10 Commercial Leasing Terms to Know
As a commercial real estate tenant, there are several key terms that are helpful to know before leasing commercial space. Read on for the top commercial leasing phrases you should be aware of.
1. Available Space
The total amount of space that is currently being marketed for lease. It includes space that is vacant or also space that is currently occupied but will be vacant in the future. Available space can include both direct and sublet space. If sublet space is excluded from the calculation, the term “direct available space” is recommended.
2. Common Area
The generally accessible areas of a building such as: washrooms, janitorial closets, electrical rooms, telephone rooms, mechanical rooms, elevator lobbies and public corridors. It does not include major vertical penetrations such as elevator shafts, stairways, equipment runs, etc.
To secure a tenant when vacancy is high in a market or submarket, a landlord may need to grant concessions in the lease. Those concessions most often take the form of free rent but may also include lease buyouts, moving allowances and above-market tenant improvement allowances.
4. Gross Lease
A legally binding contract in which a landlord receives stipulated rent from a tenant and is obligated to pay all or most of the property’s operating expenses and real estate taxes.
A leasehold is an ownership structure in which a temporary right to use land/real property has been granted by the owner to another party. Although the tenants do not own the land/real property, they are able to improve and operate it as stipulated in the lease for the term of the lease.
6. Modified Lease
A lease in which the landlord receives a stipulated rent, and payment of the property’s operating expenses is divided between the lessor and lessee via specified terms in the lease; also called “Modified Gross”.
A letter of intent is an agreement(s) between two or more parties before an actual agreement, such as a lease, is finalized. While LOIs may not be binding, provisions of them can be, e.g., non-disclosure and exclusivity. The intent is to protect both parties in the transaction until the transaction is executed.
8. NNN Lease
A lease agreement whereby the tenant pays taxes, maintenance and property insurance as well as all operating costs associated with the tenant’s occupancy, including personal property taxes, janitorial services and all utility costs. The landlord is responsible for the roof and the structure and sometimes the parking lot.
9. Pro Rata Share
The percentage that, when multiplied by reimbursable expenses (less an expense stop if referring to a gross lease), equals the amount to be reimbursed by a tenant to the landlord for expense recoveries. Typically, the percentage is calculated by dividing the net rentable area of a tenant’s leased premises by the net rentable area of the building, although this is not always the case.
10. Renewal Option
The right of a tenant to extend the lease term for a specified period of time at a predefined rental rate. In many instances, the rate is defined as a percentage of market rent, and in other instances, the rate is a specified dollar amount. An auto-renewal option is a type of renewal option whereby the lease term is extended automatically on the expiration date without any notification requirement. Often, there is a date by which this option must be executed; otherwise, the option expires.
Definitions Source: The NAIOP Research Foundation