Space Categorization

Office space is loosely classified based on the quality of construction, features and the status of location:

• Class A. Most prestigious buildings competing for premier office users with rents above average for the area. Buildings have high quality standard finishes, state of the art systems, exceptional accessibility and a definite market presence.
• Class B. Buildings competing for a wide range of users with rents in the average range for the area. Building finishes are fair to good for the area and systems are adequate, but the building cannot compete with Class A at the same price.
• Class C. Buildings competing for tenants requiring functional space at rents below the area average.

Industrial. Industrial space is usually in buildings zoned for industrial uses. They are not available for office use unless a change of use permit is filled and approved by the planning department. In some areas of San Francisco such change of use designations are very difficult to obtain.

Retail. Retail space can be leased by office use.

Rent

Rent. Rent is the monetary amount paid by a tenant to lease space.

• Asking Rent. The dollar amount asked by landlords for direct available space (not sublease), expressed in dollars per square foot per year in most parts of the country and dollars per square foot per month in areas of California and selected other markets. Buildings will have an average asking rent for available space. Usually a point of departure for negotiations between landlords and tenants.

Basis. The rent basis designates what operating expenses are included and excluded in the rent. The most common rent bases are:

• Full Service: All costs of operation are paid by the landlord up to a base year or expense stop. In some parts of the U.S., this rent basis is called Full Service Gross.
• Triple Net: All costs of operation including, but not limited to, real estate taxes, insurance and common area maintenance are borne by the tenant on a pro rata basis.
• Modified Gross: any arrangement whereby the tenant pays one or more of the expenses covered by the landlord in a Full Service lease, but not all of the expenses as in a Triple Net lease. Modified Gross leases cover a range of lease types and terminologies used in various markets around the nation. Some of the more common are Industrial Gross, Single Net and Double Net. The definitions of these bases vary from market to market depending on the expenses they include or exclude.
• Net of Electric: A popular form of Modified Gross, this is like a Full Service lease, but the tenant pays for his or her electric charges either to the utility company (according to a meter) or to the landlord on a pro rata basis. In the Northeast, this arrangement is called Full Service Gross Plus Electric. Acronyms: Full Service (FS), Triple Net (NNN).

Concessions. In a slow market in order to attract tenants, a landlord will sometimes grant concessions. These most often take the form of free rent but may also include lease buyouts, moving allowances and above-standard tenant improvement allowances. In a hot real estate market concessions are difficult to negotiate.

Contract Rent. The lease rates appearing in a signed contract. Typically the contract rate is the first year rate as opposed to the average rate over the term of the lease.

Effective Rent. Effective rent equals contract rent less free rent and any cash allowances such as a lease buyout or moving allowance. Escalations written into the lease are included in the calculation of effective rent. Tenant improvement allowances and brokerage commissions are not subtracted from the contract rate in calculating effective rent. (This definition is equivalent to the tenant effective rent. A landlord or lender would likely include all tenant improvement allowances and brokerage commissions in calculating effective rent.)

Effective Rent Calculation:

• Effective Rent = (total rent - free rent - cash allowances)/lease term/rentable sf
• Total Rent = rent paid during the term of the lease including escalations
• Cash Allowances include free rent, moving allowances and other cash considerations

Escalation. Leases often include escalations or stepped increases in rent to be paid by the tenant to the landlord at a specified future date (for example, year five of a 10-year lease).

Expense Stop. The per square foot annual amount the landlord agrees to pay for operating expenses. Once this amount is exceeded, the tenant pays its pro rata share of the additional costs.

Free Rent. To entice tenants in a soft market, landlords may offer free rent, usually a certain number of months at the beginning of the lease when the tenant does not have to pay rent. A number of variations are possible such as giving the tenant free rent in the middle of the lease or prorating the free rent into the tenant's monthly payments. In today's hot market free rent is uncommon.

Lease Buyout. In a slow market a landlord may offer to buy out a tenant's existing lease if the tenant will move into the landlord's building. Likewise, in a hot market a landlord may offer to buy out a tenant's existing lease if the tenant will move out of the landlord's building.

Sublease. Sublease space is offered on the market by the current tenant for sublease, regardless of whether the space is occupied or vacant. This space often competes with direct lease space (offered directly by the building owner or agent). Sublease space tends to be an important factor in the office and retail markets, less so in the industrial market.

Tenant Improvement Allowance. The amount of money which a landlord may agree to give the tenant to fix up the tenant's space. Usually expressed as a dollar amount per square foot. The amount is subject to negotiation between the landlord and tenant. In hot real estate markets, tenants should expect to pay a larger proportion of the cost of tenant improvements. In soft markets the opposite is true.

Term: The length of the lease. Leases with a 3 to 10 year term are the most common.

General Terms

Availability. The date the space will become available to a potential tenant.

Inventory. Inventory is the total building square footage in a particular geographical area that is considered competitive. Also sometimes called the base, base inventory or competitive inventory. The inventory represents those properties on which the market statistics are generated. Not all properties in a market are included in the inventory. Examples would be buildings smaller than the minimum size threshold, functionally obsolete buildings and buildings in which the owner occupies 75% or more of the space (see below). While research departments may include these buildings in their databases in order to track available space in the buildings, they must be excluded from the competitive inventory and the statistical calculations and reports.

Net Absorption is the net change in physically occupied space between the current measurement period and the last measurement period. Net absorption can be either positive or negative. Pre-leasing activity is NOT included in net absorption calculations because pre-leasing does not involve any change in occupancy. Net absorption is calculated when the pre-leasing tenant moves into its new space (positive absorption) and vacates its former space (negative absorption). The calculation of net absorption includes transactions that occur in sublease space as well as direct lease space.

Vacancy. The vacancy rate is the amount of vacant space divided by the competitive building inventory. Vacant space is physically unoccupied, and it may or may not be available for lease or sublease. This is physical vacancy. It is not determined by whether or not a tenant is paying rent on the space.

 

© 2000 - 2007 orgSpaces.org. All rights reserved. Feedback or Resources to List? Tell us: spacefund@ncclf.org