Arizona Commercial Real Estate Glossary

After hours services: Many larger buildings will charge a tenant for electricity usage if they occupy their space beyond normal business hours. Normal hours are usually 7 to 6 during the week, plus 8 to 12 on Saturdays. If you plan on working in your space 24 X 7, then this could be expensive. Anywhere from $3 to $40 per hour for each hour beyond the normal. If you are a typical tenant, this could be good, because it allocates the expense to the real user of the electricity and you don't end up paying for the workaholics electric overload.

ALTA Survey: This is a document prepared under the direct supervision of a licensed Land Surveyor. This is dictated not only by the Arizona State Code as directed by the Board of Technical Registration, but is also a requirement of the current ALTA/ACSM Standards for Land Title Surveys. ALTA surveys are required anytime that "extended coverage" is requested from the title company. An ALTA survey is a boundary survey, but will also locate all observable improvements on the property and locate, where possible, all encumbrances of record (easements, setbacks, flood zones). ALTA surveys are performed to a higher standard than a typical boundary survey. Property corners may or may not be set, as requested in the optional Table A. In Arizona, if property corners are set, a Record of Survey must also be prepared and recorded with the County Clerk's office by a certified Civil Engineer that details where all the easements, right-of-ways, and property lines are. It is usually required by a Title Company to confirm the accuracy of the title policy they are issuing in a purchase. Within an ALTA Survey, there are various items that may be required. Ask about the Table A requirements. ALTA stands for American Land Title Association, a coordinating body.

Amortizing payment: Refers to spreading the payment out over the life of the lease or other time frame. An example might be a Landlord who spreads out the cost of tenant improvements over three years and adds the amount to your monthly rent. The Landlord pays for the work up-front, but is being reimbursed over lease term. Often, Landlords will add an "interest cost" to the amount amortized..

American with Disabilities Act (ADA): Federal regulations intended to equalize access for people with disabilities in buildings. New buildings must comply in order to obtain their building permits. Lease spaces being substantially remodeled need to comply in order to obtain permits. Older buildings not being remodeled have not normally been required to change. Changes can include wider restroom stalls, ramps, handrails.

Assignments: The transfer of the obligations and rights of the lease or purchase contract to another party. This is often used in an offer letter, so that a Buyer would have the time to establish its final form of ownership, such as an LLC. An assignment does not necessarily relieve the assigning party of its obligation or liabilities. Confer with legal counsel.

Attornment Provisions: Lease language provision in which the tenant agrees, in advance, to accept or pay rent to a new landlord or new owner. This is important if the current landlord defaults on their mortgage.

Base Rent: Amount of money paid to the Landlord, usually quoted on an annual basis per foot or monthly amount. It typically does not include rental tax, but may include all other charges for expenses related to the building operation (electricity, water, insurance, janitorial, repair). When the expenses are included in the base rent, this is commonly called a full service lease. See Overages and Escalation terms.

Buyers Representative: A Licensed Real Estate Agent working solely for the Buyer, not the Seller. Agency rules in Arizona allow the Buyers Agent to receive a commission from the Seller even though he does not represent the Seller. Most Sellers have their own Sellers agents working to get them the best price and terms. The parties to the transaction must be informed ahead of the negotiations of this status. The Buyers Representative (agent) is normally paid by splitting the commission already agreed to be paid by Seller to the Sellers agent.

CAP Rate: Abbreviation for Capitalization rate. This is the financial rate of return an investor would receive if the property continues to perform in perpetuity. For example, a 10% CAP rate means an investor would receive $10 every year, in perpetuity, if they paid $100 for the building. It is supposed to measure the degree of risk of the investment which would include quality of income stream, probability of continuing, and the overall market.

Class A,B, or C: This refers to the quality of the building. Usually, it is based on price or rental rates with the presumption that price reflects the image and appeal a property has. This classifying term is challenging, as each of us perceives quality differently. It should not be relied upon as a judgement of the property.

Commencement Date: A date which Landlord and Tenant agree the lease actually started. This may be different than the occupancy or lease date. Often, a lease document has a commencement date exhibit that both parties sign. The commencement date often triggers the start of rent and acceptance of the property condition.

Dual Agent: Refers to a Licensed Real Estate Agent who claims to be representing the best interests of both the Tenant and Landlord, or both the Buyer and Seller. This is sometimes referred to as Limited Dual Agency.

Expansion or Escape Clause: Wording in a lease document that allows a Tenant to end their lease obligation earlier than the original term. Used for rapidly expanding companies, or startups that may be at risk for success. Usually, there are associated written notices required and payments of additional fees to the Landlord.

