2010: 12 Predictions for Houston’s Business & Investment Community

It has been said that “the only thing constant is change.” While this is true, the rate of that change is anything but constant. If you pause to reflect on how rapidly things are changing all around us, you will realize that momentum is building and the change is picking up pace.

While this change has been unwelcome to many Houstonians, and most of the business owners that I am in contact, the very idea that the rapidity of this change means we may actually be able to see the changes manifest within our lifetimes is thrilling to me. Whether you feel the same way or not, it does make predictions such as these a bit more difficult to pen.

I’ve managed to get a majority of predictions right in my still young days, but admittedly I did not anticipate how quickly or strongly the stock market would rebound in 2009.  In 2008 to the present, I did not expect such a precipitous decline in real estate values, especially within my passion: commercial real estate – which actually seemed to move parallel to the stock market, yet still have not corrected.   So…

Here are my 12 predictions or best guesses for what will transpire in 2010:

1. Houston: We Do Not Have A Citywide Recession – By Year End.

The shock to the financial system produced significant volatility, which is now easing.  Volatility creates fear.  When businesses are fearful they will not make major decisions, banks ultimately will not lend, and a shake-out will occur.  The shake-out in Houston is still underway as the tremors of Wall Street volatility continue to be felt.  My simple prediction  for Houston is that the weakest business sectors in 2008 and 2009, will likely be the most promising industries in 2010, albeit for a short-term.  Houston’s base employment will decline – but not close to the 100,000 we saw in 2009.  Just a few shocks.  Added, the government will increase its presence in the city via census and new jobs, this will buoy the employment market to positive numbers by year-end.  Understandably, via significant government intervention, we are kicking a can down the road.  But I feel all of the credit bubble, national debt, doom mongers will likely have to hold their tongues throughout 2010.

2. Houston Tenants:  Get Prepared, Opportunities are Appearing

The commercial real estate sector, to which I specialize, is feeling the effects of a dried up lending market.  From a commercial real estate owner’s perspective, things look dire.  Because businesses are finding themselves not having the available resources to cover the monthly nut, they are shutting down.  As building materials and labor are not seeing significant declines, landlords are getting squeezed. So, in turn vacancy has risen dramatically in 2009, most of which is occurring in the 2nd half of the year.   To combat, Houston commercial real estate landlords and lenders are reducing tenant improvement allowances and getting tough on the building’s controllable expenses to offset a drop in rental rates and/or above-average tenant concessions.  I believe that no time since the early 90’s will concessions be so widely used to attract tenants as they will be in 2010.  Lease renewals dominated the 2009 leasing market, but as downsizing and deferred maintenance issues arise, I think the second half of the year we will see a pickup in companies relocating.  Thus the spread between good buildings and bad buildings will widen and likely begin to accelerate in late 2010, possibly start of 2011.   Expect end of 2010 rental rates to mirror 2004 or 5’s. In essence, the office leasing market will have pulled the slack from the 2006-2008 increases – tightening the rope towards a longer term trend.  This sudden reduction in rents will create building foreclosures for those who purchased during the period. 

3. Deflationary Pressure Continues

I believe the U.S. and world economy will likely experience a continued deflationary dip during 2010. Banks are still not lending and the expansion of the monetary base is not keeping pace with the massive contraction in the credit markets. With the commercial real estate shoe yet to be realized and a glut of production capacity, deflation is the more likely an immediate threat to the economy. I believe the Fed and government pull out all of the stops to fight the deflationary threat. With new consumer stimulus programs, tax rebates, government lending, pressure on the banks to lend and the printing presses running overtime, all of the newly-created money will eventually work its way into the system and as the velocity increases, deflation will subside and inflationary pressures will materialize. This could easily spiral out of control and lead to hyperinflation in a few years, as no matter how confidently Ben Bernanke speaks of his abilities, once the money is created and flows into the economy it multiplies via fractional reserve banking and becomes very difficult to soak back up. So while I view widespread inflation as inevitable, I don’t think it will happen in 2010.

4.  Stock Market Rangebound

I believe the plunge protection team will continue to support the stock market during 2010, although the growth will slow considerably. As stocks are mainly a cash market, the deflationary impact felt in the credit markets will have little impact on stocks. The market is due for a correction and there may be short volatile swings as investors lose confidence, but I think the market will end the year little changed (+/- 5%). No doubt, the market is on life support without an injection of liquidity via the government and Fed.

5. Fed Funds Rate to Remain Near Zero

While many are anticipating a rise in rates during 2010, I believe the Fed will be forced to keep rates low due to deflationary pressures. Any rate increase would wreak havoc on the markets and this is the Fed’s biggest fear. At most, a small increase could occur towards the end of 2010. Higher rates are certainly on the horizon, but I think we need to see much higher inflation before the Fed changes course.

6. National Real Estate Prices Flat to Lower

Real estate prices are likely to flat-line or decline during 2010. As real estate is heavily reliant on the rapidly-contracting credit market, deflation will trump any inflationary pressures created from the expansion in base money. There is an over-supply of housing and the high rate of foreclosures is likely to continue or increase during 2010. I believe real estate will be an excellent buy at some point in the next 5-10 years, but it is not near a bottom yet.

