Capitalization Rate (a.k.a. “Cap Rate”): The rate of return on a real estate investment property based upon the income that the property is expected to produce. A capitalization rate can also be defined as the ratio of net operating income to property asset value or purchase price. By way of example, if a building has a net operating income of $400,000.00 and the building is being marketed for sale at a “4% cap rate”, the desired sales price for the building would be $10,000,000.00 (i.e., $400,000 NOI/.04 = $10,000,000.00).
Carrying Charges (for Landlord): Expenses incurred as a result of property ownership, including maintenance costs, real estate taxes, insurance and mortgage payments.
Cash Security Deposit: At its simplest level, it is cash security given at lease execution to a landlord from a tenant as “collateral” to ensure tenant’s performance of its monetary and non-monetary covenants under the lease. If the tenant is in default (beyond the expiration of any applicable notice and cure period described in the lease), generally stated, the landlord can “draw” on the security deposit in order to “cure the default.”
Caveat Emptor: Latin for “let the buyer beware.” In the context of real estate, it stands for the principle that the buyer (or tenant) bears the burden to inspect property before purchasing (or leasing) at his or her own risk. See “As Is.”
Certificate of Occupancy: A certificate of occupancy is a document issued by a local government agency or building department after inspection verifying a building’s or leased premises’ compliance with applicable building codes and other laws, indicating such space to be in a condition suitable for a tenant’s and/or a building’s permitted use and occupancy.
Cleaning Specifications: Generally, an exhibit that is referred to in the body of a lease and attached to such lease detailing what cleaning services are to be provided to a tenant by its landlord at no cost. In a well-crafted lease, language is often included detailing a number of items that the tenant will either pay the landlord for if so requested and/or be required to perform themselves (e.g., kitchens, private bathrooms or showers, server rooms and glass surfaces).
Collateral Assignment of Lease: A document required by a franchisor to be included as an integral part of a lease, wherein among other things: (1) the landlord must notify franchisor in writing of any default by tenant under the lease as and when such defaults occur; (2) that if tenant defaults on its obligations under the lease or under its franchise agreement, beyond applicable notice and cure periods, the franchisor shall have the right to take possession of the tenant’s space and thereafter tenant shall have no further right pursuant to the lease; (3) that if franchisor exercises its rights under the Collateral Assignment, landlord shall take all action necessary to retake the premises (such action including termination, eviction and legal action); (4) that franchisor shall have no obligation under the Collateral Assignment until the premises are lawfully tendered to it; (5) that if the franchisor takes possession of the premises and assumes the lease as tenant thereunder, the landlord shall be required to recognize the franchisor as tenant under the lease; (6) that the landlord agrees that the franchisor may further assign the lease to any person or entity who as part of such assignment such person or entity shall agree to assume tenant’s obligations under the lease; (7) that upon such assignment, franchisor shall have no further liability or obligation under the lease; and (8) that upon termination or expiration of the franchise agreement or the lease, franchisor shall have the right to enter the premises to make all necessary modifications or alterations to the premises for the removal of all articles which display franchisor’s proprietary marks (including all signs, advertising materials, stationery and forms).
Other examples of when a collateral assignment of lease is used include when a business is sold to a buyer with partial “seller financing” or on bank loans on income-producing property. In either scenario, the “Assignee,” as “Lender,” has agreed to make a loan to the “Borrower” (the “Loan”), evidenced by a promissory note (the “Note”) and other related loan documents, and to secure the Loan, the Borrower has agreed to assign to Assignee, and Assignee has agreed to take from Borrower, an assignment of the lease for collateral purposes, on the terms and conditions set forth in the collateral assignment of lease.
Cold Shell: Also known as a “dark shell” or “gray shell.” Although definitions differ regionally and nationally, at its most basic meaning, it is a space or building delivered to a tenant with an unfinished interior void of basic essential systems and utility lines (e.g. HVAC, plumbing and electrical conduit), and in many cases flooring (with only a dirt floor delivered at possession in the case of newly constructed retail spaces) and walls (other than exterior walls). See “Warm Shell” and “Vanilla Box.”
Common Area: Those areas of a building and its property that are available for non-exclusive use by all tenants or groups of tenants and their invitees, such as lobbies, corridors, parking lots and other building amenities (e.g., a gym, walkways surrounding the parking lot, patios and gardens).
Common Area Maintenance (CAM): Charges paid by the tenant in addition to base rent or fixed rent for the upkeep of the common areas designated for use and benefit of all tenants. CAM charges are common in shopping centers. Tenants are typically charged for their share of, among other operating costs of a landlord, such items as parking lot and building maintenance, lighting, snow removal, property taxes, insurance, and utilities.
