Understanding Estate Types in Commercial Property

The concept of ownership is fairly simple. However, when dabbling in commercial real estate, the question of “Who owns what?” becomes significantly more complex.

For instance, multiple individuals or legal entities can have interest in the same parcel of land. Adding to that, their rights will vary depending on the type of estate (interest) each party holds.

Finding it difficult to follow already? Let’s start at the beginning.

An estate in land describes the interest or rights of a person in a defined parcel of land. There are three main types of estates in commercial property:

  • Freehold estates
  • Leasehold estates
  • Concurrent estates

In the article below, we’ll describe each estate type, how they differ, and reasons to choose one type of commercial property estate type over another.

What is a Freehold Estate?

A freehold estate is the absolute ownership of an area of land. The owner of the freehold estate owns the land in its entirety for all time. This is the highest form of ownership an individual or a company can achieve.

The freehold estate owner is free to do as they please with their property including develop buildings and industrial facilities, erect and demolish structures, improve the land, and perform other activities.

The freehold owner can sell, lease, gift, or donate the land as they see fit, bound only by the established laws, building codes, and regulations in their area.

There are, of course, several types of freehold estates, each with various rights and responsibilities of the owner.

Fee Simple

When you buy a parcel of land for a new development project, what you’re really doing is acquiring the “fee simple absolute” interest. This type of interest in an estate provides you unrestricted rights to the property, within the extent of the law. It’s also inheritable, meaning if at the end of your life you have not distributed the land to anyone specific, it will automatically be inherited by your heirs.

The fee simple ownership is inheritable, transferable, sellable, and subject todonation, gifts, and leases. The fee simple owner is free to construct or develop the land without any permission, except for the government.

Life Estate

A life estate is a type of ownership which only extends to the end of your life. In other words, after you pass away, your interest in the property reverts back to the fee simple owner. Life estates are commonly used for estate planning and residential property with practically no application in commercial real estate.

Other types of freehold estates exist, however, they have phased out of modern practices.

Why Should You Buy a Freehold Ownership?

Freehold ownership guarantees you the freedom to develop your commercial project in any way you want. All buildings and structures you erect on your property also belong to you and you’re free to use and modify them without limitations or conditions.

Here are some other benefits to buying a freehold estate:

  • You won’t have to deal with anybody (except the authorities and building inspectors)
  • You’ll amass equity that can be used as collateral to secure bank loans or other financial services
  • You can build appreciation and possibly profit from a future sale

Keep in mind, though, that all of this freedom comes with a steep price tag. Buying a freehold estate is the single most expensive way to purchase a property. As the freehold owner, you’re also responsible for taxes, maintenance, repairs, insurance, and all other costs associated with the land.

Notice, ownership and possession are two different things. You don’t always need to purchase the land in order to be able to use it for your commercial project.

In fact, some states like Hawaii will not allow you to obtain a freehold interest in the land, no matter how much money you’ve got.

What is a Leasehold Estate?

A leasehold estate is a type of land tenure where one party (the lessee or tenant) pays the owner (the lessor or landlord) for the right to use the land for a specified amount of time.

A leasehold is obtained by a type of ground lease, which can be configured differently, depending on the needs and wishes of both parties. In doing so, the freehold owner transfers some of their rights to the leasehold owner, such as the right to occupy, the right to exclude others, the right to operate a business, and so on.

The lease term is typically for a long duration – anywhere from 30 years all the way up to 999 years. However, these leases are usually set for above 50 years. Because of this, a leasehold can last practically forever, giving the lessee possession of the land to develop commercial buildings and operate businesses on the premises.

With a leasehold estate, the lessee does not own the land, however, and their rights are limited. Every project is pre-approved by the landowner. Modifications to the structures, improvements of the land, and significant changes to the type of business operations at the facilities must also be approved by the landowner.

This limits the flexibility of the leasehold owner to adapt to changing conditions. Depending on the specific lease structure and cooperation of the freehold owner, this may or may not be a significant concern. However, if there is any disagreement between both parties, they are bound to the wording of the lease contract.

Therefore, it’s absolutely necessary to have the contract analyzed by a legal professional to ascertain whether enough provisions are in place to protect the leaseholder’s interest in the property.

Despite not owning the land, the leasehold owner can own the buildings, structures, and improvements they develop on the property. After the lease expires, this immovable property usually reverts back to the freehold owner, together with the land. Depending on the terms, the leasehold owner can be responsible for demolishing the buildings and returning the land to its original state.

The leasehold owner usually has a right to sell and transfer the leasehold to a different person or legal entity during their term.

Throughout the lease, rent is paid periodically – typically monthly or annually, with the rental period specifically defined in the contract. The rent structure can vary. It usually starts as a flat fee which can increase over time to adjust for inflation or can follow a more complicated percentage-based system.

Another problem leaseholders face is obtaining bank loans and other financial services. Since they do not own the land, banks can be reluctant to provide funds, especially if the term of the leasehold is below 50 years.

Why Should You Buy a Leasehold Ownership?

At first glance, it seems that obtaining a leasehold interest is sticking your hand into a hornet’s nest since many of your rights are dependent on provisions in the lease contract.

This is correct, however, there is one significant reason why you should consider a leasehold interest – cost.

Buying the freehold interest in a piece of land is very expensive and requires a huge capital investment before first sod. This often necessitates a hefty mortgage loan, which banks may or may not be willing to extend to you.

In comparison, leasing the land is relatively cheap and most importantly, you pay as you go. Any upfront payment required is usually negligible and the investor can funnel their money directly into the development phase.

Depending on your project, a leasehold estate can be the perfect method of acquiring the land to build on.

Freehold vs Leasehold

Now that we have explained exactly what a freehold estate and leasehold estate is, let’s do a more direct comparison.

Freehold Estate Leasehold Estate
Ownership Rights Owns the land outright and may do anything without restriction with it Leases, or rents the land to use, develop buildings, and operate a business
Lease Term Retains rights to the land forever or until it is transferred to another party Is bound by the lease term length (usually 30-999 years) specified in the lease agreement
Authority Maintains absolute authority over the land, needing no approval or permission to construct, develop, modify, renovate, or demolish existing structures (save for building inspectors and related authorities) Must abide by the conditions outlined in the lease agreement and must receive permission from the freehold owner to make any changes
Right to Transfer Maintains complete rights to transfer, sell, give away, or exchange the land as they see fit Will need explicit permission before transferring interest in the property or land
Cost Requires a large capital investment and can be extremely costly Typically requires no upfront costs and is paid in monthly installments, making it affordable
Financing Readily financed by banks since the freehold estate can act as collateral and guarantee the investment Financing based on a number of factors and is dependent on individual circumstances

What is a Concurrent Estate?