7. Unemployment Remains Stable

Officially-reported unemployment (U-3) will hang around 10% for most of 2010, but could rise to as high as 12% nationwide. Of course, true unemployment that counts marginally employed and discouraged workers is closer to 20% currently. Government will be the major source of any new jobs, as private enterprise and small businesses continue to struggle. Of course, any wealth or jobs the government claims to create is really just a wealth transfer and not true or sustainable growth.

8. U.S. Dollar Rallies, but Drops to New Lows by Year End

With rates likely to remain near zero, I anticipate more dollar weakness during 2010. The Fed doubled the supply of base money during the past year, deficits are at record levels and Asian countries have already begun diversifying out of dollars. There have also been reports that several other countries are following suit. If the dollar begins to lose its status as world reserve currency, look out below! The current bounce could continue a bit longer before the plunge, but by the end of the year the dollar index will be at or below 70.

9. Gold and Silver to Make New Nominal Highs

While some are claiming gold has peaked, I believe gold is nowhere near a top and will reach a new nominal high between $1,200-$1,400 during 2010.  That is not to say it won’t go below $1,000, first.  Overall, I see a volatile year for the metal.  Gold can perform well during periods of inflation or deflation. While I believe deflation is the greater threat during 2010, this will occur primarily in credit-based markets such as real estate. Cash-based markets such as precious metals are likely to experience inflation as record amounts of new money have been printed during the past year. Look for more central bank purchases during 2010, as well as significant purchases from China and other countries that are eager to diversify away from dollars.

10. Energy Prices to Trade in Range

With the strengthening economy, increasing demand from China and India, plus declining supplies, I expect energy prices to move higher during 2010.  As I write, we are already nearing $80. Oil will trade most of the year in the $70-$90 range, likely nearer to the upper end of the range. I think natural gas will generate even greater returns than crude oil as it bounces off oversold lows. In addition, I expect clean energy companies to rebound during the 1st half of 2010 and think lithium and rare earth miners will benefit from this trend.

11. Agriculture Prices to Rise

One thing that is certainly not in over-supply is agriculture. With a very poor harvest season, lack of water in key agricultural areas and exploding demand from a growing middle class in Brazil, Russia, China and India, I believe prices for many food items will move higher in latter 2010 and significantly higher in subsequent years.

12. More Bank Failures, Political Tension, Voter Discontent

I anticipate a large number of  banks will fail during 2010, more than double that of 2009, allowing the largest banks to scoop up smaller competitors at bargain prices.  People will become less apathetic as government meddling and banker exploitation will finally begin to hit everyone in the pocketbook. Look for more frugality, local buying, community organization and a move towards becoming self-sustaining.

Weekly Rewind: December 21-25

Houston’s 2010 Business Survey (:The More The Merrier:)

Robert S. “Bob” Lowery:

The results will be posted in the upcoming 2010 forecast.  Yes, my elves will work through the holidays.  Best wishes to you and yours this holiday season!!

Top 10 Houston Blogs – As I See It

Off the Kuff

A Progressive political blog.

Latest Posts:

  • Judicial Q&A: Cheryl Harris Diggs
  • Precinct Analysis, District Council
  • Here Come the Gay Tourists
  • Bellaire Bans Texting While Driving
  • RIP, Laff Stop

Hair Balls

Houston Press Spin-Off.  Hilarious.

Latest Posts:

  • All of Sharpstown Mall’s Problems to be Solved with Name Change
  • More Allegations of Sexual Harrassment and Abuse at the Houston Humane Society
  • Business is Booming in the DWI-Arrest Industry
  • Game Time: My Plea to In-And-Out Burger…Let Me Speak for You
  • Survey of Top Pop Culture Dogs Proves Aggies may have Skewed Priorities

Houston Strategies

An open dialogue on serious strategies for making Houston a better city, as well a coalition-builder to make it happen.

Latest Posts:

  • An Agenda for Mayor Parker
  • World’s Smartest Cities
  • Comparing Texas’ Big 4 Metro Economies
  • Houston VS. Chicago, Seattle, Portland
  • Houston One of Five Cities that will Rise in the New Economy

BlogHouston

Focuses on Houston politics, media, and life.

Latest Posts:

  • What’s the Status of the City’s Sorely Needed New Emergency Radio Network?
  • Big Sports News in Recent Days
  • City of Houston to Harris County:
  • Metro Chairman David Wolff’s Admonition
  • Good News for Ice Cream Lovers

Houston Clear Thinkers

Observations on developments in law, business, medicine, culture, sports and other matters.

Latest Posts:

  • That Wild Landry’s Ride Continues
  • They Got How Much?  For Doing What?
  • Mr. Ruehle, You are a Free Man
  • Criminalizing the Neighborhood Pharmacist
  • How Many Felonies did you Commit Today?

Houston Tomorrow

Collection of writings from Houston’s Visionaries.

Latest Posts:

  • Houstonians Want Safer Streets
  • The Case for an Energy Tax
  • Perception vs. Reality
  • Block by Block Sustainability
  • Sprawl has passed into History

Bay Area Houston

Dedicated towards Clear Lake, Houston, and Political Junkies.

Latest Posts:

  • A Republican in Democratic Judicial Clothing
  • Harris County GOP Insanity
  • Kay Bailey’s Whataburger Commercial
  • Surprise! Texas Tort Reform Didn’t Work!
  • What a Kinky Idiot

Houstonist

Collection of Houston Pictures, Food, Music and Beverage.

