Learn Common Leasing Terms

Posted by: Alan Bernier

25 terms you will likely encounter when going through the commercial real estate leasing process.

1. NNN (Triple Net) Lease: In additon to the monthly rent, the tenant is responsible for paying for their share of property taxes, insurance, common area maintenance, utilities, and janitorial service.

2. Industrial Gross Lease: In addition to the monthly rent, the tenant is responsible for paying for their utilities and janitorial service.

3. Modified Gross Lease: In addition to the monthly rent, the tenant is responsible for janitorial service in their space.

4. Full Service Lease: This is common in most muti-tenant office buildings.  In this type of lease all expenses (including utilities and janitorial service) are included in the monthly rent.  This is also common for most subleases and shared spaces.  However, it is common for the landlord to pass on any annual increases in expenses (as well as annual savings).

5. Rent Escalations: The amount a tenant's rent increases year to year. The most common escalation is based on CPI (Consumer Price Index) or a percentage of annual rent.

6. Tenant Improvements (TI’s): The interior improvements built within the space (premises).  Furniture, fixtures and equipment (FF&E) are considered separate from TI's.
7. Amortization: This relates to costs incurred by a Landlord that are passed on to the tenant in the form of additional rent during the term of the lease. This is very common with tenant improvements. The landlord may offer to amortize the cost of improving the space into the tenant's rental payments.

8. Plug and Play: Typically refers to a space that comes with furniture and telco wiring in place.  Very common with subleases and shared spaces.

9. Turnkey Build Out: Turnkey tenant improvements are typically provided by the landlord. The landlord and tenant establish the budget.  The landlord pays for the improvements and contracts with the builders directly.  The costs of the improvements are then included in the monthly rent.  This is different from a Tenant Improvement Allowance in which the landlord provides an allowance (loan) to the tenant and the tenant is responsible for the contracts and managing the buildout.

10. Work Letter: The work letter defines the specifications and estimates for tenant improvements (build out) in the space and is usually defined before a lease is signed and attached as an exhibit to the lease.

11. Load Factor: Also known as the Loss Factor, the Load Factor is the percentage difference between the usable square feet of a tenant's space and the rentable square feet.  For example, the building lobby and common areas are not part of a tenant's space however a tenant is typically responsible for paying their pro-rata share of these spaces.  A tenant's rent is based on the rentable square feet.  If a space is 3,000 rentable square feet and the Load Factor is 15%, then the actual space that the tenant occupies (premises) is equal to 2,550 usable square feet.

12. Common Area: The common area is the area of the building that is allocated to each tenant but is not directly
controlled by any one tenant. Some examples include the lobby, elevator, bathrooms, supply closets, and mechanical

13. Usable Square Feet: The amount of square feet measured within a tenant’s space.

14. Rentable Square Feet: The amount of square feet that a tenant pays for.  It is the usable square feet times the building's load factor. 

15. Common Area Maintenance (CAM): Amount charged to tenants for expenses related to the maintain and upkeep of hallways, restrooms, parking lots, landscaping, etc.  It is always good to understand what is included in the CAM.

16. Base Year: A Base Year is established in most leases except triple net (NNN) leases. The Base Year (typically the first year) of the lease, establishes the base line for building expenses.  The tenant is then typically responsible for paying their pro-rata share of expense increases for each subsequent year.  These are typically minor expense increases.  It is good to understand the history of a building's expense increases.

17. Holdover Rent: This is the amount of additional rent a tenant must pay if they remain in their space after the lease term expires. Holdover Rent is typically between 150% and 200% of the normal monthly rent and is a negotiable term in the lease.

18. Sublease: Subleasing rights are determined in a lease and is something to consider carefully.  These rights establish the rules for renting a tenant's space to a third party (subtenant).  This is an important term and one that should be reviewed carefully by a professional (your lawyer or broker).

19. Assignment: This relates to assigning your lease to a 3rd party with the landlord’s consent.  This is an important term of the lease because it applies to a tenant's potential merger, acquisition and change of ownership.

20. Non-Disturbance: This relates to a tenant's right to occupy a space without risk of losing the space so long as they are not in default of the lease terms.

21. Right of First Offer (ROFO):  A tenant's right to make the first offer on a space to lease or buy.  With a ROFO, the Landlord must approach the tenant first with the particular opportunity.  The tenant has the right for an established period of time to make an offer.

22. Right of First Refusal (ROFR): A right, usually given by an owner to a tenant, which gives the tenant a first chance to
buy the property or lease a portion of the property if the owner decides to sell or lease. The owner must have a
legitimate offer which the tenant can match or refuse. If the tenant refuses, the property can then be sold or leased
to the offeror.
23. Renewal Option: The right of a tenant to renew (extend the term of) a lease for a stated period of time at a rent
to be determined (i.e. 9.5% of "fair market rent").

24. Relocation Clause:  This is any clause in the lease giving the landlord the right to move the tenant during the
lease period.

25. Pro-Rata Share:  Percentage of a building that is occupied by the tenant. It is usually based on the rentable or
leasable square footage measurement of your space compared to the rentable or leasable square footage of the building.

Last updated: 04.29.2009 02:51 PM