guaranteed and may involve a level of discretion to be considered by the landlord.

Rent Increases

Predetermined rental rate increases over the lease term, which specifies the amount and timing of rental increases. 

Rules and Regulations

Additional lease requirements or clarifications set by landlords or condo boards such as common areas. 

Subletting

The arrangement where a tenant finds another business to occupy leased premises, however they may be responsible for the rent payment in the event their sublet tenant doesn’t fulfill their financial obligations. 

This is different from a lease assignment, which may absolve a tenant from its responsibilities of paying rent. Note that writing approval of a landlord is often required to either sublease or assign a lease.  

Tenant Improvement Allowance

Funds provided by landlords to tenants for space improvements. This is considered a tenant inducement to encourage a tenant to enter into a lease agreement. The amount, timing, and specified use of funds is negotiable and the amount of funds may be provided either before or after the work is performed. 

Tenant Inducements

Incentives provided by landlords to attract tenants. Although tenant inducements (such as tenant improvement allowances or free rent) are negotiable items, the strength of the market, the level of motivation of the landlord and the strength of the tenant are important considerations for a landlord to determine the amount of tenant inducements they are willing to offer.   

Trade Fixtures

Tenant-owned items removable without property damage. We recommend that a tenant consults with a legal professional before agreeing to have trade fixtures assigned to a landlord in the event of a lease. 

Useable Square Feet 

Space available for furniture, fixtures, and equipment within leased premises  Compare this to the definition of Leasable square footages, which include a gross up for common areas. 

Use Clause

Lease provision specifying permitted and prohibited uses of leased premises. The specific uses for a property are often dictated by zoning or landlord’s requirements. 

Working Drawings 

Documentation for permits and construction planning prepared by certified professionals, and are required by municipalities for code and compliance purposes.

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