Latest Posts:

  • St. Arnold Brew News
  • H-Town Rock
  • Eat This: French Onion Soup
  • Houstonist Photo of the Day: Antique Running
  • You Wanted the Best! You Got the Best!

Swamplot

Covers real estate, home design and renovation, architecture, and the landscape of Houston.

Latest Posts:

  • Saved by a Ham: The Museum Plan for Immanuel Lutheran Church
  • Daily Demolition Report: Demo Defender
  • Greatest Moment in Real Estate 2009
  • Rail Removal Program Complete for the Year: Heights Hike and Bike Trail Opens
  • Haven is Open:  Modern Texas Cuisine – Algerian Way

Culture Map

Everything Houston.  Great site that toes the line of news and blog.

Latest Posts:

  • No Joke: Houston’s Legendary Laff Stop Closes
  • Is Houston Shrinking?
  • Where to Eat on Christmas
  • Plan proposed to save Historic Heights Church
  • D-Box Motion Movie Seats come to Tomball

Honorable Mention:

SpaceRef

Startup Houston

NeoHouston

Voted by Robert S. “Bob” Lowery

Weekly Rewind: December 14-18

If you think last week was slow, wait for the next two.  Enjoy the football and family!

5 Negotiable Items in your Office Lease (Part 2 of 2)

In my previous article, 5 Negotiable Items in your Office Lease, I explored items of negotiation in your office lease.  The typical office lease that our tenant representation group comes across is approximately 40 pages, with 5-10 exhibits.  Within a lease are hundreds of negotiable items, some downright (Texas term) questionable.  Believe me when I tell you that office leases are evolving to heavily favor landlords, especially now that many are in the red.  As I write, landlords and attorneys are structuring creative lease clauses in an effort to pass their “controllable” costs on to businesses like yours.

Next 5 Negotiable Items…

6. Furniture

As tenants, large and small, have vacated their respective spaces in 2009, many owners are finding themselves in the furniture business.  In many office buildings that have 50,000 SF or greater, a selection can be vast.  With the over-abundance of office furniture that is currently available, prior to signing on to a building space, ask whether any furniture will be provided.   Also request that after your lease expires you have ownership right or responsibility.  Depending on your situation, you may or may not want the office furniture because of its difficulty and expense to move. So, your best bet is to negotiate free use of the furniture and the right to keep or purchase it at the conclusion of the lease, should you want to take it with you to your next location.

7. Expenses (Upfront)

Larger companies have the ability to get landlords to contribute to the upfront costs of the move process. This can only be negotiated during times where the market has a lot of vacancy. Small business typically can accomplish this same concept through free rent, as noted in item #4.

8. Security Deposits

Security deposits are typically a function of how much money a landlord will spend to get you to move into the space (commissions and tenant improvements) vs. how confident they are in your ability to pay rent (financial statements review). We have seen security deposits range from 1-12 months depending on the situation. A good rule of thumb is 1-3 months of security deposit for a small business who needs only minor improvements and 2-6 if offered a turnkey build-out.  A larger company, in today’s leasing market, is not likely to have to place a security deposit.

9. Commission Payment

If you are represented by a tenant rep broker, you have the ability to pay for your tenant representation broker under your own arrangement (flat fee, hourly, percentage), in which you can use this leverage during your negotiations.  Typically a commission is split between a landlord’s representative and a tenant representative.  The only problem is that most landlord representatives are compensated for the entire fee, so having the tenant rep will actually cost you nothing.

10. Lease Options

Renewal Options, Termination Options, and Expansion Options all should be negotiated. These options provide you with the most flexibility and control of your office lease.  Our tenant representation team is skilled in the negotiation of options.  Believe us when we say, you cannot read this stuff in a book.

Weekly Rewind / December 7-11

100+ Commercial Real Estate Terms that your *representation* should be comfortable…

Senior Leasing Consultant-Tenant Representation

The “ideal”commercial real estate tenant representative is able to:

Dissect an office lease like an attorney,

Audit expenses like an accountant,

Cad an office building like an architect,

Implement a construction plan like a developer,

Immerse in a community like a residential agent,

Put out fires when “people issues” arise like management,

Analyze income property or comparable space like appraisers,

Master the ground level and subsurface like a surveyor,

And is tech savvy like a telco business.

This said, I understand that more than one-half of my readership support comes from those who are unfamiliar with, gaining entry to, or educating others in the field of commercial real estate – primarily leasing and tenant representation.

Thus, I have compiled a list of terms that are relevant to representatives of businesses, whether it be for the purposes of leasing or purchasing commercial real estate.

“and we thank you for your support”

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Abatement

Free or reduced rent for a fixed period of time.

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Above Building Standard

Upgraded finishes and specialized designs necessary to accommodate a tenant’s proposed leasehold improvements.

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Allowance or Construction Allowance

The contribution by the landlord for the cost of tenant improvement in excess of the base building shell, often expressed as a cost per square foot with a maximum.

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Anchor Tenant or Major

The major or prime tenant in a shopping center, building, etc.

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As-Is Condition

The acceptance by the tenant of the existing condition of the premises at the time the lease is consummated, including any defects.

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Assignment

A transfer by lessee of lessee’s entire estate in the property. Distinguishable from a sublease where the sublessee acquires something less than the lessee’s entire interest.

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Attorn

A tenant’s agreement to recognize a new owner (including a foreclosing lender) as the new landlord and pay rent and otherwise perform under the existing lease.