The final form of ownership is the concurrent estate.

A concurrent estate is created when multiple individuals or legal entities own the same property at the same time. Co-owners are also referred to as joint tenants to the property.

There are several types of concurrent estates, the most common being:

Joint Tenancy

The joint tenancy ensures complete equality of rights between all owners of the property. Each tenant has a complete interest and possession of the property as a whole. The ownership is held under the same title and extends in time equally for all tenants. This means that ownership and tenure of the property ends for all tenants at the same time with neither party being able to sell or transfer their share.

Joint tenants have a right to survive each other, with the last survivor receiving complete ownership of the property.

Tenancy By the Entirety

This tenancy is formed between married spouses for their jointly acquired property. It’s practically identical in nature to a joint tenancy.

Tenancy in Common

This form of ownership allows different parties to own different shares of the same property under different titles.

Each co-tenant can freely operate with their share of the property and sell, trade, or mortgage it at will, without input of the other tenants.

Wrapping Up

Whether you’re a landowner or an investor looking to kickstart your next commercial project, it’s imperative to know the difference between all these forms of ownership and how your rights change from freehold, to leasehold, to concurrent estate owner.

Do you have a piece of land or property you’d like to offer as a freehold, leasehold, or concurrent estate? Then check out CREOP, the advanced online software designed to make marketing your land and property, negotiating deals, and finalizing sales a cinch. Get in touch with us today and see how we can help you advertise your parcel and get it sold right away.

Commercial Real Estate Flyers: Design Best Practices

So, you’ve developed a commercial property and you’re ready to capitalize on all your hard work?

Before investors or tenants hand over their hard earned cash, you’ve still got to do a little marketing if you want to convince them you’ve got the right property for their business.

In order to do that, you’ll need to gather your marketing assets, which include property listings, an immersive website, and even professional looking real estate flyers.

Though you may think in this digital world that real estate flyers are unnecessary, think again. Though you may not want to stand on the corner and hand out pieces of paper to potential investors or tenants, one thing you will want to do is create digital real estate flyers that are easily shared across the web and given out to people in person.

That’s why today we’re going to convince you that real estate flyers are a necessary marketing component for any property owner looking to sell or lease. Plus, we’re going to give you some surefire ways to ensure your commercial real estate flyers attract the right people and convert.

Why You Should Use Commercial Real Estate Flyers in 2020

Advanced web technology has irreversibly changed how we market everything, including commercial real estate. Yet, there is still a spot for more traditional marketing materials, such as flyers, brochures, and offer memorandums. In fact, this type of marketing still exists, just with varied forms so business owners can reach wider audiences than ever before.

In the commercial real estate world, properties exchange hands for millions and sometimes billions of dollars, and yet, interactions are still mostly conducted face to face. We’d even go so far as to say there’s a long time before we learn to entrust life-changing transactions consisting of lots of money to the computer.

Handing somebody a physical flyer promoting your property gives you another touch point to use and influence the buyer’s decision. In fact, a flyer with the property’s core information and benefits can complement a verbal presentation and give your potential investor something to remind them later about the property long after they’ve walked away.

Think about it.

Our fingers remember the distinct feeling of cheap glossy flyers we’re handed from fast food restaurants. Handing somebody a piece of premium paper that feels solid and expensive to the touch is going to leave an impression – just like a firm hand shake does.

This type of marketing, though often pushed aside and replaced with digital means of advertising, gives you an edge over the competition.

Now that you know you’re going to need a commercial real estate flyer for your piece of real estate, let’s take a look at how you can create highly attractive and converting flyers for your properties.

1. Create Integrated Experiences

Any decent marketer will tell you that marketing today is all about offering an integrated experience, no matter what means you take to market your brand. Your marketing efforts must interact seamlessly with what you’re offering and take potential investors on a journey that leads to a transaction. If not, you’ll never generate a sale or have a signed lease agreement in hand.

Because of this, it’s best to think of your real estate marketing materials as extensions of you, and insist that they come in all forms – print, online, and in-person interactions.

This process starts with handing someone a beautifully designed and informative flyer. From there, the conversation moves online, where a detailed website neatly presents all the compelling reasons to pick up the phone and request a meeting.

This then takes us to our next point.

2. Consistently Represent Your Brand

Every flyer, brochure, business card, email, or social media post is a representation of your business.

There are a million and one downloadable templates for any type of commercial real estate property you have. There are also many design apps that allow you to customize and modify premade layouts for just about everything you need.

It’s important to consider how the design of your real estate flyers and other marketing materials correlate with your brand and the message you’re trying to get across. This is true even for property owners that have one piece of real estate they want to sell or lease.

If you’re going to leave a lasting impression on potential investors, you need your marketing materials to be consistent with one another and stay true to the values your brand is known for.

Of course, a commercial real estate flyer is all about the property that’s available. However, even if you can’t land the transaction right now, nailing down the visual presentation will entice potential investors to come back around and take another look. And eventually, you’ll land a sale.

3. Follow the Design Rules for Commercial Real Estate Flyers

In order to push ahead of the competition, you need to follow a handful of design principles when creating your commercial real estate flyers. And the best part is, whether you plan to make these marketing materials available for in-person interactions, or as an immersive experience on your website, the same best practices will come into play.

Layout

If you’re picking a ready-made template, choose a layout that has all the core elements of a commercial real estate flyer:

  • Building name and address
  • Square footage and price
  • Photograph
  • Map
  • Text area / Featured benefits / Highlights section
  • Contact information, company name, and logo

From there on, different types of real estate will be marketed differently.

For example, an office space flyer will inform tenants about nearby transportation options, as well as nearby amenities such as parking spaces, cafes, restaurants, bars, gyms, and anything else people like to do after a hard day’s work.

office space layout

On the other hand, an industrial complex flyer will emphasise property features such as 3-phase power, climate controlled warehouses, railway infrastructure, and proximity to the highway network.

industrial space layout

Lastly, a property owner with a piece of retail space will want to promote to prospective business owners the amount of foot traffic going through the premises, the population of the nearby areas, and the amount of money typical customers spend when they frequent the area.

retail space layout

In the end, just make sure the layout of your commercial real estate flyer speaks to the property you’re advertising.

Images

Nothing turns off potential buyers or tenants like a bad quality photo that takes up half of your real estate flyer.

One of the best marketing investments you can make is having your property professionally photographed.

images example

Premium quality photographs can mean the difference between someone finalizing a purchase and going elsewhere with their business. You want to make sure to highlight your property’s best angles and entice people to come check it out in person.