Estoppel Certificate: A document signed by the Tenant that confirms they are the Tenant, that their lease is legitimate, and the amount of any security deposit the Landlord is holding. It is usually required to be signed by the Tenant when an owner sells the property, or is refinancing their debt on the property.

Escalations: Refers to how much a Tenants rent or obligation for expenses will increase. Usually quoted as a rate per foot per year, or as an annual percentage. Some are tied to the Consumer Price Index (CPI). Others are just negotiated up front. Not all leases have these.

Executive Suite: An office within an office. Usually less than 200 square feet. In addition to the space, the tenant may receive secretarial-receptionists services, copies, fax, phone. The price is usually 2 to 4 times typical space. Great option for one or two man shows or startups. Lease terms may be as short as month to month.

Expense Stop: A dollar amount (usually stated as an amount per foot per year) that the Landlord agrees to pay for building expenses. If expenses of the building exceed this amount, then the Tenant pays the amount above the expense stop based on their square footage of the building.

Full Service Lease: A term used to describe a lease in which the stated rent amount being paid to the Landlord includes all the expenses of the building (electricity, water, gas, janitorial, RE taxes, insurance, etc..). Usually the tenant may have to pay for the overages (see term) that occur as years unfold.

Guarantee of Lease: Signer (guarantor) assures Landlord that Tenant signing the lease will pay the rent. If not, the signer (guarantor) will be obligated to fulfill the lease. Used when the Tenant may be financially weak, or substantial tenant improvement work is requested by the Tenant. Guarantor can be a corporation or a person.

HVAC: Heating, Ventilating and Air Conditioning.

Holding Over: A situation whereby a tenant is still occupying the space after their lease has expired. It can occur with or without the landlords consent. Often, hold over periods are pre-stated in the lease, and the tenant will incur a rent increase (i.e. 125% of current rate) until they vacate or renegotiate the lease. It causes the Tenant to agree on renewing or vacate as the cost of making no decision could be excessive.

Lessee: The Tenant.

Lessor: The Landlord/Owner.

Letter of Intent: A document that outlines the general terms of a proposed lease or purchase. Commonly called the LOI. It becomes the basis from which a formal lease or purchase document is written. These may or may not be binding between the parties, depending on language used. A more thorough Letter of Intent provides the parties with a more clear understanding of what they will agree to in the formal lease or purchase contract.

Load Factor: That portion of the building which is shared by all tenants (ie. restrooms, enclosed stairwells) or is within the physical structure (i.e. columns) but can't be accessed by Tenants. Typical load factors are 6% to 13%. If a space is 1,000 square feet with a 13% load factor, it means the building is only 87% efficient. In real terms, that means a 1,000 Rentable square feet with zero load factor is 13% cheaper than the 13% load factored 1,000 rentable square foot space.

Modified Gross Lease: Contrasted with a full service lease, a modified gross lease has the tenant paying directly some of the expenses. Typically, it is where the electric and water are separately metered and the tenant pays directly to utility. This may be favorable in controlling expenses for frugal lessees. In comparing lease rates, make sure you consider who is responsible to pay for what.

Monument Sign: Signage that is normally not attached to the building. Often located at best street exposure for Tenant Identification. Some Landlords charge for placement on a monument sign.

Operating Costs: Expenses related to the building and property. Typically includes electricity, water, gas, janitorial, parking lot sweeping, landscape maintenance, building maintenance (except major renovations), real estate taxes, insurance, and management fees. These items should be detailed in the lease document in order to avoid confusion.

Options to renew: The right of a tenant to extend their occupancy beyond the original term. The rental rate may or may not be pre-set. Can be useful for a Tenant so they are not forced to re-locate.

Overages: This term refers to the increase in the cost to operate the property from one year over the last. If it cost $6 per foot per year (for electric, water, janitor, taxes, etc) last year, and $6.40 per foot this year, then the overages are $.40 per foot per year. The tenant would be responsible to pay this overage to the Landlord, calculated on the size of the space they have.

Owners Agent: A licensed Real Estate agent working to get the best deal for the Owner or Landlord. Frequently referred to as the Listing Agent.

Parking Ratio: The number of parking spaces divided by the total size of the building. A ratio of 1:250 means there is one parking space for every 250 square feet in the building. The lower the ratio, the more parking spaces there are, the happier the tenants are.

Pass throughs: Refers to expenses that are incurred on the property that are passed from the Landlord to the tenant. Both Tenant and Landlord should have a lease that is clear on who pays what, when.

Percentage Rent: Not often used in office properties, but more typically in retail properties. This is rent above the base rent and building operating expenses. Often it is based on business sales volume conducted in the rented space.