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Base Rent

A set amount used as a minimum rent in a lease with provisions for increasing the rent over the term of the lease.

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Base Year

Actual taxes and operating expenses for a specified base year, most often the year in which the lease commences. Once the base year expenses are known, the lease essentially becomes a dollar s lease.

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Building Classifications

Building classifications usually refer to Class A, B, C (sometimes D) properties. Classifications are subjective, Class A buildings generally feature superior construction and finish and are well located. They frequently offer covered parking. These buildings, of course, command the highest rental rates in their sub-market. The lower Classes of buildings are progressively less desirable due to age, location or construction. Rents decline as the class of the property declines.

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Building Code

The various laws set forth by the ruling municipality as to the end use of a certain piece of property and that dictate the criteria for design, materials and type of improvements allowed.

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Building or “Core” Factor

Represents the percentage of Net Rentable Square Feet devoted to the building’s common areas (lobbies, rest rooms, corridors, etc.). This factor can be computed for an entire building or a single floor of a building. Also known as a Loss Factor or Rentable/Usable (R/U) Factor, it is calculated by dividing the rentable square footage by the usable square footage.

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Building Standard

A list of construction materials and finishes that represent what the Tenant Improvement (Finish) Allowance/Work Letter is designed to cover while also serving to establish the landlord’s minimum quality standards with respect to tenant finish improvements within the building. Examples of standard building items are type and style of doors, lineal feet of partitions, quantity of lights, quality of floor covering, etc.

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Building Standard Plus Allowance

The landlord lists, in detail, the building standard materials and costs necessary to make the premises suitable for occupancy. A negotiated allowance is then provided for the tenant to customize or upgrade materials.

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Build-out

The space improvements put in place per the tenant’s specifications. Takes into consideration the amount of Tenant Finish Allowance provided for in the lease agreement.

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Build-To-Suit

An approach taken to lease space by a property owner where a new building is designed and constructed per the tenant’s specifications.

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Capital Expenses

A capital expense is generally defined by reference to generally accepted accounting principles (GAAP), but GAAP is often unclear on whether a particular item is a capital expense

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Certificate of Occupancy

A document presented by a local government agency or building department certifying that a building and/or the leased premises (tenant’s space), has been satisfactorily inspected and is/are in a condition suitable for occupancy.

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Clear-Span Facility

A building, most often a warehouse or parking garage, with vertical columns on the outside edges of the structure and a clear span between columns.

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Common Area

There are two components of the term “common area”. If referred to in association with the Rentable/Usable or Load Factor calculation, the common areas are those areas within a building that are available for common use by all tenants or groups of tenants and their invitees (i.e. lobbies, corridors, restrooms, etc.). On the other hand, the cost of maintaining parking facilities, malls, sidewalks, landscaped areas, public toilets, truck and service facilities, and the like are included in the term “common area” when calculating the tenant’s pro-rata share of building operating expenses.

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Common Area Maintenance (CAM)

This is the amount of Additional Rent charged to the tenant, in addition to the Base Rent, to maintain the common areas of the property shared by the tenants and from which all tenants benefit. Examples include snow removal, outdoor lighting, parking lot sweeping, insurance, property taxes, etc. Most often, this does not include any capital improvements (see “Capital Expenses”) that are made to the property.

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Comparables or Fair Market Comparables

Lease rates and terms of properties similar in size, construction quality, age, use, and typically located within the same sub-market and used as comparison properties to determine the fair market lease rate for another property with similar characteristics.

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Concessions

Cash or cash equivalents expended by the landlord in the form of rental abatement, additional tenant finish allowance, moving expenses, cabling expenses or other monies expended to influence or persuade the tenant to sign a lease.

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Condemnation

The process of taking private property, without the consent of the owner, by a governmental agency for public use through the power of eminent domain.

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Construction Management

The actual construction process is overseen by a qualified construction manager who ensures that the various stages of the construction process are completed in a timely and seamless fashion, from getting the construction permit to completion of the construction to the final walk-through of the completed leased premises with the tenant.

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Consumer Price Index (“CPI”)

Measures inflation in relation to the change in the price of a fixed market basket of goods and services purchased by a specified population during a “base” period of time. It is not a true “cost of living” factor and bears little direct relation to actual costs of building operation or the value of real estate. The CPI is commonly used to increase the base rental periodically as a means of protecting the landlord’s rental stream against inflation or to provide a cushion for operating expense increases for a landlord unwilling to undertake the record keeping necessary for operating expense escalations.

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Contiguous Space

(1) Multiple suites/spaces within the same building and on the same floor which can be combined and rented to a single tenant. (2) A block of space located on multiple adjoining floors in a building (i.e., a tenant leases floors 6 through 12 in a building).

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Contract Documents

The complete set of design plans and specifications for the construction of a building or of a building’s interior improvements. Working Drawings specify for the contractor the precise manner in which a project is to be constructed.

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Core Factor

Represents the percentage of Net Rentable Square Feet devoted to the building’s common areas (lobbies, rest rooms, corridors, etc.). This factor can be computed for an entire building or a single floor of a building. Also known as a Loss Factor or Rentable/Usable (R/U) Factor, it is calculated by dividing the rentable square footage by the usable square footage.”

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Covenant

A written agreement inserted into deeds or other legal instruments stipulating performance or non-performance of certain acts or, uses or non-use of a property and/or land.