Typography and Colors

Ideally, you want to match the fonts and colors of your flyers, brochures, and website.

In doing so, vsitors will have an easier time recognizing your consistent branding and style and recalling previous information they read or emotions they felt about your brand.

If you can’t match the style exactly, focus on making the flyer easy to scan and effortless to read. Use colors to outline or contrast other design elements, keeping the reader’s eye pinned to the flyer.

Content

All the fancy presentation of a real estate flyer is pointless if you fail to create solid content for it. Sure, a commercial real estate flyer is mostly a visual piece of marketing material. However, this means the written text you do include on the flyer is even that more important.

The key to winning a potential buyer or tenant over is being able to tell them in 5 lines or less why they should buy or lease from you.

Remember, it’s all about selling or leasing out the property you have available. It’s not there to advertise your business, so don’t emphasize your brand too much. Instead, use demographic data, market statistics, and projections to present a compelling business case about the property and make people feel that if they don’t jump in and buy or lease now, they’ll regret this missed opportunity later.

Of course, don’t forget to put your name, contact information, logo, and website on the flyer, so those interested can look you up later.

If you want to take it a step further, you can always add a QR code that leads people from your flyer directly to your website, where all the compelling benefits you listed will be matched with even more detailed information about the property and your business.

Again, if you match the design of your flyer and website, you can offer a seamless transition between both mediums, thus giving the reader reassurance they’re looking at the same property and company.

4. Strive to Hire a Qualified Marketer

Of course, any advice provided in this article cannot compensate for the years of experience and practical knowledge of a professional marketer.

The person designing your marketing material should not only have vast understanding of the property and your industry, but also the ability to convey the values of your project to the target buyers or tenants you want to attract.

Not able to hire a professional marketer quite yet? Don’t worry. At CREOP, we understand the importance of marketing properties to interested buyers and tenants. At the same time, we know that property owners don’t necessarily have the time, money, or skills needed to create “professional” real estate flyers.

That’s why we strive to provide a user-friendly online platform that helps any property owner, regardless of marketing or design skills, to create stand out real estate flyers, offer memorandums, and other advertisement materials.

5. Study Your Competition

If the right person is already responsible for marketing your properties, they’ll understand the need to research the competition and study their designs in detail.

After all, your potential investors will likely meet some of these other developers (who are your competition) and will be handed their real estate flyers in addition to yours.

Of course, the goal is to copy (or worse, plagiarize) your competition’s marketing materials. Rather, the goal is to study what they’re doing that’s working, tweak what isn’t working, and make your materials even better than theirs.

Doing this will leave lasting impressions on all interested buyers or tenants, no matter how many other property owners they consult.

Wrapping Up

Your commercial real estate flyer does not live in isolation; and it never should.

Just like every other marketing tool, a real estate flyer will represent your business, attract the right target audience, and drive sales. If you take the time to create informative, original, and highly attractive real estate flyers representing the properties you have available, you’re sure to get more business in no time.

This is especially true if you use a cloud-based software like CREOP. Providing property owners the tools to design and manage a property marketing campaign in no time, CREOP is as effective as hiring a professional marketing – without the hefty price.

So, get in touch with us today and see how we can help you create real estate flyers, offer memorandums, proposals, and full-fledged marketing packages to advertise your available property for the highest sales prices or rent rates possible.

Understanding Percentage Rent in Commercial Leases

When it comes to negotiating a commercial retail lease, there are plenty of lease provisions you should be aware of before signing on the dotted line. After all, it’s your responsibility as a tenant to understand what your landlord expects from you. And sometimes, that’s more money than you might expect to pay each month.

Though this doesn’t always happen, there are times when a percentage rent clause becomes part of a commercial lease agreement. As a way to ensure they receive great value from the business you run, landlords often charge a percentage rent in addition to the base rent you agreed to pay to lease the property.

If you’ve never heard of percentage rent in commercial lease, keep reading. Today we’re going to explain to you what percentage rent is, how breakpoints work, and ways to negotiate with your landlord so you get the best deal possible.

Let’s get started!

What is Percentage Rent?

Percentage rent is extra rent you pay your landlord that is ties to the sales you generate from your business. By charging a percentage rent, landlords are able to share in your growing success.

Though this seems unfair to tenants trying to run a business, it’s important to note that owning a commercial building comes with plenty of expenses that go beyond the square footage that’s being leased to you. For example, things like maintenance, marketing, and continuous improvement of not only the building but common areas surrounding it are things your landlord typically handles. For a landlord leasing a shopping mall, this ends up being quite costly.

By charging tenants a percentage rent, landlords are able to tap into the success business owners are reaping as a result of their hard work. And honestly, a tenant is always going to do more business in a busy commercial building as opposed to a deserted unit in a remote part of town.

So, in an effort to generate more revenue for themselves, and provide you the best commercial space possible, it’s possible your landlord might include a percentage rent clause in your lease agreement.

Commercial Lease Rent: A Breakdown

Rent as part of a commercial lease can be broken down into two parts: base rent and percentage rent.

Base Rent

The base rent  of a commercial lease is a flat amount the tenant owes each month, regardless of whether their business is generating a profit or operating on a loss.

The base rent is usually calculated based on the floor area of the property. However, the base rent can also be a flat rate based on your business’ gross sales.

Base rent is helpful for business’ like fast food chains or coffee shops, both of which have fairly consistent and predictable revenue. In fact, their base rent would be loosely associated with their projected annual revenue.

On the other hand, businesses who have peak seasons (e.g. Thanksgiving or Christmas) may not be able to afford a consistently high base rent every month of the year. As a solution, a low base rent is charged, allowing the business to sustain a healthy cash flow during its slow months. However, you can bet business’ with a low base rent and seasonal sales will also have a percentage rent clause in their commercial lease agreement.

Percentage Rent

If a lease has a percentage rent clause, the percentage part of the rent is charged only after a business exceeds a specific amount of revenue that exceeds its gross sales. This is called the breakpoint.

The average percentage rent in the retail industry is 7%. That said, this value is not set

in stone and can be negotiated. In fact, different industries also find applications for percentage rent, where the value can differ significantly.

Breakpoints

When your business’ gross sales surpass a specified amount agreed to by both you and your landlord, your rent hits what’s called a breakpoint. From there, any sales you generate are subject to the percentage rent amount in your lease agreement.

Breakpoints ensure that businesses are not overburdened with high rent rates at low periods

of the year. At the same time, they allow landlords to profit when a business is doing well and turning a high profit.