Comparables | Comparable Space: Space in a tenant’s building or within a pre-established radius of such building with characteristics similar to the existing space including, without limitation, in terms of: (1) finishes, (2) the amount of overall windows, (3) bullpen space, (4) windowed offices, (5) usable square feet, and (6) if in a high rise building, the location of the space in terms of the view (and if another building, in terms of amenities and location on an “avenue” or “side street”), and if a retail space, in a still visible and well trafficked location.
Comparison Year: With respect to real estate tax, operating expense or other escalations, a “comparison year” is any tax year subsequent to the base year (e.g., Base Tax Year or Base Operating Year) for any part or all of which there is additional rent payable in addition to the base or fixed rent provided for under the lease.
Compatible Labor: Contractors who can work side by side, on the same project, or in the same building without causing union issues, strikes, work stoppages, picketing or riots.
Compliance with Law: The obligation to conform to a rule, specification, policy, standard, regulation, ordinance, code, or law.
Community Board: Although they are not necessarily prevalent regionally or nationally, in New York City, they are, in theory, boards designed to improve the quality of life of those living and working in New York City in designated districts. In Manhattan alone, as of November 1, 2016, there are twelve (12) community boards. In the context of a lease for a liquor store, bar, restaurant, or other establishment who desires to serve alcoholic beverages, the approval of the community board in the district to conduct such use is mandatory. Tenant advocates should strongly consider, when negotiating the letter of intent, a contingency to secure community board as well as liquor license approval. For example, in New York State, approval from the New York State Liquor Authority (“NYSLA”) is required. See “Liquor License Contingency.”
Concessions | Tenant Concessions: Incentives used by landlords in the form of free rent, tenant improvement allowances, cash, above-building-standard finishes, buy-outs of a tenant’s lease in another building, and other incentives used to induce prospective tenants to either relocate to or remain in its building.
Condemnation: The legal process under eminent domain by which privately held property is taken by the government for public use, without the owner’s consent, but upon the payment of compensation for the appraised value of the property. Also see “Eminent Domain.”
Condenser Water: A provision requiring a tenant to purchase, and for a landlord to furnish, condenser water to a tenant’s space in sufficient (or maximum) capacity to operate the existing (or to be installed by tenant) water cooled supplemental air conditioning system servicing the space. Also see “Tap-In Fee.”
Conditional Limitation: A “pro-landlord” provision contained in a lease allowing a landlord the right to terminate a tenant’s lease if certain conditions are not met (e.g., if tenant has defaulted in the payment of its fixed rent more than twice in any consecutive 12 month period, upon the occurrence of a 3rd default within said period, the landlord shall be able to terminate the lease on five days’ prior notice).
Condition of Premises: The condition that: (1) a landlord shall deliver the premises to its tenant on the possession and/or lease commencement date (e.g., broom clean, vacant with landlord’s work completed, and all systems servicing the premises in working order); or (2) tenant shall deliver the premises to its landlord on the lease expiration or earlier termination date of the lease (e.g., all systems in working order and the premises and the condition thereof as of the lease commencement date, reasonable wear, tear and casualty excepted). Also see “As-Is”, “Removal Obligations”, “Restoration Obligations” and “Specialty Alterations.”
Condominium: A building or complex of buildings containing a number of individually owned units. In a commercial lease, landlord advocates should consider adding a provision to the lease that if, in the future, the building becomes subjected to condominium ownership, then the lease and all rights of tenant thereunder shall be subject and subordinate in all respects to any condominium declaration and any other documents (and upon landlord’s request but at no cost to tenant, it shall enter into an amendment of the lease to conform to the formation of such condominium provided that no such amendment shall increase tenant’s obligations or liabilities under the lease, nor abrogate any of tenant’s rights under the lease.).
Conduit: A structure or tube, generally contained underground or within a building, with one or more ducts, through which cables, wiring, equipment, and/or facilities can be placed and/or run. Rigid conduit is generally required by landlords over “flexible” conduit.
Consent: See “Deemed Consent” and “Landlord’s Consent.”
Construction Bond(s): See “Payment Bond”, “Performance Bond” and “Payment and Performance Bond.”
Construction Contract(s): A formal written agreement between a contractor and a landlord or tenant for the construction, alteration, repair, modification or build-out of a building, office, retail, or industrial space.
Construction Drawing(s): The detailed visual representation of the intended dimension, design, and location of a construction project.