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Covenant of Quiet Enjoyment

The old “quiet enjoyment” paragraph, now more commonly referred to as “Warranty of Possession”, had nothing to do with noise in and around the leased premises. It provides a warranty by Landlord that it has the legal ability to convey the possession of the premises to Tenant; the Landlord does not warrant that he owns the land. This is the essence of the landlord’s agreement and the tenant’s obligation to pay rent. This means that if the landlord breaches this warranty, it constitutes an actual or constructive eviction.

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Default

The general failure to perform a legal or contractual duty under a commercial lease, such as not paying rent when due, or the breach of other nonmonetary lease covenants.

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Demising Walls

The partition wall that separates one tenant’s space from another or from the building’s common area such as a public corridor.

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Design/Build

A system in which a single entity is responsible for both the design and construction. The term can apply to an entire facility or to individual components of the construction to be performed by a subcontractor; also referred to as “design/construct”.

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Depreciation

Spreading out the cost of a capital asset over its estimated useful life or a decrease in the usefulness, and therefore value, of real property improvements or other assets caused by deterioration or obsolescence.

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Distraint

The act of seizing (legally or illegally) personal property based on the right and interest which a landlord has in the property of a tenant in default.

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Dollar or Expense Stop

An agreed dollar amount of taxes and operating expense (expressed for the building as a whole or on a square foot basis) over which the tenant will pay its prorated share of increases. May be applied to specific expenses (e.g., property taxes or insurance).

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Effective Rent

The actual rental rate to be achieved by the landlord after deducting the value of concessions from the base rental rate paid by a tenant, usually expressed as an average rate over the term of the lease.

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Efficiency Factor

Represents the percentage of Net Rentable Square Feet devoted to the building’s common areas (lobbies, rest rooms, corridors, etc.). This factor can be computed for an entire building or a single floor of a building. Also known as a Core Factor or Rentable/Usable (R/U) Factor, it is calculated by dividing the rentable square footage by the usable square footage.

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Eminent Domain

A power of the state, municipalities, and private persons or corporations authorized to exercise functions of public character to acquire private property for public use by condemnation, in return for just compensation.

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Encroachment

The intrusion of a structure which extends, without permission, over a property line, easement boundary or building setback line.

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Encumbrance

Any right to, or interest in, real property held by someone other than the owner, but which will not prevent the transfer of fee title (i.e. a claim, lien, charge or liability attached to and binding real property).

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Equity

The fair market value of an asset less any outstanding indebtedness or other encumbrances.

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Escalation Clause

A clause in a lease which provides for the rent to be increased to reflect changes in expenses paid by the landlord such as real estate taxes, operating costs, etc. This may be accomplished by several means such as fixed periodic increases, increases tied to the Consumer Price Index or adjustments based on changes in expenses paid by the landlord in relation to a dollar s or base year reference.

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Estoppel Certificate

A signed statement certifying that certain statements of fact are correct as of the date of the statement and can be relied upon by a third party, including a prospective lender or purchaser. In the context of a lease, a statement by a tenant identifying that the lease is in effect and certifying that no rent has been prepaid and that there are no known outstanding defaults by the landlord (except those specified).

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Exclusive Agency Listing

A written agreement between a real estate broker and a property owner in which the owner promises to pay a fee or commission to the broker if specified real property is leased during the listing period. The broker need not be the procuring cause of the lease.

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Expansion Option

A right for the tenant to increase the size of its premises under specified terms and conditions.

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Expense Stop

An agreed dollar amount of taxes and operating expense (expressed for the building as a whole or on a square foot basis) over which the tenant will pay its prorated share of increases. May be applied to specific expenses (e.g., property taxes or insurance).

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Fair Market Value

The sale price at which a property would change hands between a willing buyer and willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of the relevant facts. Also known as FMV.

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First Generation Space

Generally refers to new space that is currently available for lease and has never before been occupied by a tenant.

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First Mortgage

The senior mortgage which, by reason of its position, has priority over all junior encumbrances. The holder of the first or senior mortgage has a priority right to payment in the event of default.

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First Refusal Right or Right Of First Refusal

A lease clause giving a tenant the first opportunity to buy or lease a property at the same price and on the same terms and conditions as those contained in a third party offer that the owner has expressed a willingness to accept. Such rights often pertain to adjacent space.

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Flex Space

A building providing its occupants the flexibility of utilizing the space. Usually provides a configuration allowing a flexible amount of office or showroom space in combination with manufacturing, laboratory, warehouse distribution, etc. Typically also provides the flexibility to relocate overhead doors. Generally constructed with little or no common areas, load-bearing floors, loading dock facilities and high ceilings.

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Floor Area Ratio (FAR)

The ratio of the gross square footage of a building to the land on which it is situated. Calculated by dividing the total square footage in the building by the square footage of land area.

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Force Majeure

A force that cannot be controlled by the parties to a contract and prevents said parties from complying with the provisions of the contract. This includes acts of God such as a flood or a hurricane or, acts of man such as a strike, fire or war.

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Foreclosure

A procedure by which the mortgagee (“lender”) either takes title to or forces the sale of the mortgagor’s (“borrower”) property in satisfaction of a debt.

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Full Service Rent

An all-inclusive rental rate that includes operating expenses and real estate taxes for the first year. The tenant is generally still responsible for any increase in operating expenses over the base year amount.