A Practical Example of Percentage Rent

If this all seems like a lot to you, don’t worry, you’re not the only one. Let’s take a look at a real-life example to make things clearer:

You operate a consumer electronics store and you’re offered a retail space in a new strip mall. The contract includes a base rent of $5,000 per month and a percentage component of 7% of the gross sales, which is applied for every dollar above $150,000 – measured in gross income.

  • In July, when shopping is typically down, the store generates $80,000 in revenue. This means only the base revenue of $5,000 is charged.
  • In November, there’s Black Friday, and as a whole, shopping activity in your store peaks. The electronics store generates $250,000 in gross sales. The breakpoint is $150,000, so on top of the base rent (which is 5,000), the store also owes 7% of the $100,000 excess, equal to $7,000. Therefore, the total rent you owe for November is $12,000.

As you can see, when you have a percentage rent, the monthly rent you owe largely depends on your sales and can vary greatly from month to month. That’s why it’s important to understand your commercial lease in order to negotiate the best deal for your business.

What Is Included and Excluded When Calculating Percentage Rent?

Percentage rent is calculated from the gross sales of your business each rental period. This includes both cash and credit card sales at the time of merchandise delivery or performance of services. With credit sales, the risk of collecting (or specifically, not collecting) the revenue falls onto the tenant. In other words, if you process a transaction, but fail to invoice and collect for that transaction until next month, you might still owe your landlord a percentage rent.

Any discounts, refunds, credits, allowances, or price adjustments extended to individual customers are not accounted for when calculating percentage rent. If a sales tax is attached to the price of the product or service, it is also usually excluded.

How to Calculate the Natural Breakpoint of Your Percentage Rent?

A natural breakpoint in a percentage rent commercial lease is the amount of gross revenue at which the base rent becomes equal to the percentage rent.

For our consumer electronics store example, we have a base rent of $5,000 and a percentage of 7%. The natural breakpoint is $71,428.57, because 7% of $71,428.57 is $5,000.

You can calculate the natural breakpoint by dividing your base rent by your percentage rent. If we express the percentage as a fraction, the calculation is really easy.

$5,000 /(7/100) = $5,000 * 100 / 7 = $71,428.57

In a lot of commercial leases, the percentage rent breakpoint is simply the natural breakpoint. This ensures the landlord always receives a fixed percent of gross revenue or more in rent.

When the tenant suffers a lack of sales for the month, the base rent is still charged and it represents a larger percentage of the tenants’ gross income. In other words, the business faces a greater relative charge when they have the least amount of business.

For our example, if the electronics store only yields $45,000 in revenue, the base rent of $5,000 represents 11.11% of their gross income.

If the agreed breakpoint in the lease is higher than the natural breakpoint, the business benefits from a reduced rent compared to their gross income.

For our example, if the electronics store yields $75,000 in revenue, but the breakpoint is set at $80,000, then the base rent of $5,000 is only 6.67%.

Rent Periods and Sales Auditing

Since percentage rent is directly calculated from the gross income of the business, the landlord will expect the tenant to provide sales reports either monthly, quarterly, or annually.

If reported monthly or quarterly, usually a final annual report is required to nullify any previous errors and adjust the percentage rent accordingly.

The tenant’s sales records must be made available for audits by the landlord. Usually the landlord will request an annual audit by a certified external accounting company.

Tips for Negotiating Percentage Rent

Oftentimes your prospective landlord will provide a ready-made lease contract configured with their preferred base rent, percentage rent, and breakpoint. However, that does not mean these figures are set in stone.

You can and should negotiate.

Tenants should strive for the lowest possible base rent and percentage rent, while also seeking the highest possible breakpoint. There’s no magical leverage to help you achieve that, but you can balance the terms to better suit your business.

New or Slow Businesses

Businesses that have just opened their doors, or project a slow revenue growth can benefit from a higher base rent and a higher breakpoint.

For example, consider a base rate of $5,500, percentage of 7%, and breakpoint at $90,000 (naturally at $78,571.42). Right up to that breakpoint, the business can benefit from a rent equal to just over 6.11% of their gross sales.

Highly Seasonal Businesses

Alternatively, highly seasonal businesses with volatile monthly revenue can gain an advantage from a low base rent and a higher percentage rate.

For example, a base rate of $4,500 could secure businesses some extra cash flow when sales are slow. If we increase the percentage rent to 8.5% and set the breakpoint at $60,000 (naturally at $52,941.18), the business would still save a significant amount of money, even during the strong months.

If November and December yield gross sales of $100,000, the tenant would need to pay $3,200 in additional percentage rent, or a total of $7,700 per month. That’s an increase of 71%, but there is enough revenue to absorb the extra cost and return profit for the business.

Wrapping Up

In the end, percentage rent in commercial leases is not a difficult concept to grasp. Though it is more complex than a flat rent arrangement, it shouldn’t be too difficult for any business owner to figure out. That said, the devil is in the details and understanding your commercial lease agreement before you agree and sign is crucial to the overall success of your business. After all, your landlord isn’t the only one looking to generate a profit.

Are you ready to advertise your commercial space as available to tenants and want to make sure they understand all the details, including the percentage rent clause that you intend to add to the agreement? Then take advantage of the beginner friendly online platform CREOP. Designed to make marketing commercial properties a breeze, complete with everything a potential tenant would need to know before agreeing to lease from you, this advanced software makes your job easier, so you can concentrate on more important things, like getting lease agreements signed.

Get in touch today and see how we can help you lease your commercial space with ease.

Understanding Commercial Lease Floor Areas – Gross vs Net Leasable Area

When talking about commercial real estate, everything is calculated based on floor space. For example, development costs, how much area can you lease, and even the potential annual revenue are all dependent on the square footage of the property.

But how do you accurately measure your floor space?

Unfortunately, measuring floor space is not as straightforward as you might think. In fact, there are many different ways to measure a building and its floor space. From the total footprint of a building to the area available for commercial tenants, it’s important you know exactly what someone means when they say a building is X number of square feet.

Whether you’re a developer, investor, tenant, or buyer, it’s crucial you understand commercial lease floor areas and how they relate to your financial goals.

Seems complicated?

Let us clear things up for you.

Types of Floor Area

In architecture, construction, and real estate, floor area (also known as floor space) is the area taken up by a building or part of it, and is measured in square feet or square meters. Of course, as we mentioned above, things are more complicated than that. One must consider whether external or internal walls, corridors, stairwells, lift shafts, and more are calculated into that measurement.

Here’s a look at the different types of floor area.

Gross Floor Area (GFA)

Gross floor area is the total area of the building measured all the way out to the external face of the external walls.

In other words, it’s the total footprint of the building, multiplied by the number of floors.

