Class B (Office building)

Class B (or Grade B) will have similar surfaces as a Class A building but using materials
of a lower quality. The buildings will have fewer architectural details than typical Class
A buildings.

Typical fixtures include a mix of hardwood; wood flat panel doors; formica countertops;
and ceramic tiles and porcelain sinks used in toilets.

Class A

Most prestigious buildings competing for premier office users with rents above average
for the area. Buildings have high quality standard finishes, state of the art systems,
exceptional accessibility and a definite market presence.

Class B

Buildings competing for a wide range of users with rents in the average range for the
area. Building finishes are fair to good for the area. Building finishes are fair to good for
the area and systems are adequate, but the building does not compete with Class A at the
same price.

Class C

Buildings competing for tenants requiring functional space at rents below the average for
the area.

A Guide to Office Building Classifications; Class A, Class B, Class C

July 6, 2008

When considering office space, tenants will find that office buildings are generally
classified as being either a Class A, Class B, or a Class C building. The difference
between each of these classifications varies by market and class B and C buildings are
generally classified relative to Class A buildings. Building classifications are used to
differentiate buildings and help the reporting of market data in a manner that
differentiates between building types. That said, there is no definitive formula for
classifying a building, but in the general characteristics of each are as follows:

 Class A. These buildings represent the highest quality buildings in their market.
They are generally the best looking buildings with the best construction, and
possess high quality building infrastructure. Class A buildings also are well-
located, have good access, and are professionally managed. As a result of this,
they attract the highest quality tenants and also command the highest rents.
 Class B. This is the next notch down. Class B buildings are generally a little
older, but still have good quality management and tenants. Often times, value-
 added investors target these buildings as investments since well-located Class B
buildings can be returned to their Class A glory through renovation such as facade
and common area improvements. Class B buildings should generally not be
functionally obsolete and should be well maintained.
 Class C. The lowest classification of office building and space is Class C. These
are older buildings (usually more than 20), and are located in less desirable areas
and are in need of extensive renovation. Architecturally, these buildings are the
least desirable and building infrastructure and technology is out-dated. As a result,
Class C buildings have the lowest rental rates, take the longest time to lease, and
are often targeted as re-development opportunities.

The above is just a general guideline of building classifications. No formal international

standard exists for classifying a building, but one of the most important things to consider
about building classifications is that buildings should be viewed in context and relative to
other buildings within the sub-market; a Class A building in one market may not be a
Class A building in another.

There is no international standard for classifying office buildings. In fact, BOMA is

generally against the publication of a classification rating for individual properties. Were
there a more scientific method for classifying buildings though, some of the building
characteristics which could be used to compare and rank buildings would be as follows:

 HVAC Capacity
 Elevator quantity and speed
 Backup Power
 Security and life safety infrastructure
 Ceiling heights
 Floor load capacity
 Location
 Access (freeway, public transportation)
 Parking
 Construction, Common Area Improvements
 Nearby and/or on-site amenities (dry cleaning, restaurants, ATM, etc.)

Real Estate Terminology

Above Standard Tenant Improvements. Improvements that exceed the building standard (see
building standard)

Access. All Class A and nearly all Class B buildings offer access 24 hours a day, 7 days a week,
year round. Not all building services will be available outside "building hours."

Agent. One who acts for another as a fiduciary. A real estate license is required to act as an
agent for another in real property transactions.

Air Conditioning. (See also "HVAC") comes in different forms, but the choice in any one building
will either be non-existent or very limited:
 1. Building Controlled.
a. Tends to be found in newer buildings in which air-conditioned was
installed as original equipment.
b. Is supplied during building hours during the "air conditioning season."
(see below) offers the tenant limited control over their environment –
sometimes not even a thermostat.
c. Is included in the rent.
d. Requires a payment for after-hours use. Prices vary enormously, from a
low of about $25 to a high of $300 or more per hour. This is not
dependent on the size of your space, but on the overall area that has to
be turned on in order to cool your space. In many cases a "Supplemental
Unit" is the best choice in these circumstances (see below).
2. Tenant-Controlled.
a. Tends to be found in older buildings that were built before the
introduction of air-conditioning.
b. Runs whenever the tenant wants it, at the temperature the tenant wants.
c. Usually requires a unit situated in the tenant’s space.
d. May be air-cooled or connected to the building’s supply of chilled or
condenser water. Additional charges may be payable for chilled or
condenser water outside building hours and these may be high if the
system has to be turned on specially.
e. Generally runs off electricity paid for by the tenant in addition to the rent.
3. Supplemental Units. Where a tenant is supplied with Building Central air-
conditioning during business hours, it is often more economic to install a
supplemental system for after-hours cooling. Such a unit may be air-cooled or
may be connected (for a charge) to a 24-hour cooling tower if one exists. (Many
higher-end buildings do not permit the unsightly venting required for air-cooled
units.)