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Future Proposed Space

Space in a proposed commercial development which is not yet under construction or where no construction start date has been set. Future Proposed projects include all those projects waiting for a lead tenant, financing, zoning, approvals or any other event necessary to begin construction. Also may refer to the future phases of a multi-phase project not yet built.

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Graduated Lease

A lease, generally long term in nature, which provides that the rent will vary depending upon future contingencies, such as a periodic appraisal, the tenant’s gross income or simply the passage of time.

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Gross Building Area

The total floor area of the building measuring from the outer surface of exterior walls and windows and including all vertical penetrations (e.g. elevator shafts, etc.) and basement space.

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Gross Lease

A lease in which the tenant pays a flat sum for rent out of which the landlord must pay all expenses such as taxes, insurance, maintenance, utilities, etc.

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Ground Rent

Rent paid to the owner for use of land, normally on which to build a building. Generally, the arrangement is that of a long-term lease (e.g., 99 years) with the lessor retaining title to the land.

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Guarantor

One who makes a guaranty or promises to pay a third party’s obligations.

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Guaranty

Agreement whereby the guarantor undertakes collaterally to assure satisfaction of the debt of another or perform the obligation of another if and when the debtor fails to do so. Differs from a surety agreement in that there is a separate and distinct contract rather than a joint undertaking with the principal.

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Hold Over Tenant

A tenant retaining possession of the leased premises after the expiration of a lease.

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HVAC

The acronym for “Heating, Ventilating and Air-Conditioning”.

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Improvements

Generally refers to the improvements made to or inside a building but may include any permanent structure or other development, such as a street, sidewalks, utilities, etc.

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Lease

An agreement whereby the owner of real property (i.e., landlord/lessor) gives the right of possession to another (i.e., tenant/lessee) for a specified period of time (i.e., term) and for a specified consideration (i.e., rent).

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Lease Agreement

The formal legal document entered into between a Landlord and a Tenant to reflect the terms of the negotiations between them; that is, the lease terms have been negotiated and agreed upon, and the agreement has been reduced to writing. It constitutes the entire agreement between the parties and sets forth their basic legal rights.

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Lease Commencement Date

The date usually constitutes the commencement of the term of the Lease for all purposes, whether or not the tenant has actually taken possession so long as beneficial occupancy is possible. In reality, there could be other agreements, such as an Early Occupancy Agreement, which have an impact on this strict definition.

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Leasehold Improvements

Improvements made to the leased premises by or for a tenant. Generally, especially in new space, part of the negotiations will include in some detail the improvements to be made in the leased premises by Landlord.

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Legal Description

A geographical description identifying a parcel of land by government survey, metes and bounds, or lot numbers of a recorded plat including a description of any portion thereof that is subject to an easement or reservation.

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Letter Of Credit

A commitment by a bank or other person, made at the request of a customer, that the issuer will honor drafts or other demands for payment upon full compliance with the conditions specified in the letter of credit. Letters of credit are often used in place of cash deposited with the landlord to satisfy security deposit requirements.

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Letter Of Intent

A preliminary agreement stating the proposed terms for a final contract. They can be “binding” or “non-binding”. This is the threshold issue in most litigation concerning letters of intent. The parties should always consult their respective legal counsel before signing any Letter of Intent.

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Lien

A claim or encumbrance against property used to secure a debt, charge or the performance of some act. Includes liens acquired by contract or by operation of law. Note that all liens are encumbrances but all encumbrances are not liens.

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Lien Waiver (Waiver of Liens)

A waiver of mechanic’s lien rights, signed by a general contractor and his subcontractors, that is often required before the general contractor can receive a draw under the payment provisions of a construction contract. May also be required before the owner can receive a draw on a construction loan.

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Listing Agreement

An agreement between the owner of a property and a real estate broker giving the broker the authorization to attempt to sell or lease the property at a certain price and terms in return for a commission, set fee or other form of compensation.

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Long Term Lease

In most markets, this refers to a lease whose term is at least three years from initial signing until the date of expiration or renewal option.

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Lot

Generally, one of several contiguous parcels of land making up a fractional part or subdivision of a block, the boundaries of which are shown on recorded maps and “plats”.

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Lump-Sum Contract

A type of construction contract requiring the general contractor to complete a building or project for a fixed cost normally established by competitive bidding. The contractor absorbs any loss or retains any profit.

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Market Rent

The rental income that a property would command on the open market with a landlord and a tenant ready and willing to consummate a lease in the ordinary course of business; indicated by the rents that landlords were willing to accept and tenants were willing to pay in recent lease transactions for comparable space.

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Master Lease

A primary lease that controls subsequent leases and which may cover more property than subsequent leases. An Executive Suite operation is a good example in that a primary lease is signed with the landlord and then individual offices within the leased premises are leased to other individuals or companies.

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Mechanic’s Lien

A claim created by state statutes for the purpose of securing priority of payment of the price and value of work performed and materials furnished in constructing, repairing or improving a building or other structure, and which attaches to the land as well as to the buildings and improvements thereon.

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Metes and Bounds

The boundary lines of land, with their terminal points and angles, described by listing the compass directions and distances of the boundaries. Originally, metes referred to distance and bounds referred to direction.

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Mixed-Use

Space within a building or project providing for more than one use (i.e., a loft or apartment project with retail, an apartment building with office space, an office building with retail space).