Features excluded from the gross floor area vary, though they often include the roof, covered walkways, terraces, porches, chimneys, air shafts, roof overhangs, trenches for piping, and other utility connections.

Here’s why gross floor area is important:

  • It’s the public number that brokers use to advertise available space or calculate previous sales numbers
  • The city uses this number to determine planning numbers like the building’s density or floor space index
  • It’s used to calculate applicable levies
  • Construction companies need to know how many walls and floors they need to build and will look to the gross floor area first when creating their plans

Though this area does not always drive development costs or the amount of revenue you stand to gain from leasing the space, it’s an important one to know when starting a new commercial development project or investment endeavor.

Gross Internal Area (GIA)

Gross internal area is the total area of the building measured only to the internal face of the external walls.

Since the external wall area is excluded, this measurement provides the total useful area contained in the building.

Some of this space will be dedicated to common building features and facilities, such as stairs, escalators, lifts, machinery rooms, pumping rooms, plumbing, ducts, vents, public toilet areas, and other service or maintenance rooms.

Net Internal Area (NIA)

Net internal area is the usable area available to occupants of the building. It’s calculated by taking the gross internal area and subtracting floor areas being used by:

  • Lobbies
  • Machinery rooms on the roof
  • Stairs/escalators
  • Lifts
  • Columns
  • Toilet areas
  • Ducts
  • Risers

Tenants leasing a commercial property like a store or office space are only interested in the usable space of the premises, since that’s where they can fit displays, storage units, computer desks, and equipment. Everything else is not important. In other words, when someone is looking to buy or lease a commercial property, they want to know what the net internal area is.

Commercial Leases and Building Measurements

Commercial leases are almost entirely based on the leased area. However, that area can be measured differently and can even include additional areas not contained within the boundaries of the leased property. This makes the lease more expensive, though not necessarily more usable.

Because of this, investors look for properties with the maximum net internal area for the smallest given gross floor area.

In other words, they look for properties with the most usable space within the smallest building possible. Doing this will allow them to charge premium rent rates that tenants are willing to pay because there is plenty of usable space for tenants to use to run their businesses.

Ideally, tenants only want to pay for the net internal area. After all, the net internal area is the space that they get to use and will generate them revenue. However, this rarely happens.

If investors charge tenants just for the net internal area, there are large amounts of building space, though unused by the tenants, sitting idle and not generating the investor any money. Remember, the investor pays for that unusable space. By not charging tenants for that same space, they lose money, making the project unsustainable.

In the end, commercial tenants always pay for more area than they physically get to use.

What is Gross Leasable Area (GLA)?

After learning about the different types of floor area, you might be asking yourself what is gross leasable area then? The gross leasable area is the total area designed for exclusive use by a commercial tenant plus common areas, elevators, common bathrooms, stairwells, and other parts of the building the tenant doesn’t actually occupy.

If the building is leased to a single tenant, then the gross leasable area is equal to the gross floor area. Simple enough.

If there are multiple tenants leasing different parts of the building, the gross leasable area is calculated based on the shared walls between them, plus those extras mentioned above.

To get the gross leasable area for one tenant, you would measure from the center of the common wall (shared with another tenant) to the outside face of the external wall. The external wall can be a shopfront, a window display, or just a flat wall. Regardless, it is included in the gross leasable area. Similarly, though the area occupied by the shared wall is not usable, it is also included in the gross leasable area of both tenants.

Any structural members – columns, arches, or truss structures –  that are enclosed within the boundaries are also included in the gross leasable area.

Retail leases will commonly use gross leasable area as a basis for rent calculations. The problem is, many tenants think they’re leasing X amount of square feet for their business only to find out that the actual square footage is quite smaller.

What is Net Leasable Area (NLA)?

The net leasable area is the space within the leased unit that’s actually available to the tenant for use.

This area excludes the external walls, as well as common areas and utility rooms, which are not contained within the unit. However, it does include basements, storage areas, mezzanines, upper floors, and other floor areas which can be used by the tenant.

Unlike most retail leases, office leases typically base the rent rate on the net leasable area rather than the gross leasable area. However, there’s a catch – office tenants still need to pay fees for the common areas.

These areas do not fall within the boundaries of any leased units and are not used directly by business owners on a daily basis. However, they are used by the businesses, their employees, and their customers at some point.

Furthermore, these common areas require a fair share of maintenance and building services such as lighting, electrical/elevator maintenance, plumbing, cleaning, gardening, and more. These cost a considerable amount of money each year and are not going to be paid for by investors; that burden is placed on tenants leasing the space.

Core Factor/Pro-Rated Share of Space

The core factor is also referred to as a load factor or a pro-rated share of space.

If the entire building is leased by a single company, the calculation of the core factor is really simple – it’s 100%.

When multiple tenants share the same building, the shared areas are added in proportion to the net area leased by each tenant.

Let’s make this easier to understand by considering the following office lease scenario: 

You rent 10,000 sq.ft (net) in an office building that has 5,000 sq.ft of net leasable area and another 5,000 sq.ft of common areas and service rooms.

You have 20% of the building for your exclusive use. Your core factor is 20%, which means you’ll pay for 1/5th of the common areas.

Therefore, your rent will be calculated based on 10,000 sq.ft of net leasable area and 20% of 5,000 sq.ft of common areas, for a total of 11,000 sq.ft.

This is important when a tenant is looking to lease a commercial space. If a tenant does not understand the differences between the areas, or doesn’t know about the core factor calculation, they could end up overspending on rent without even realizing it.

BOMA Standard for Measurement

When drafting or negotiating a commercial lease agreement, it’s important to include and look for the standard which defines how the floor area will be measured. Remember, though the gross leasable and net leasable areas are widely used calculations in commercial leases, the GFA, GIA, and NIA have the potential to vary.

The Building Owners and Managers Association – BOMA – is the widely accepted authority for building measurements. BOMA has specific standards for different commercial buildings including office spaces, retail stores, industrial facilities.

The information above is derived from the BOMA standards, although the literature includes extensive details on how to calculate building area for a wide variety of conditions. Please visit the BOMA website for more information on building measurement standards.

Wrapping Up

In the end, it’s important to understand common terms related to commercial leases and building sizes, whether you’re an investor or tenant looking to lease a space and run a business. Not knowing the differences, or how rent is being calculated, can cause a lot of financial strain, quickly put you in a hole, and ruin your investment or business dreams.

Are you ready to advertise your commercial property as available to tenants and want to ensure potential business owners know all the different measurements? Then be sure to use our highly advanced and easy to use online platform, CREOP, designed to make marketing commercial retail space visually appealing and informative. Get in touch today and see how we can help you lease your property faster, with highly qualified tenants you can rely on.