Construction Escrow Agreement: When used in conjunction with a lease, it is an agreement where a landlord and tenant agree that the tenant will deposit, with an escrow agent, a sum of monies to be used as partial (or full) payment for the construction of Tenant’s Work, with the funds on deposit distributed periodically in payment of supplies and labor upon the presentation of documentation specified thereunder to the escrow agent (such as each request for disbursement being accompanied by: (i) invoices for the work performed to date, (ii) a letter signed by an authorized officer of the tenant stating that the work has been performed and that the amount billed is as provided for in the tenant’s construction contract with the contractor submitting the bill, (iii) certification by tenant’s architect that said work has been substantially completed in accordance with the plans approved by tenant and all contracts between tenant and the contractor, (iv) a full (or partial) lien waiver signed by the contractor(s) of tenant (and the subcontractors of contractor) who have performed the work for which a distribution from the escrow is being requested and (v) a certificate of tenant certifying that there has been no material adverse financial change since the preceding advance of funds from the escrow (which is often accompanied by a last lien and judgment search as well). Final draws are often conditioned upon the receipt by the escrow agent, (in addition to any and all other documents required above) of (x) full and final unconditional lien waivers from its contractor and all subcontractors, (y) a free and clear last lien and owner’s search against the building and the tenant, indicating that no liens, claims or encumbrances existed on the premises (other than landlord’s mortgage (if any) and permitted encumbrances in favor of landlord, with the cost of such report being tenant’s sole responsibility and (z) a final or temporary commercial certificate of occupancy for the building (which in case of a temporary certificate, tenant shall thereafter remain obligated to diligently pursue and secure the permanent certificate of occupancy for the build out of the premises).
Construction Completion & Payment Guaranty: A guaranty by an individual and/or entity to complete any work commenced on a construction contract and to pay for all amounts due under such contract. The inclusion of (and performance under if required) such a construction and payment guaranty within a “good guy” or a straight guaranty can be a pre-condition to the termination of such guaranty.
Construction Management: Services described in a construction management agreement specifying that the construction manager will provide management of all trades and sub-contractors until the completion of any and all work on a construction project (all, generally stated, in accordance with any construction specifications, budgets and any change orders subsequent to the execution of the construction management agreement). Language is often included requiring such management to be performed on an “open-book basis” (i.e., with full transparency as to actual costs incurred), using the total cost of such construction plus a construction management fee calculated in the range of three percent (3%) to five percent (5%) of such hard construction costs.
Consumer Price Index (“CPI”): A tool to measure inflation by examining the change in prices of a fixed basket of consumer goods and services such as housing, food, transportation, and medical care over a period of time. It is sometimes called a cost-of-living index.
Contiguous Space: Space that is adjacent to another space and such contiguous spaces being either: (1) next to each other on the same floor or (2) on the floor which is either directly below or above the other.
Contingency: Dependence on a future event, circumstance, or fulfillment of a condition that may occur but is not certain to occur. In the context of leasing, common contingencies are those related to securing: (1) approval of a certain governmental or quasi-governmental board or authority (e.g., community board or state liquor authority) or (2) a permit or variance for a particular use (e.g., a physical cultural establishment for a fitness center).
Cooperative (Co-Op): A legal entity, usually a corporation, which owns real estate, usually in the form of a residential building. Individuals who buy “into a co-op” are not actually purchasing real property. Instead, they are essentially becoming: (1) a shareholder in a corporation that owns real property, as evidence by shares of stock allocable to the unit purchased and (2) a tenant of such corporation, as evidence by a proprietary lease for the unit purchased.
Co-Brokerage Agreement: In the context of a commercial lease (or the sale and purchase of real estate), an agreement wherein two (or more) real estate brokerage firms generally agree in writing to the following: (1) which broker is the listing agent of the premises on behalf of the landlord (or seller), (2) that the listing agent and co-broker are the sole brokers who brought about the leasing (or sale) of the premises, (3) the listing agent and co-broker are the sole brokers entitled to receive a commission and the method under which they will be paid (and the splitting of such commission) in accordance with the terms and conditions of the co-brokerage agreement.
Co-Tenancy Requirements (Clause): A provision generally found in a retail lease which states that tenant shall not be obligated to initially open for business during a “blackout” period and if tenant does not open, the term of the lease and tenant’s rental obligations shall not begin until the earlier of tenant’s opening or the end of the blackout period. Such blackout period could be at any time when less than sixty-five percent (65%) of the gross leasable area of the retail tenants, excluding tenant’s square footage and the square footage of any restaurant or purveyor of food, is occupied and open for business. The tenant may elect to open during a blackout period but will not be required to pay landlord rent and other charges until the day after the end of the blackout period. If the lease provides for a period of time prior to the commencement date for tenant to perform its fixturization and other construction work, then tenant need not accept delivery by landlord of the demised premises when the end of the fixturization period will occur within the blackout period. The tenant shall have the option to terminate the lease at any time during the blackout period as well.
Covenant: An agreement to do, or refrain from doing, a specific thing, such as to pay rent, to make repairs, to not compete with.