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Net Lease

A lease in which there is a provision for the tenant to pay, in addition to rent, certain costs associated with the operation of the property. These costs may include property taxes, insurance, repairs, utilities, and maintenance. There are also “NN” (double net) and “NNN” (triple net) leases. The difference between the three is the degree to which the tenant is responsible for operating costs.

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Net Rentable Area

The floor area of a building that remains after the square footage represented by vertical penetrations, such as elevator shafts, etc., has been deducted. Common areas and mechanical rooms are included and there are no deductions made for necessary columns and projections of the building.

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Non-Compete Clause

A clause that can be inserted into a lease specifying that the business of the tenant is exclusive in the property and that no other tenant operating the same or similar type of business can occupy space in the building. This clause benefits service-oriented businesses desiring exclusive access to the building’s population (i.e. travel agent, deli, etc.).

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Normal Wear and Tear

The deterioration or loss in value caused by the tenant’s normal and reasonable use. In many leases the tenant is not responsible for “normal wear and tear”.

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Operating Cost Escalation

Clauses that adjust rents by reference to external standards such as published indexes, negotiated wage levels, or expenses related to the ownership and operation of buildings. The landlord’s definition of Operating Expenses is generally very broad, covering most costs of operation of the building. Most landlords pass through proper and customary charges, but in the hands of an overly aggressive landlord, these clauses can operate to impose obligations which the tenant would not willingly or knowingly accept.

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Operating Expenses

The actual costs associated with operating a property including maintenance, repairs, management, utilities, taxes and insurance. A landlord’s definition of operating expenses is likely to be quite broad, covering most aspects of operating the building.

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Operating Expense Escalation

Although there are many variations of operating expense escalation clauses, all are intended to adjust rents by reference to external standards such as published indexes, negotiated wage levels, or expenses related to the ownership and operation of buildings.

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Parking Ratio or Index

The intent of this ratio is to provide a uniform method of expressing the amount of parking that is available at a given building. Dividing the total rentable square footage of a building by the building’s total number of parking spaces provides the amount of rentable square feet per each individual parking space (expressed as 1/xxx or 1 per xxx). Dividing 1000 by the previous result provides the ratio of parking spaces available per each 1000 rentable square feet (expressed as x per 1000).

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Partial Taking

The taking of part (a portion) of an owner’s property under the laws of eminent domain.

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Pass Throughs

Refers to the tenant’s pro rata share of operating expenses (i.e. taxes, utilities, repairs) paid in addition to the base rent.

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Percentage Lease

Refers to a provision of the lease calling for the landlord to be paid a percentage of the tenant’s gross sales as a component of rent. There is usually a base rent amount to which “percentage” rent is then added. This type of clause is most often found in retail leases.

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Performance Bond

A surety bond posted by a contractor guaranteeing full performance of a contract with the proceeds to be used to complete the contract or compensate for the owner’s loss in the event of nonperformance.

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Preleased

Refers to space in a proposed building that has been leased before the start of construction or in advance of the issuance of a Certificate of Occupancy.

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Prime Tenant

The major tenant in a building or, the major or anchor tenant in a shopping center serving to attract other, smaller tenants into adjacent space because of the customer traffic generated.

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Pro rata

Proportionately; according to measure, interest, or liability. In the case of a tenant, the proportionate share of expenses for the maintainenance and operation of the property.

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Punch List

An itemized list, typically prepared by the architect or construction manager, documenting incomplete or unsatisfactory items after the contractor has notified the owner that the tenant space is substantially complete.

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Real Property

Land, and generally whatever is erected or affixed to the land, such as buildings, fences, and including light fixtures, plumbing and heating fixtures, or other items which would be personal property if not attached.

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Recapture

A clause giving the lessor a percentage of profits above a fixed amount of rent; or in a percentage lease, a clause granting the landlord a right to terminate the lease if the tenant fails to realize minimum sales.

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Renewal Option

A clause giving a tenant the right to extend the term of a lease, usually for a stated period of time and at a rent amount as provided for in the option language.

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Rent

Compensation or fee paid, usually periodically (i.e. monthly rent payments, for the occupancy and use of any rental property, land, buildings, equipment, etc.

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Rent Commencement Date

The date on which a tenant begins paying rent. The dynamics of a marketplace will dictate whether this date coincides with the lease commencement date or if it commences months later (i.e., in a weak market, the tenant may be granted several months free rent). It will never begin before the lease commencement date.

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Rentable Square Footage

Rentable Square Footage equals the Usable Square Footage plus the tenant’s pro rata share of the Building Common Areas, such as lobbies, public corridors and restrooms. The pro-rata share, often referred to as the Rentable/Usable (R/U) Factor, will typically be at least 1.10 and may be higher for more inefficient buildings (such as historic rehabilitations) or for partial floors.

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Rentable/Usable Ratio

That number obtained when the Total Rentable Area in a building is divided by the Usable Area in the building. The inverse of this ratio describes the proportion of space that an occupant can expect to actually utilize/physically occupy.

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Rental Concession

Concessions a landlord may offer a tenant in order to secure their tenancy. While rental abatement is one form of a concession, there are many others such as increased tenant improvement allowance, signage, lower than market rental rates and moving allowances are only a few of the many.

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Rent-Up Period

That period of time, following construction of a new building, when tenants are actively being sought and the project is approaching its stabilized occupancy.