What is a Ground Lease (Pros and Cons)

One of the first and most critical steps to realizing a new development project is securing the land to build on.

In this case, there are only two options – buy it or lease it.

Though many developers frown upon the idea of renting a parcel of land to build on, it is an attractive alternative that comes with lots of possibilities. That’s why today we’re going to share with you what a ground lease is and what the pros and cons are to having one.

So, let’s get started!

What Is a Ground Lease?

A ground lease, also known as a land lease, is a lease agreement that allows you to rent a piece of undeveloped or developed land for a long period of time. This land your leasing can be used for development and commercial purposes.

In other words, a ground lease is an agreement that lets you lease the land you want to build your next commercial property on.

With a ground lease, the following happens:

  • A landowner leases the land (rather than selling it) to a developer for anywhere between 35 and 99 years
  • The developer (or tenant) pays rent to the landowner and retains the right to develop buildings and operate business ventures on the premises
  • All responsibilities and associated costs related to the land, such as taxes, insurance, development permits, and maintenance fall onto the developer

When a developer signs a ground lease agreement, they do not own the land; they are only renting it. However, any structure or facility that the developer builds on the land is owned by the developer, not the landowner.

When the ground lease expires and is not renegotiated, the land, as well as any improvements created by the developer, reverts back to the landowner.

Ground leasing enables a developer to obtain a piece of land that’s too expensive to buy or is otherwise inaccessible and make something profitable out of it. For example, government properties are often too expensive for an investor to buy. That said, renting a piece of government property is much more doable.

In addition, a ground lease enables the landowner to benefit from the property they’re leasing to developers without having to sell it or make major investments to develop the site.

In the end, it’s a win-win situation for both the landowner and developer.

A Practical Example A Ground Lease

Large franchise chains like McDonald’s frequently operate using a ground lease. The land is usually purchased by the corporation and leased to the local franchise to develop the building, set up the operation, and run the business.

Every ground lease agreement contains specific terms and provisions for the usage of the land. In this case, the land is only provided for the development of a McDonald’s restaurant. The developer is bound by the lease agreement and cannot switch 10 years down the road and open a KFC joint.

Types of Ground Leases

A development project is rarely paid for in cash. In fact, there are different kinds of loans or mortgages available to finance the construction and/or improvement of the land. In order to grant the exorbitant amounts of money required to develop a commercial project, banks will require some collateral in the event the business defaults.

Should the business fail, there is a hierarchy of who gets to claim the assets to recoup their investment.

Top priority is usually either the bank providing the loan or the landowner. From here stem two basic types of ground leases – subordinated or unsubordinated.

Subordinated Ground Lease

With a subordinated ground lease, the landowner agrees to forfeit the top priority claim to the land should the developer default on the loan.

Banks are much more willing to finance a business venture if they’re guaranteed the right to claim first. As such, the landowner effectively pledges their land as collateral in the event the business goes bankrupt.

This means that a subordinated ground lease creates a significant risk for the landowner, which is usually compensated for by charging the developer a higher rent.

Unsubordinated Ground Lease

An unsubordinated ground lease gives the landowner the ability to claim their land back should a developer default – guaranteed.

This is a preferred option by many landowners who do not wish to incur the risk of losing their land.

However, it makes it difficult for the developer to secure the necessary funds for development, as banks are reluctant to approve a loan if not given top priority to claim should the loan go into default.

To offset this challenge and make it worthwhile for developers, unsubordinated ground leases typically come at a reduced rate and yield less profit for the landowner.

Ground Leasing vs Other Commercial Leases

Though still related to commercial real estate, ground leasing differs dramatically from other forms of commercial leasing.

Gross Leasing

Similar to renting an apartment, in a gross lease the investor (or tenant) pays the landowner an agreed rent amount to use the facilities for conducting their business. There is usually an already erected building such as an office space, grocery store, or workshop that the investor simply leases.

The investor assumes no other responsibility with a gross lease other than the scheduled rent payment. Taxes, permits, insurance, and other costs fall onto the landowner. However, the investor has very little freedom to modify or upgrade the facilities without prior consent.

Net Leasing

Net leases allow investors to assume some of the landowner’s responsibilities to varying degrees. Because of this, the investor has more freedom to improve and modify the facilities.

The exact structure of a net lease is up to the landowner and investor to negotiate and agree on.

A special kind of net lease, called a triple net lease, transfers most of the landowner’s costs and responsibilities to the investor, including construction cost, property taxes, insurance, and more. Since these are costs the investor is now responsible for, this type of lease usually comes with a lower base rent.

Absolute Net Lease

Absolute Net leases are similar to triple net leases but go a step farther by placing 100% of the responsibilities onto the Tenant’s shoulders.  This includes structural items such as the roof, exterior walls, and parking lot.

Advantages of Ground Leasing

Ground leasing is not the perfect solution for every real estate development project. However, it’s becoming increasingly popular in the United States and offers a number of advantages for both developers and landowners.

Pros of Ground Leasing for Investors

The biggest advantage for property investors using a ground lease is that they don’t have to buy the land to operate their business and make a profit. Acquiring the land for a development project can be the biggest hurdle holding an investor back from successfully running a business.

In fact, acquiring land involves massive upfront costs, and many times, the perfect site is just not accessible. For example, oftentimes the landowner doesn’t want to sell or the land may be public property that cannot be obtained or is uneconomical to do so.

Ground leasing helps you avoid upfront costs and frees up resources to be used on improvements instead. And to top it off, rent payments are tax deductible, which is always good news.

Pros of Ground Leasing for Landowners

Arguably, ground leasing is more advantageous to the landowner than the investor leasing the land.

The owner of the land retains ownership, and sometimes, a significant portion of control over how property is utilized. Depending on the case, the ground lease may include extensive documentation for the type of facilities built, the purpose of the business, and details on how business will be conducted.

Once the ground lease agreement is signed, the landowner can enforce the provisions found in the contract. Any changes to the development or use of the land must receive the land owner’s permission.

In addition, ground leasing is a great way to establish a passive income stream for landowners. This is because the owner of the land doesn’t need to invest in developing the real estate themselves. They just collect rent payments.

If a landowner were to sell their land, they would receive capital gains and owe a significant amount of taxes to the government. After all, rent payments are considered regular income and are subject to taxes. However, it can be financially advantageous to pay income taxes rather than capital gains taxes.