Air-Conditioning Season. The time of year during which building air-conditioning is turned on.
Approximately May 15 to October 1, but varies from building to building.

Anchor tenant. A large retail tenant that draws traffic to the shopping center.

Architect. If you are doing anything other than moving into a ready-built space or asking the
landlord to move a couple of walls about, you will need one. The earlier in the process that they
are brought in, the better. (See "Space Planners")

Assignment. A transfer of an interest in real property, in the case of leasing, the leasehold
interest.

Attorney. You will need one to translate the terms and conditions of the business negotiations
into legalese. Make sure that they are knowledgeable about commercial leasing, or you could be
buying trouble.

Base Rent. An amount of rent before adding any escalations.

Base Year. Usually the first year of a lease to which future operating expenses are compared for
the purpose of calculating expense increases.

Brokerage Commissions are normally paid by the landlord on commercial leasing transactions.
Build-out. The proposed construction for a new or renovated suite.

Building Hours refers to the hours of the day during which full building services are provided.
While you may be able to gain access to your space 24 hours a day, 7 days a week, you may
receive heat/air-conditioning only during Building Hours, the lobby may be attended only during
Building Hours, and the freight elevator may only be available during some Building Hours.
Typically Building Hours are 8 a.m. to 6 p.m.

Building Standard refers to a set of specifications set forth by the landlord. It will apply to paint,
carpet, doors, light fixtures, ceilings, window finishes, etc. (see "Workletter")

Capitalization. A method of determining property value based upon income.

Capitalization Rate. The percentage rate applied to the net income to determine value. Also
known as Cap Rate.

Certificate of Occupancy. Issued by governing authorities certifying the right to occupy a

property.

Class of building refers to the age, construction quality, modernity of building systems, services
and maintenance standards of a building. In practice people’s opinion of the class of a building
may differ, and landlords are naturally inclined to inflate the class of their buildings a notch or two.
(See below for a description of classes.)

Class A buildings are the top tier of buildings built and maintained to the highest standard and
with the most up-to-date systems. Think chrome and glass, modern infrastructure, computerized
elevators, etc. Class A normally post-1960 construction, and rated excellent overall. Also used
subjectively to describe the quality of a building. (See "Class of Building.")

Class B buildings include most pre-war buildings, however fancy, although some have been
recently so thoroughly upgraded that they are now lower-end Class A. Older, less fancy, in some
cases a lot more charming. Class B is pre-1960 construction and rated good overall. Also used
subjectively to describe the quality of a building. (See "Class of Building.")

Class C buildings are basically everything that doesn’t make it into Class B. Think side-street
(mostly), unattended or only partly attended lobby, and generally more basic. Class C are older
with some functional defects. (See "Class of Building.")

Cleaning is provided in many office buildings (and all Class A buildings) as a service paid for in
the rent. But many Class B buildings now being promoted as office buildings were formerly loft
buildings and do not include cleaning in the rent. The value of cleaning is about $2.50 per
rentable square foot per year. This can make what at first sight seems to be a bargain actually
rather less of one.

Common Area. Building or project areas used in common with other tenants including service
areas such as maintenance rooms, janitorial closets, elevators, lobby etc.

Consumer Price Index. A governmental index used in determining the cost of goods and
services. It is soften used in commercial leases to prevent the erosion of income by escalating the
rent payable annually.
Construction Period. This is a rent-free period prior to actual occupation of the space allowed to
the tenant to build out its space. Obviously this only applies when the tenant (as opposed to the
landlord) is organizing the construction.

Creditworthiness is not the same as still being in business after two years. Your
creditworthiness, in the eyes of a landlord, will vary depending on market conditions and on his
needs at the time.

Default. The failure to comply with an obligation required under the lease contract. These usually
are penalties upon default - which may or may not be monetary.

Demising Walls. The walls that separate one tenant from another or from the common area.

Direct Meter – see "Electricity"

Direct Operating Escalation – see "Escalations"

Drop Dead Date. The date by which, if the premises are not delivered, the tenant may terminate
the lease.

Effective Rent. The average of all the years of the rent after deducting any landlord concessions
such as free rent or over standard tenant improvements.

Electrical capacity refers to the amount of power available in the premises and is generally
expressed in terms of watts per square foot. A typical specification would be in the range of 4 to 7
watts per rentable square foot.

