Commercial Tenant Leasing Glossary
Absolute Triple Net Lease: lease requiring the tenant to pay a base rent plus all costs associated with the operation, repair and maintenance of the building, all real estate taxes and utilities. Not all landlords and lessees define triple net in the same way.
ADA: Americans with Disabilities Act passed by Congress in 1994. Its intent was to provide persons with disabilities accommodations and access equal to or similar to that of the general public.
Additional Rent: any rent due under a lease that is in addition to the base rent. The most common form of additional rent is operating expense increases.
Agency: any relationship in which one party (agent) acts for or represents another (principal). Agency agreements involving real property should always be in writing.
Allowance: set dollar amount provided by the landlord under a lease to be used by the tenant for a specific purpose. Examples include allowances for tenant improvements, moving expenses, and design fees. If the expense exceeds the allowance amount, the excess will be the tenant's responsibility. If the expense is less than the allowance, the savings are usually retained by the landlord unless the lease specifies otherwise.
Amortization: payment of debt in periodic installments of principal and interest, as opposed to interest only payments. Commonly used in a lease where the landlord incurs costs for additional tenant improvements which are treated as a debt and repaid by the tenant over the term of the lease.
Assignment: a transfer to another of real or personal property or any rights in property. Common assignments are of leases, mortgages, and deeds of trust. However, the term encompasses all transfers of title.
Base Building: the existing shell of a building prior to the completion of tenant improvements. This condition varies from building to building, and landlord to landlord.
Base Rent: the minimum rent in a lease to which additional rent is added. The additional rent may be based on a percentage of sales or otherwise.
Base Year: the twelve month period of time upon which a direct expense escalation of rent is based. Generally, it is the calendar year in which the lease commences.
BOMA: Building Owners and Managers Association. BOMA publishes the definition of rentable and useable area, which is used to determine the square footage leased in most commercial office buildings.
Building Class: Building Class is usually used to describe an office property and refers to the quality of the property. Class definitions fall with the following guidelines. Class A+: Landmark quality, highrise building with prime central business district location (the best of the Class A buildings). Class A: Generally 100,000 sf or larger (five or more floors), concrete and steel construction, built since 1980, business/support amenities, strong identifiable location/access. Class B: Renovated and in good location, newer building that are wood frame construction, and/or in non-prime locations. Class C: Older, unrenovated of any size in average to fair condition.
CAM Charges: Common Area Maintenance charges. Those charges levied on or the expenses incurred in maintaining the common areas of a commercial building.
Commencement Date: the date on which a lease begins. This is usually, but not always, the day on which the tenant takes possession of the leased premises, which usually occurs upon substantial completion of the tenant improvements.
Certificate of Occupancy (COO): a certification issued in writing by a local government agency verifying that a newly constructed building is in compliance with all building codes and may be occupied.
Demised Area: the walled off area of a leased space, separated from spaces leased to others (by a "demising" wall) or common area. Also measured as useable area.
Effective Rent: the average per square foot rent paid by a tenant over the term of a lease. It takes into account free rent and rent increases. It generally does not include tenant allowances and free parking.
Effective Useable Area: excludes the areas within the useable space that the tenant pays rent on but effectively cannot use such as columns and inaccessible spaces.
Escalation Clause: a clause in a lease requiring an increase in the rent at a future date. It may be accomplished by several types of clauses, such as: (1) fixed increases - a clause which calls for a definite, periodic rental increase; (2) cost of living - a clause which ties the rent to a government cost of living index, with periodic adjustments as the index changes; (3) direct expenses - the rent is adjusted according to changes in the expenses of the property paid by the lessor, such as tax increases, increased utility costs, maintenance costs, etc.
Estoppel Certificate: a document that prevents parties from later asserting facts different from those contained in a document. They are often required by the buyer of an income property. The tenant and landlord both sign the estoppel certificate, confirming the lease and other material facts. Thereafter, neither party is able to make claims to the contrary.
Expansion Option: a right granted by the landlord to a tenant whereby the tenant has the option to add more space to its premises pursuant to the terms of the option.
Expense Stop: a fixed amount in a lease where the tenant is responsible for all building operating expenses and taxes in excess of a defined amount.
Extension Option: an agreed continuation of occupancy under the same conditions, as opposed to a renewal, which involves new terms and/or conditions. In a lease, it is a right granted by the landlord to the tenant whereby the tenant has the option to extend the lease.
Fair Market Rent: generally, the rent which would be negotiated by a willing landlord and tenant in an "arm's length transaction" for a specific property at a given time, even though the actual rent may differ. In a lease, the term "fair market rent" may be defined in a number of different ways.
Free Rent: a concession granted by a landlord to a tenant whereby the tenant is excused from paying rent for a stated period during the lease term.
Fully Serviced Lease: a lease in which the stated rent includes the operating expenses and taxes for the building. Same as a gross lease. Opposite of an absolute triple net lease.
Gross Lease: a lease in which the stated rent includes the operating expenses of the building. Same as a fully serviced lease.
Gross Up: an adjustment made to operating expenses to adjust for the occupancy level of a building. When operating expenses are "grossed up", it means that the building's variable expenses have been adjusted upwards to the level those expenses would have been if the building was fully occupied (usually 95%).
Ground Lease: a lease of land only. Usually an absolute triple net lease on a long term basis (30 years or more). Ground rent is not considered an operating expense.
HVAC: Heating, Ventilation, Air Conditioning. A general term encompassing a system designed to heat and cool a building.
Landlord (Lessor): the party (usually the owner) who gives the lease (right to possession) in return for consideration (rent).