Permitted Uses: A paragraph in a lease which describes how the Tenant may use the space i.e.administrative office. Becomes important if zoning is in question or if Tenant plans unique purpose, or if a sublease is pursued.

Phase One Study: A review of the current and historical environmental condition of a property. Federal Lending guidelines impose Lenders to have investigated the environmental soundness of a property. Furthermore, environmental risk and liability is connected to ownership and may expose tenants to financial resolution costs. These studies are done on behalf of specific parties and are not normally transferable. Tenants in industrial use properties or considering very long term leasing may be advised to obtain a phase one study prior to committing to a lease. Almost always done for a property purchase situation.

Preliminary Title Report: Generated by a Title Company as a review of liens, encumbrances, ownership, and taxes on a property. Normally done in preparation for a sale transaction. Large space Tenants may request a title report to confirm various property information, rather than relying on Owner.

Pro-rata Share: An amount calculated by dividing the square foot of the Tenants space by the entire building size. A 1,000 sq ft Tenant would have a 10% pro-rata share of a 10,000 sq ft building. Attention should be paid to variances in occupancy levels, particularly as it relates to expense overages.

Rental tax: An amount charged by the County and City that is against the rental income the Landlord receives from the Tenant. Depending on the City, it varies from 1.4% of the rent, to close to 3%. It's usually paid on-top of the base rent amount.

Real Estate Tax: This is the property tax paid to the State, who collects and distributes portions to the County and City the building is in. Similar to tax as paid for owning residential property. This is different than the Rental tax (see term).

Reserved Parking: Spaces identified for a specific purpose, which typically excludes visitors. Important to consider how much of the entire parking is established as reserved versus open (i.e. for visitors). Reserved usually means the Tenant is paying for it, whether per space or as part of the lease. The reserved spaces are normally covered, but may be uncovered in hi-rise or densely parked projects.

Rentable Square Feet: Refers to the square footage that is used in calculating rent. The rentable square footage normally exceeds the usable square footage because the Landlords allocate the areas that all the tenants have in common (i.e. Elevators, central lobbies, columns, restrooms, storage closets). BOMA (Building Owners and Managers Association) is a national group that provides a written formula for measuring standards. The difference between the rentable and the useable is called the load factor. Useable plus load factor equals rentable.

Subletting: The process of leasing space from a Tenant who is already obligated to a Landlord. A tool used to relieve a current tenant from the space. Does not normally release the primary tenant or their guarantors from the original lease. Most leases require Landlords consent. SubTenants need to confirm all aspects of the lease in writing with both the original Tenant and the Landlord. to make them attractive, most subleases are done at a discount from the face rate on the lease and the original primary Tenant absorbs the difference.

Security Deposit: Money collected at initiation of lease to provide additional confidence the Tenant will perform. It is not normally the last months rent, but is typically equal to that amount. Also, most leases require the deposit be replaced if the Landlord has to use it to cure a monetary default. It should be clear as to the space condition needed and timing at end of lease for return of deposit.

Tenant Improvements (TI's): Refers to physical work done to a space to accomodate a specific tenants needs. Can include many things, such as carpet, paint, new wall partitions, new sinks. Depending on negotiations, most Landlords allocate money to pay for certain standard items. Unusual items may have to be paid by the Tenant, or amortized over the lease term as additional rent. A full remodel could run between $30 and $50 per foot, depending on condition of space prior to changes.

Tenant Representative: A Licensed Real Estate Agent working for the best interests of the Tenant, not the Landlord. They usually don't have a listing agreement or agency relationship with the Owner or his Agent. This allows the Tenant Rep. to commit fully to achieving the objectives of the Tenant.

Triple Net Lease (NNN): A lease arrangement whereby the Tenant is obligated to pay for all the operating expenses associated with their space. They would have to contract individually for janitorial, electricity, insurance, and repairs. Not often seen in office buildings because many services overlap (i.e. there is a central air system, central restrooms). NNN leases can become expensive if surprise maintenance issues arise, or the property does not have an established expense pattern (it's new).

Usable Square Feet: The square footage that the individual tenant can actually use to sit or work in. (see rentable square footage and load factor). Most leases use the phrase...Rentable Square Footage, as it may cover up variations in individual suites and makes the rent seem cheaper per foot.

1031 exchange: Related to payment of taxes on the sale of commercial property. Allows the Seller to defer payment of certain taxes if they buy another property(s) within a specified time frame. A reverse exchange is less common, but is possible. Because of the implications, good tax and legal counsel is always recommended.

Arizona Office Space