Electrical Wiring. Built space will already be wired for electricity, but possibly not adequately for
your use. If you do not negotiate for the landlord to carry out any further wiring, it will be your
responsibility to install it. Raw space will not be internally wired, and again the wiring of the space
will be subject to negotiation as part of any Workletter, or will be your responsibility as tenant.

Electricity is delivered:

1. Via Direct Meter. This way you pay what is on the meter direct to the utility
company.
2. Via Submeter. This way you pay the landlord what is on the meter plus a
percentage "handling" fee (typically 10%). This is not always more expensive
than a Direct Meter, as the landlord of a large building may be able to negotiate
better rates than you can on your own.
3. As Rent Inclusion. This way you pay a fixed annual charge per rentable square
foot. Typically this will be in the range of $2.90 to $3.50.

Escalations come in two basic flavors:

1. Real Estate Taxes. Almost all leases have these. Tenants pay their
"proportionate share" of any increase in Real Estate taxes over a base year
approximately equal to the first year of their tenancy.
2. Operating Expenses. This is where the creativity comes in. The theory is that as
it gets more expensive to run the building, so tenants pays their part of that
increase. Now let's see what they’ve come up with:
 a. Direct Operating Expenses. The best for the tenant in times of low
inflation. If operating expenses go up, the tenant pays his "proportionate
share." If they don’t, he doesn’t pay. Often hard for a small tenant to get.
b. Porter’s Wage Formula. For every penny the porter’s hourly wage goes
up, so proportionately does the rent per square foot - most commonly
"penny-for-penny". Thus if the porters’ wages go up from $15 per hour to
$17 per hour, the rent goes up $2 per square foot. Not so bad in times of
low wage inflation, this can have a serious ratchet effect when the
opposite is the case, out of all proportion to the actual increase in
operating costs of which the porters’ wage is only a part. The effects can
be particularly grim if the formula includes fringe benefits. Less punitive
in percentage terms when the original rent is a relatively high number.
c. Percentage. Increasingly common, and quite unpleasant. 3%
compounded over a 10 year term adds up. We have even heard of
people asking for 4%. Indeed, people have even been known to pay it.
d. Consumer Price Index. Self-explanatory. Clearly a crap-shoot, like
everything apart from Direct Operating Expenses. Tends to be attached
to a straight percent minimum.

Estoppel Certificate. A certification by tenant that the lease is full force and effect and confirms
the economics of the lease.

Expense Stop. Used to cap the amount the landlord is willing to pay to cover a particular
expense or group of expenses such as operating expenses.

Financials. The landlord will require full financial and general information about your company
before agreeing to terms or drawing a lease. You may have competition for your chosen space,
so assemble this information before you get to the stage of making a proposal. It is in your
interests to provide as much detail as possible in order to convince the landlord that you are a
creditworthy prospective tenant or for him to assess your likelihood of success if you are a
startup. Make sure that it is neatly presented and is fully comprehensible to someone who knows
nothing about your business, and, preferably, that it is expressed in dollars. Audited statements
carry vastly more weight than something that you put together on Quickbooks the day you send it
in. Do not expect the landlord to spend hours trying to understand ill-presented financials- he will
move on to the next proposal instead. And do not attempt to conceal the true situation of your
company.

First Right of Refusal. Grants a tenant the first right to match an offer to buy or lease a property
or premises, or refuse such an offer. after an offer has been tendered by a third party.

Free Rent. Depending on market conditions, it may be possible to negotiate a period of free rent.
In a landlord’s market this may be as little as one month; in a tenant’s market as much as a year,
or even more on a long lease. If it is more than a month or two, the abatements will normally be
spread over the term of the lease. (See "Construction Period")

Full Service Rent. An all inclusive rent covering rent, operating expenses, taxes and lessor's
insurance, subject to escalations when these expenses increase after the first year of the lease.

Good Guy Clause. This is a form of personal Guarantee whereby the guarantor undertakes to
pay any unpaid rent so long as the tenant remains in possession of the premises. It is therefore
less onerous than a full guarantee where the guarantor undertakes to pay the rent for the full term
of the lease whether or not the tenant remains in possession.
Gross lease. A gross lease, as distinguished from a "Net Lease," includes real estate taxes,
heating and building services in the base rent. Office and loft leases are nearly always of this
type. (See "Net Lease")

Gross Rental Rate. Quoted either as a fixed dollar amount per month or per year or based on an
amount per square foot per month or per year. The rate is usually quoted with a base year for
realty taxes and operating costs. Some buildings quote rates on a sem-gross basis.