Lease Term: the period of time in which the landlord grants to the tenant the right to possession of real property.
Lessee (Tenant): the party to whom a lease is given in return for rent.
Lessor (Landlord): the party (usually the owner) who gives the lease in return for rent.
Letter of Intent: generally a written statement that two parties to a prospective transaction (buyer/seller or lessor/lessee) intend to proceed to a binding agreement in good faith on stated principal business terms to be entered into. This definition applies when signed by both parties. Alternatively, such a statement may be signed only by one party and is then an indication of a willingness to enter into agreement on the stated terms and conditions. To avoid legal issues regarding offer and acceptance and thus the formation of a binding contract, care must be taken to include a clause stating that there is not an offer being made and no intent to create a legally binding obligation.
Load Factor: in a lease, the load factor is the multiplier to a tenant's useable space that determines the tenant's proportionate share of the common area (restrooms, lobby, mechanical rooms, etc.). The load factor is usually expressed as a percentage and ranges from a low of 5% for a full floor tenant to as high as 20% for a multi-tenant floor.
Net Rentable Area: this is the area (square footage) for which rent can be charged. Generally, it is the gross area of a full floor less the area of all vertical penetrations (elevator shafts, stairwells, mechanical shafts, etc.) Net rentable area can be measured in many ways, but the most common measurement for office buildings is the BOMA standard which includes the tenant's premises plus an allocation of the common area directly benefiting the tenant, such as restrooms, common corridors, mechanical and storage rooms, and the elevator lobby on the tenant's floor.
Occupancy Cost: any cost or charge incurred by a tenant as set forth in the lease, such as rent, operating expense increases, parking charges, moving expenses, and renovation costs.
Occupancy Date: unless specifically stated otherwise in the lease, it is the date on which the tenant takes possession of its leased premises.
Operating Expenses: the cost of operating an office building, such as janitorial, management fees, utilities, and other day to day expenses, including taxes, insurance, and a reserve for replacement of items which periodically wear out. Operating expenses should not include capital expenses such as roof replacement nor those associated with the production of income such as leasing commissions and legal fees.
Owner's Representative: an agent who is an advocate for the owner and/or landlord.
Pass Throughs: an increase in operating expenses over the base year that is billed to a tenant as additional rent.
Premises: generally, the entire rentable area leased by the tenant. Sometimes used to designate solely the useable area leased, i.e. that which the lessee has exclusive occupancy as opposed to the common areas.
Reasonable Consent: a standard applied in a lease (most often in a sublease provision) which limits the landlord's ability to withhold its consent in its sole discretion. If a reasonable person would give consent to an action, given the circumstances, so must the landlord.
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 (e.g. 95% of "fair market rent").
Rent: the consideration paid for the right to occupy and use real property.
Rental Rate: the amount of rent paid for the occupancy and use of real property. Generally stated on a per square foot per month or per year basis.
Right of First Offer or First Opportunity: a right, usually given by an owner to a tenant, which gives the tenant a first opportunity to lease a portion of the property if the owner decides to lease. Unlike a Right of First Refusal, the owner is not required to have a legitimate offer which the tenant can then match or refuse. If the tenant refuses to make an offer or if the parties cannot agree on terms, the property can then be leased to a third party.
Right of First Refusal: a right, usually given by an owner to a tenant, which gives the tenant a first right to lease a portion of the property if the owner decides to lease. The owner must have a legitimate offer which the tenant can match or refuse. If the tenant refuses, the property can then be leased to the offeror.
Right of Offset: a specific clause in a lease where the tenant has the right to deduct from the rent certain costs which are due to the tenant from the landlord. Included may be the costs incurred by the tenant to cure defaults of the landlord, after notice and failure by the landlord to cure the defaults.
Space Pocket: a portion of leased premises that is set aside to accommodate future growth on the part of the tenant. The space pocket is often fully improved at the commencement of the lease, but no rent is due on the pocketed area until the earlier of "actual use" or a specified future date.
Sublease: a lease, under which the lessor is the lessee of a prior lease of the same property. The sublease may be different in terms from the original lease, but cannot provide for a greater property interest.
Subordination: To make subject or junior to.
Substantial Completion: generally used in reference to the construction of tenant improvements. The tenant's premises is typically deemed to be substantially completed when all of the tenant improvements for the premises have been completed in accordance with plans and specifications previously approved by the tenant. Sometimes it is used to define the commencement date of a lease.
Tenant (Lessee): the holder of an interest in property for a specific term under a lease.
Tenant Improvements: improvements to buildings made to meet the needs of tenants. They may be paid for by the landlord, tenant or both.
Tenant Representative: an agent who exclusively represents the tenant.
Turnkey: refers to an owner making a property completely ready for a tenant to occupy. Turnkey tenant improvements are provided at the landlord's expense according to plans and specifications agreed upon by the parties. Unlike an allowance where the tenant pays for costs in excess of the allowance amount, the landlord bears the risk of construction in a turnkey situation.
Useable Area: the area (square footage) that can be occupied by a tenant within a tenant's leased space. Useable area can be measured in many ways, but the most common measurement for office buildings is according to BOMA standards.
Value Engineering: process by which costs can be decreased or benefits can be added to an undertaking or project through redesign, prioritization or other actions.
Work Letter: specifications for tenant improvements usually attached to a lease and/or letter of intent. The work letter provides the basis for working drawings and contractor pricing and may allocate costs between the parties. It also establishes the dates for approval of drawings, etc.
Working Drawings: drawings prepared by a licensed architect and used by contractors in the construction of the tenant improvements. They show all architectural details.