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Representation Agreement

An agreement between the owner of a property and a real estate broker giving the broker the authorization to attempt to sell or lease the property at a certain price and terms in return for a commission, set fee or other form of compensation.

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Right Of First Refusal

See “First Refusal Right”.

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Sale-Leaseback

Essentially a financing transaction where the owner occupant of a property agrees to sell all or part of the property to an investor and then lease it back and continue to occupy space as a tenant. Although the lease technically follows the sale, both will have been agreed to as part of the same transaction.

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Security Deposit

A deposit of money by a tenant to a landlord to secure performance of a lease. This deposit can also take the form of a Letter of Credit or other financial instrument.

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Slab

The exposed wearing surface laid over the structural support beams of a building to form the floor(s) of the building or laid slab-on-grade in the case of a non-structural, ground level concrete slab.

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Space Plan

A graphic representation of a tenant’s space requirements, showing wall and door locations, room sizes, and sometimes includes furniture layouts. A preliminary space plan will be prepared for a prospective tenant at any number of different properties and this serves as a “test-fit” to help the tenant determine which property will best meet its requirements. When the tenant has selected a building of choice, a final space plan is prepared which speaks to all of the landlord and tenant objectives and then approved by both parties. It must be sufficiently detailed to allow an accurate estimate of the construction costs. This final space plan will often become an exhibit to any lease negotiated between the parties.

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Special Assessment

Any special charge levied against real property for public improvements (e.g., sidewalks, streets, water and sewer, etc.) that benefit the assessed property.

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Speculative Space

Any tenant space that has not been leased before the start of construction on a new building.

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Step-Up Lease (Graded Lease)

A lease specifying set increases in rent at set intervals during the term of the lease.

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Straight Lease (Flat Lease)

A lease specifying the same, a fixed amount, of rent that is to be paid periodically during the entire term of the lease. This is typically paid out in monthly installments.

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Strip Center

Any shopping area, generally with common parking, comprised of a row of stores but smaller than the neighborhood center anchored by a grocery store.

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Subordination Agreement

As used in a lease, the tenant generally accepts the leased premises subject to any recorded mortgage or deed of trust lien and all existing recorded restrictions, and the landlord is often given the power to subordinate the tenant’s interest to any first mortgage or deed of trust lien subsequently placed upon the leased premises.

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Taking

A common synonym for condemnation or any actual or material interference with private property rights but it is not essential that there be physical seizure or appropriation.

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Tenant (Lessee)

One who rents real estate from another and holds an estate by virtue of a lease.

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Tenant At Will

One who holds possession of premises by permission of the owner or landlord, the characteristics of which are an uncertain duration (i.e. without a fixed term) and the right of either party to terminate on proper notice.

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Tenant Improvements

Improvements made to the leased premises by or for a tenant. Generally, especially in new space, part of the negotiations will include in some detail the improvements to be made in the leased premises by the landlord.

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Tenant Improvement (“TI”) Allowance or Work Letter

Defines the fixed amount of money contributed by the landlord toward tenant improvements. The tenant pays any of the costs that exceed this amount. Also commonly referred to as “Tenant Finish Allowance.

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Time Is Of The Essence

Means that performance by one party within the period specified in the contract is essential to require performance by the other party.

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Trade Fixtures

Personal property that is attached to a structure (i.e. the walls of the leased premises) that are used in the business. Since this property is part of the business and not deemed to be part of the real estate, it is typically removable upon lease termination.

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Triple Net (NNN) Rent

A lease in which the tenant pays, in addition to rent, certain costs associated with a leased property, which may include property taxes, insurance premiums, repairs, utilities, and maintenances. There are also “Net Leases” and “NN” (double net) leases, depending upon the degree to which the tenant is responsible for operating costs.

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Turn Key Project or Premises

The construction of a project in which a third party, usually a developer or general contractor, is responsible for the total completion of a building (including construction and interior design) or, the construction of tenant improvements to the customized requirements and specifications of a future owner or tenant. This term refers to the fact that the space is completely constructed and ready for occupancy, and the tenant need only “turn the key” to occupy the space (i.e., no further work is necessary).

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Use

The specific purpose for which a parcel of land or a building is intended to be used as specified in the lease’s use clause.

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Usable Square Footage

Usable Square Footage is the area contained within the demising walls of the tenant space. Total Usable Square Footage equals the Net Square Footage x the Circulation Factor. Also see Circulation Factor and Net Square Footage.

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Vacancy Factor

The amount of gross revenue that pro forma income statements anticipate will be lost because of vacancies, often expressed as a percentage of the total rentable square footage available in a building or project.

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Vacancy Rate

The total amount of available space compared to the total inventory of space and expressed as a percentage. This is calculated by multiplying the vacant space times 100 and then dividing it by the total inventory.

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Workletter or Work Letter

A list of the building standard items that the landlord will contribute as part of the tenant improvements. Examples of the building standard items typically identified include style and type of doors, lineal feet of partitions, type and quantity of lights, quality of floor coverings, number of telephone and electrical outlets, etc. The Workletter often carries a dollar value but is contrasted with a fixed dollar tenant improvement allowance that can be used at the tenant’s discretion.

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Working Drawings

The set of plans for a building or project that comprise the contract documents that indicate the precise manner in which a project is to be built. This set of plans includes a set of specifications for the building or project.