Heating. Typically office buildings provide central heat during "building hours" in the "heating
season" and residual heat during cold weather. (See "Building Hours;" "Heating Season;" and
"HVAC")

Heating Season typically runs from October 1 to May 14th (the inverse of the Air-Conditioning
Season).

High Rise. 25 story building or greater.

Hold Over Tenant. A tenant in possession after the lease term expiration.

HVAC. Heating, Ventilating and Air-Conditioning. (See "Air-Conditioning" and "Heating.")

Landlord’s Work describes any building or decorating work carried out in the space by the
landlord at his expense prior to the tenant’s occupation of the space. It is totally negotiable. The
agreement that governs this is called the "Workletter" and is an integral part of the lease. It can
run the gamut from nothing at all to a full build-out of the space, depending on market conditions.
It can be set up in either of two basic ways:

1. The Landlord builds the space out using his own contractors. You can elect to
have more than the basic work done, in which case you will pay the extra.
2. You build out the space, and the landlord either gives you a cash contribution to
the work, or free rent in lieu of the cash.

In the end the tenant pays for the work, and the landlord amortizes the cost over the term of the
lease. If you ask for a lot of work, therefore, the landlord will be less flexible when negotiating the
rent, and may look for a larger security deposit. (See "Workletter, " "New Building Installation" and
"Building Standard")

Lease Terms are typically 3, 5, 10 or 15 years, but there are no rules. The longer the term the
more time the landlord has to amortize expenses, and the more concessions he will be likely to
concede.

Loss Factor. This is the difference between "Rentable Square Feet" (the area for which the
tenant pays) and "Usable Square Feet" (the carpetable area which the tenant actually occupies)
expressed as a percentage of the Rentable Square Feet. The Loss Factor was originally intended
to represent the tenant’s share of the common areas of the building, including the lobby, elevator
shafts, common corridors, risers, freight entrance, etc. In a few buildings it still does this fairly
accurately. But in New York there is no law laying down the criteria for calculating the Loss
Factor, so many landlords have been unable to resist the temptation to be creative and are
constrained only by the pressures of the market. You cannot negotiate the Loss Factor.

Low Rise. Building with six stories or less.

Master Lease. The controlling lease covering a property, may control a subsequent lease or
leases such as a sublease or assigned lease.

Mid Rise. Seven to 24 story buildings.

Mixed use Project. More than one use within a project such as office and retail; office and hotel;
office and apartments; retail and apartments.

Mullions. Material used to divide window lines to allow for the attachment of walls in creating
rooms.

Net Lease. A Net Lease is one where the tenant takes on the entire responsibility for the
payment of all the expenses of running a property in addition to the payment of rent, including
maintenance costs, real-estate and other taxes, wages, etc. The opposite of a Net Lease is a
"Gross Lease," and Net Leases are generally only encountered in cases that involve the renting
of entire buildings or of condominium units. (See "Gross Lease")

Net Rental Rate. he base rental cost expressed in dollars per square foot per year. The net rate
does not represent the total rental cost. Realty taxes and operating costs must be added in order
to arrive at the total cost per square foot for the space. Some landlords quote on net net or
sometimes triple net.

New Building Installation describes the building out of a piece of space to "Building Standard."
In general it is implied that this will be carried out by the landlord at his expense, before the
commencement date of the lease. (See "Building Standard")

Non-competition Clause. Prevents the owner from leasing space to another tenant that
competes with an existing tenant.

Non-Disturbance. Protects a tenant from loss of its premises in the event of default by another
party. If the owner is foreclosed, a non-disturbance agreement from the lender protects the
tenant. If a sub-lessor defaults on a lease, non-disturbance agreement from the owner protects
the sub-tenant.

Notice of Lease Term Commencement. A document executed between owner and tenant
defining the actual date the lease commenced, which may or may not define a new expiration
date.

Novation. To make new, such as a new lease agreement in lieu of a sublease or assignment of a
lease.

Options. New York City has always been a market in which it has been more difficult for tenants
to negotiate options and other rights to renew and/or expand than in other markets around the
country.

Parking Ratio. The number of parking spaces available per 1,000 square feet of space leases, or
for an entire project.

Pass-throughs. Operating expenses and/or tax increases paid by tenant under agreement are
said to be passed-through to tenant.

Porter’s Wage Formula – see "Escalations"

Prebuilt. Prebuilt spaces have been built out speculatively with generic layouts and are ready for
immediate occupancy. Can be a good quick solution if your needs are fairly standard.