Finally, the owner of the land inherits all buildings, structures, and improvements at the end of the ground lease term. If the current ground lease is not extended or renewed, the investor must simply forfeit their immovable assets unless there is a clause in the ground lease that mandates the developer to demolish and remove all structures and return the land to its original stage when the lease is up.

Disadvantages of Ground Leasing

Like most things, there are disadvantages to ground leasing that both investors and landowners need to consider.

Cons of Ground Leasing for Investors

While investors pay for the right to develop and operate businesses on land with a ground lease, the project and design must first be negotiated with the landowner.

Of course, investors always seek the most lenient use provision so they can operate their business as they see fit.

However, sometimes that’s not possible and the ground lease may contain a specific schedule and timeline for the execution and development of the project. Investors who don’t uphold the schedule can face financial repercussions. These limitations are often hard to overcome and investors may face huge burdens to complete the project.

No matter how good your initial design is, in practice it’s often required to make changes and alterations. Depending on the use provisions, every significant change to the project must receive approval by the landowner, which can create points of friction and lead to lost time during the development process.

With a ground lease, the investor pays rent to the landowner. However, they also incur all other financial costs related to the land such as taxes, construction, improvements, permitting, insurance, and more. All of this can become very expensive over time.

Not to mention, in some cases long-term rent can prove to be more expensive than buying the land outright. Sure, sometimes that’s just not possible or economical to do. However, total cost must be taken into account before agreeing to a ground lease.

Cons of Ground Leasing for Land Owners

While not immediately obvious, there are a fair number of disadvantages to ground leasing for landowners.

To start, every development project faces the risk of not succeeding. Businesses fail for a million and one reasons. If the investor defaults, they usually cannot pay the rent they owe, meaning the landowner is out a lot of money.

If the business is bankrupt before even finishing construction, there is usually a long list of unpaid contractors which will begin litigation to recoup their money. This can affect the landowner and compromise their interest in the property.

The worst part is when a leasehold mortgage or another finance structure is involved. The relationships between the finance provider, the land tenant, and landowner become very complex, very fast.  If no protections are in place protecting the landowner, they may end up accountable for their investor’s business failure and lose the land.

In addition, though partially mitigated by the use of proper insurance, there is always some element of risk associated with incurring liability for injured third parties at the site or environmental damage caused by the investor. And while the landowner is not directly responsible for such injuries or damage, they may be held partially accountable.

Finally, landowners must carefully consider the rent structure of the ground lease. Since it encompasses decades, the market can and will change dramatically, rendering a fixed rent structure irrelevant within just a few years.

The rent structure must change just as the market does and account for inflation and the state of the market, so that the landowners always receive a fair rent for their property. There are even some ground leases that tie the rent rate to the performance of the business. So, if the business excels and becomes very profitable, the landowner also gets a proportionate share of that profit.

Wrapping Up

In the end, a ground lease is a complex, though highly advantageous solution for developers looking to start a commercial project without having to invest a ton of money upfront. Plus, the benefits awarded the landowner make leasing land for a long period of time a fairly easy process that allows both parties to win.

Are you a land owner looking to promote your piece of land to developers, or a developer looking to lease the property you just erected thanks to a ground lease? Then be sure to check out our highly advanced and easy to use online platform designed to help you design stunning marketing packages that entice people looking for a business opportunity without a lot of hassle. Get in touch today and see how we can help you with your next commercial property endeavor.

Gross Rent Multiplier: A Quick Guide for Investors

It is estimated that there are 109 million people, or 36% of the population, currently renting in America. And this only accounts for residential properties. When it comes to commercial buildings, there are well over 5.5 million spanning the country. And you can bet a lot of them are being leased.

Needless to say, there is a lot of opportunity available for investors of all kinds to build a successful real estate business.

Investors in the market looking to expand their commercial building portfolios are always on the hunt for the best deals and the most profitability. However, determining whether a potential investment property is a good one or not takes some know-how.

If you’re an investor looking to build a bigger portfolio with properties that have a high ROI and tenants willing to pay premium prices, you’re going to need a quick way to vet, compare, and analyze potential listings. That’s why today we’re going to teach you about one of the best resources investors rely on to gauge the value and profitability of potential investment properties: gross rent multiplier – A.K.A. gross income multiplier (GIM).

What is Gross Rent Multiplier?

Gross rent multiplier (GRM) is a calculation used by real estate investors to determine the value and estimated profitability of a property before taking the plunge and buying.

Experienced investors always have a plate full of potential properties they’re considering when trying to build their portfolio. But prioritizing which ones to invest more time and resources into for analysis quickly becomes difficult, especially if the properties are not exactly comparable, as is often seen with commercial properties. That’s where calculating the gross rent multiplier comes in handy.

Why Gross Rent Multiplier is Important

It’s not enough to know that the gross rent multiplier is useful in determining the potential profitability of an investment property.

A successful investor will understand why calculating this value, as opposed to others, is so important, especially in the beginning stages of purchasing:

  • Quickly and efficiently decide which properties are worth your time analyzing further
  • Compare properties that are similar and determine which ones stand to generate the most annual revenue
  • Buy the right property at the right time, regardless of the status of the housing market using gross rental income values in your calculation
  • Avoid falling victim to the versatile housing market by using fair market value to determine potential annual rental income – use GRM instead
  • Easily convince lenders of your ability to repay a loan upon approval
  • Determine how the property’s condition and possible rent rate compare to the competition
  • As a commercial investor, easily differentiate between very different properties and let the numbers guide your efforts
  • GRM / GIM is a more pure metric compared to cap rate as there is less room for error by the Broker or Seller.

Of course, there is no magic formula that will guarantee what a potential investment property will yield the first year or any year thereafter. The point of calculating the gross rent multiplier is to quickly weed out properties you know will not be profitable and focus your attention on those you are seriously considering investing in.

How to Calculate Gross Rent Multiplier

Gross rent multiplier is a mathematical formula used to calculate an investment property’s potential rent income based on the ratio of the property’s fair value market (or purchase price) to the expected gross annual rent income.

In other words, to calculate the gross rent multiplier of any property, you have to have a value assigned to the property and know the amount of rent you can expect to collect each year from it.

You can get the GRM for an investment property using the following equation:

Market Value (or purchase price)/ Annual Gross Rental Income = Gross Rent Multiplier

Let’s say you want to purchase an investment property listed at $300,000 and you know the annual gross rental income is $30,000. Calculating the GRM would look like this:

$300,000/$30,000 = 10.0 GRM

Of course, this means nothing to you right now; it’s just a number. However, if you were to take a comparable property, also listed for $300,000, but with an expected annual gross rental income of only $25,000, you would now have a GRM of $300,000/$25,000 = 12.0 GRM.

