Learning the basic terms of commercial real estate leasing will help you develop your knowledge in the field of commercial real estate investing. The following terms must be understood before signing a commercial lease.
Maintenance of Common Areas (CAM)
This is a very important commercial real estate lease term to be aware of. Most of the time, when you have a multi-tenant building, you factor in CAM charges. Tenants typically pay $12 per square foot in annual rent, plus a certain percentage of CAM. So, the CAM of a building is transmitted to the tenants.
Many of the issues considered in the commercial realm are not even available in residential leasing. For example, if your commercial real estate investment target is small office warehouses, shopping malls, or retail centers, CAM is one of the items you need to investigate.
Before you start renting or buying these types of facilities, you should know what the standard CAM is for your type of property. Sometimes on some smaller properties there is no CAM as it is paid for by the owner.
All of that is part of your costs as a landlord in this type of property. It is not a pass-through, because you cannot legitimately pass CAM expenses on to your tenants, if no one in the area who owns a similar property is making their tenants pay for them.
When you pay a fixed rent plus a percentage of sales above the fixed rent, you have a percentage lease agreement. You probably won’t run into rent-percentage situations very often as a landlord. Most of the time, percentage rents are used in retail businesses located in large shopping malls and other similar areas.
You could charge a percentage of rent, if you had a $2,000,000 mall with a JC Penny’s, Sears, or Dillard’s, and the attraction of those mega stores brought traffic to your store. For that, he wants to become your partner, in effect charging you a percentage. This is not common in small and medium businesses.
This type of arrangement is where the tenant rents the land and builds on the property. Any way he improves the grounds, including the buildings, generally belongs to the landlord when the lease ends. This is actually a form of financing.
You’ll find many land renters in high-cost land areas, like New York City. People don’t want to commit their personal capital to owning land when they could invest that money in business operations. The standard land lease is a very long-term lease:
A sublease is when you rent out the entire property and then sublet a portion of it to someone else. For example, you could rent 10,000 square feet from a landlord. If you don’t need all that space, you have the right to put your own tenant on the property through a sublease.
An assignment is very similar to a sublease, in that you initiate the rental agreement. However, you become a landlord by assigning the entire property to one or more tenants that you manage.
There was a time when real estate investors leased properties and negotiated a very low rental rate. They would then allocate that same property to tenants at a much higher rate. His real estate business consisted entirely of collecting money from his allowance.
Assignment not allowed
In some commercial leases, there is a sublease clause that states you are allowed to sublease the entire property, subject to the landlord’s approval. This clause, in effect, means that you cannot assign the lease. Particularly when moving into larger properties, you’ll want to be sure to personally check the credit of everyone who expresses an interest in leasing your property.
Tip: Mappings can get you in trouble. If you don’t know if the assignee is creditworthy, don’t assign under any conditions.
Understanding commercial real estate lease terms will benefit you in the long run, and remember to always have your commercial real estate leases reviewed by a real estate attorney.