Proportionate Share generally refers to your space’s area expressed as a percentage of the
total rentable square feet in the building. In practice, sadly, if you add up all the proportionate
shares in a building you are unlikely to arrive at a total equal to or less than 100%. What a
surprise.

Proposal. When you wish to make an offer on a space we, as your brokers, will draw up a non-
binding proposal, which we will submit on your behalf. As a minimum it will specify the following:

Tenant

Building

Space

Rentable Square Feet

Rent Per Square Foot

Term

Lease Commencement

Rent Commencement

The way the electricity will be paid for

Escalations

R&D Building. A combination of office and production space as might be used for research and
development.

Real Estate Taxes. All Real Estate Taxes are included in the base rent at the start of the lease.
In almost all cases, leases include an escalation clause stipulating that the tenant will pay its
proportionate share of Real Estate Tax increases in future years. (See "Escalations").

References -- See "Financials."

Renewal Option. Grants the tenant the right but not the obligation to renew under specified
terms and conditions.

Rent – Rent is expressed in dollars per rentable square foot per annum (See "Rentable Square
Feet.") At the beginning of the term it will normally include all real estate taxes and the operating
costs of the building. In many office buildings it will also include cleaning, which is worth $2.50 to
$3 per square foot per year. It will almost invariably include heat in the winter, and may or may
not include Air conditioning in the summer. It will probably not include electricity. In loft buildings
sprinkler and garbage removal charges may be additional. Rent will be subject to escalations,
which will normally kick in one year after commencement. Where the term is longer than 5 years,
there are likely also to be one or more "Rent Bumps" during the course of the term. (See "Air
Conditioning," "Electricity" and "Escalations")
Rent Bump – describes an increase in the rent which is built in to the lease. For example a ten
year lease may have a rent of $40 for years 1 through 5, and $45 for years 6 through 10

Rent Reviews – see "Escalations."

Rentable Square Feet – is the area on which your rental payment is based. What you actually
get is "Usable Square Feet." The difference between the two is called the "Loss Factor" and is
expressed as a percentage of the "Rentable Square Feet." (See also "Loss Factor")

Security Deposit. A deposit made by a tenant to a landlord to secure tenant's promise to perform
its obligations under the lease. Unless you are a long-established, rock solid, profitable company
with significant assets and a long history of paying rent on time, you will almost certainly have to
provide one. Landlords are inconsistent on this, and may ask for as little as three months’ rent, or
as much as a year’s. Maybe we can negotiate a "burn down" whereby it is reduced over a period
of years after an initial period, but don’t rely on it. Deposits can be in the form of a Letter of Credit,
which are more attractive to the sophisticated landlord as they do not constitute assets in the
event the tenant declares bankruptcy.

Space Plan. The preliminary space design defining the tenant's space requirements, often
includes furniture layouts.

Space Planners earn their crust by helping you get the maximum possible use out of your space
as built.

Square Footage – comes in two varieties: "Rentable Square Feet" and "Usable Square Feet."
The difference between them is called the "Loss Factor" and can be over 30%. See the separate
entries for details.

Subleasing. You will want your lease to contain as liberal a sublease provision as possible.
Generally landlords retain the right to turn down subtenants if they think that they are insufficiently
financially sound or if their use is inappropriate to the building. Often they will include provisions
allowing them to "recapture" the premises if the tenant approaches them for permission to sublet,
or to take all or part of any profit that may result from an increase in the rent. Clearly a landlord is
more likely to recapture during a period of rising rents, and consequently sublet spaces are much
less frequently available during such periods.

Submeter – see "Electricity"

Tenant Improvements. Improvements made to a property to make the space suitable for the
tenant's intended use, whether paid for by landlord or tenant.

Usable Square Feet – What you actually occupy. (See "Rentable Square Feet" and "Loss
Factor")

Voice and data wiring. Generally speaking the tenant is responsible for this, although in some
cases outlets may have already been installed (but not necessarily wired.)

Workletter. A list of the quantity and type of component parts that will be used to construct tenant
improvements, usually provided by landlord to secure a tenant for a property. The Workletter is
the part of the lease describing in greater or lesser detail the work that the landlord will carry out
in the space prior to its occupation by the tenant. It’s value is expressed in terms of $ per rentable
square foot . This must be negotiated at the stage of the initial proposal. The value of the
Workletter will rise and fall depending on the strength of the market and the creditworthiness of
the tenant. (See "Landlord’s Work")

Working Drawings. A complete set of plans, normally developed after lease execution, defining
the precise layout and construction of the premises, suitable for obtaining permit and true costs.

 Zoning. A method used by government to regulate the use of property in a given area or
zone. A set of ordinances controlling use.