Comparing the two example properties, you now realize that you stand to make much more money with the first property as opposed to the second based on the gross rent multiplier. In fact, the lower the gross rent multiplier, the higher the likelihood that the property will yield more profit.

Of course, the gross rent multiplier does not account for things like:

  • Cost of vacancies
  • Annual taxes
  • HOA fees
  • Insurance
  • Maintenance and repairs
  • Utilities you cover

Remember, GRM relies solely on the gross annual income. To really determine whether an investment property is worth your time and money, you’ll have to do more research.

Want to take a potential property’s GRM and estimate the market value?  Simply use this formula:

GRM x Annual Gross Rental Income = Approximately Value Market              

What a GRM is Not

Gross rent multiplier is an excellent tool for quickly comparing properties and gauging whether you should continue your research or not.

That said, GRM is not the end all calculation you should use to make an investment decision. Many other factors play into the profitability of a property that go far beyond the expected annual gross income.

In addition, the gross rent multiplier is not a calculation that should be used to determine the time it will take for you to pay off an investment property. Unfortunately, many investors are misinformed and are led to believe that if a property has a GRM of 10.0 that means it will take approximately 10 years to pay off the property in full and begin generating nothing but profit.

The problem with this thinking is that the gross rent multiplier does not take into account any other expenses related to a property that an investor will be in charge of. Not to mention, the gross rent income is an estimate, not a surefire number that will remain static over time. All of these things have the potential to play into how long it takes you to pay off your investment property and begin generating pure profit.

Want to get an idea how much the related costs of owning an investment property might be each year? Choose one of the following to get an idea:

Knowing this information and the GRM will give you a better idea how much profit you stand to gain from an investment property each year.

Wrapping Up

In the end, all real estate investments come with a certain level of risk, no matter which calculations you use to make a final purchasing decision. That said, the gross rent multiplier of a property is an excellent tool to have on hand for quickly vetting and comparing properties so you can focus your efforts on properties that are likely to generate you the kind of annual income you want.

Have you recently purchased a prime piece of commercial real estate and want to advertise it as available? Take advantage of our comprehensive commercial real estate online publisher (CREOP) tool.

Simply input the details of your property and let the CREOP software crunch all the numbers and generate a professional looking marketing package that you can quickly email or print and deliver to clients and brokers. Get in touch with us today and let us help you get started with advertising your prime piece of real estate.

What is GLA? Gross Leasable Area

GLA is the Gross Leasable Area of the total floor area designed for tenant occupancy and exclusive use, including basements, mezzanines, and upper floors, and it is measured from the center line of joint partitions and from outside wall faces. GLA is that area on which tenants pay rent; it is the area that produces income.

Floor area ratio (FAR)

Floor area ratio (FAR) is the ratio of a building’s total floor area (zoning floor area) to the size of the piece of land upon which it is built.
Calculate the FLOOR AREA RATIO: Divide the GROSS FLOOR AREA by the BUILDABLE LAND AREA. The result is the Floor Area Ratio (FAR).
STEP BY STEP:
STEP 1.
Determine the total BUILDABLE LAND AREA, in terms of square feet, for the site. The buildable land area is that portion of a development site where construction can legally and reasonably occur – so public streets and rights-of way, wetlands and watercourses, and other constraints would not be included. Buildable Land Area (B) = (Parcel Width x Parcel Depth) – Square feet of undevelopable land (if applicable).
STEP 2.
Determine the FLOOR AREA of each story of the building. Calculate the area of each story (floor) of the building, typically measured between the exterior walls. Those portions of each story above the ground surface prior to any manipulation or grading are usually included in the calculation.
STEP 3.
Determine the GROSS FLOOR AREA of the Building. Gross floor area is the sum of the floor area of each story. Gross Floor Area (G) = Floor Area of 1st Story + Floor Area of 2nd Story… for all floors above the ground.

Fee Simple vs. Leasehold

Most people are only familiar with one type of real estate ownership; fee simple, also known as freehold. It is important to know the difference between fee simple and leasehold, especially if you’re buying real estate in a leasehold state such as Hawaii along with a few other states in the US.The difference in these two types of land tenure is very different and affects the value of the real estate.

FEE SIMPLE: Fee simple is sometimes called fee simple absolute because it is the most complete form of ownership. A fee simple buyer is given title (ownership) of the property, which includes the land and any improvements to the land in perpetuity. Aside from a few exceptions, no one can legally take that real estate from an owner with fee simple title. The fee simple owner has the right to possess, use the land and dispose of the land as he wishes: sell it, give it away, trade it for other things, lease it to others, or pass it to others upon death.

LEASEHOLD: A leasehold interest is created when a fee simple land-owner (Lessor) enters into an agreement or contract called a ground lease with a person or entity (Lessee). A Lessee gives compensation to the Lessor for the rights of use and enjoyment of the land much as one buys fee simple rights; however, the leasehold interest differs from the fee simple interest in several important aspects.

First, the buyer of leasehold real estate does not own the land; they only have a right to use the land for a predetermined amount of time. Second, if leasehold real estate is transferred to a new owner, use of the land is limited to the remaining years covered by the original lease. At the end of the predetermined period, the land reverts back to the Lessor, and is called reversion. Depending on the provisions of any surrender clause in the lease, the buildings and other improvements on the land may also revert to the lessor. Finally, the use, maintenance, and alteration of the leased premises are subject to any restrictions contained in the lease. During the lease term, typically there is a lease rent to be paid and there may be periodical increases throughout the term.

Important Leasehold terms to know:
• Lease Term – The length of the lease period (usually 55 years or more)
• Lease Rent – The amount of rent paid to the Lessor for use of the land
• Fixed Period – The period in which the lease rent amount is fixed
• Renegotiation Date – Date after the fixed period that the lease rent is renegotiated
• Expiration Date – The date that the lease ends
• Reversion – The act of giving back the property to the Lessor
• Surrender – Terms of the reversion
• Leased Fee Interest – An amount a Lessor will accept to convey fee simple ownership

How to measure an Owner/User building using BOMA Standards

The Gross Area Standard details procedures for measuring construction gross area and exterior gross area of buildings and provides unequivocal, direct measure of the physical size of a building. Both methods can be applied to new and existing buildings, single or multiple stories, owner-occupied or leased, and for all types of occupancies and uses.

The construction gross area includes the area defined as exterior gross area as well as other areas that have a structural floor, or are covered by a roof or canopy, that are typically unenclosed but within the building perimeter. The exterior gross area is the total floor area contained within the measure line—generally the outside surface of the exterior enclosure of building—including structured parking.