Terms used daily by Landlords and Tenants
It can be difficult enough to navigate finding and leasing a commercial property, including industrial space. Understanding the language of a lease can be particularly challenging as terms vary from city to city and all landlords have different lease agreements. In this article, we provide an overview of common leasing terms and industry language. It will help you navigate the leasing process with more confidence.
Lessor
The lessor is the person who is granting the lease and who has the legal obligations related to the lease contract; the landlord. Sometimes this is an owner, but it may also be a property management company or commercial leasing company.
Lessee
The lessee is the person leasing the space; the tenant. Although you may need to personally guarantee a lease, your business entity should be the official lessee on all documents relating to the lease.
Premises Clause
If you're leasing an entire building, the clause should simply give the street address (and should describe any outbuildings or lots that come with it). If you're leasing less than an entire building, you and the landlord need to describe the space more precisely, including whether you will have access to storage rooms, conference rooms, parking, kitchen facilities, and the like.
The Use Clause and Exclusive Clause
A use clause limits how you'll use the rented space. The limitations can be as broad as what business you'll conduct there, as narrow as what specific services or products you'll offer, or as nebulous as the quality level of your operation.
Base Rent
A set amount used as a minimum rent in a lease with provisions for increasing the rent over the term of the lease.
Base Year
Actual taxes and operating expenses for a specified base year, most often the year in which the lease commences.
Building or "Core" Factor
Represents the percentage of Net Rentable Square Feet devoted to the building's common areas (lobbies, rest rooms, corridors, etc.). This factor can be computed for an entire building or a single floor of a building. Also known as a Loss Factor or Rentable/Usable (R/U) Factor, it is calculated by dividing the rentable square footage by the usable square footage. This specific terms applies mostly to office space.
Common Area Maintenance (CAM)
This term describes costs for areas in a building which are not directly leased but which are a common responsibility, such as hallways, restrooms, stairways, and walkways. Most lessors add CAM costs to square footage costs to calculate lease payments.
Flex Space
A building providing its occupants the flexibility of utilizing the space. Usually provides a configuration allowing a flexible amount of office or showroom space in combination with manufacturing, laboratory, warehouse distribution, etc. Flex space typically also provides the flexibility to relocate overhead doors. It is generally constructed with little or no common areas, load-bearing floors, loading dock facilities and high ceilings.
Fully Serviced Lease
A lease in which the rental payment includes other services, such as utilities, maintenance, and lawn/snow removal services. The landlord pays these fees and passes them on to the tenants in the lease. This can be a benefit to tenants as it saves from having to pay these additional fees, but the landlord may be charging more than actually is being paid for these services.
Gross Lease
A lease which includes the landlord agrees to pay for all common expenses, repairs, property taxes , property insurance and (occasionally) some utilities. The cost of a gross lease is higher than for other types of leases because all of these items are included in the amount of the lease.
Triple Net Lease (NNN)
A lease which the quoted lease rate is broken down into, base rent, property taxes, property insurance, and maintenance costs.
Gross Square Foot
The total square footage of the building or office being leased. This figure usually includes common space.
HVAC
An abbreviation for 'heating, ventilating, and air conditioning.' It's often pronounced as "H-VAC."
Clear-Span Facility
A building, most often a warehouse or parking garage, with vertical columns on the outside edges of the structure and a clear span between columns.
Build-out/Leasehold Improvements
The improvements to the office or building to make it usable for the tenant. In accounting terminology, these costs are called "leasehold improvements," and they can be depreciated as expenses.
Concessions
Cash or cash equivalents expended by the landlord in the form of rental abatement, additional tenant finish allowance, moving expenses, cabling expenses or other monies expended to influence or persuade the tenant to sign a lease.
Turn-key
An office or warehouse building that is ready to occupy. In most cases, this is a commitment by the landlord to bear the cost of any build-out.
Sub-lease
A sub-lease is an agreement between the lessor and lessee to allow someone else to use all or part of the space. In some cases, a business may wish to have another business to share the space - and the rent. In other cases, the tenant may want to leave before the lease term is up, and to have someone else take over the lease, to avoid having to re-negotiate.
Default
The general failure to perform a legal or contractual duty under a commercial lease, such as not paying rent when due, or the breach of other non-monetary lease covenants.
These are some of the most commonly encountered commercial real estate lease terms. There are certainly several others, and depending on the asset class, they can particularly complicated. This is why it’s advisable to work with a specialized commercial real estate broker to help you navigate the leasing process.
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