Lease terms explained

Lease types

Full service gross lease

The tenant pays one rent amount. The landlord pays taxes, insurance, maintenance and most operating costs. Common in office.

Modified gross lease

A middle ground. The tenant pays base rent and some named costs, often utilities or janitorial. The lease says which.

Single net, double net (NN) and triple net (NNN) lease

Net leases pass costs to the tenant. A triple net lease has the tenant pay base rent plus property taxes, insurance and maintenance. Common in industrial.

Absolute net lease

A triple net lease where the tenant also covers structural items, such as the roof and foundation. Read the lease closely.

Ground lease

The tenant leases land only, then builds on it or owns the building for the term.

Sublease

The tenant leases its space to a new tenant but stays responsible to the landlord.

Assignment

The tenant transfers the whole lease to a new tenant. The landlord usually must approve.

Build-to-suit lease

The landlord builds a building to the tenant's specifications, then leases it to that tenant.

Sale-leaseback

An owner sells the building and leases it back from the buyer, freeing up cash while staying in place.

Rent and costs

Base rent

The fixed rent before extra charges. Quoted per square foot, per month or per year. Always check which.

NNN charges (operating expense pass-throughs)

Taxes, insurance and maintenance that a net-lease tenant pays on top of base rent.

CAM (common area maintenance)

A tenant's share of the cost to maintain shared areas such as parking, landscaping, lobbies and hallways.

Base year

In some gross leases, the tenant pays only increases in costs above a set year. Also called an expense stop.

Rent escalation

A built-in rent increase, either a fixed percentage each year or tied to an index such as the Consumer Price Index (CPI).

Free rent (abatement)

Months of rent the landlord waives, usually at the start of the lease.

Security deposit

Money held by the landlord against unpaid rent or damage. Ask when and how it is returned.

Personal guarantee

A promise by an owner or officer to pay if the company defaults on the lease.

Percentage rent

Extra rent based on the tenant's sales. Rare in office and industrial. Common in retail.

Holdover rent

Higher rent charged if a tenant stays past the lease end without a new agreement.

Late charge and default interest

Fees if rent is paid late. Check the grace period.

Space and measurement

Rentable square feet (RSF)

The area you pay for. It includes your share of common areas.

Usable square feet (USF)

The area you actually occupy and control.

Load factor (common area factor)

The gap between USF and RSF, shown as a percentage. A higher load factor means you pay for more shared space.

Measurement standard

The method used to measure the building. BOMA publishes standards for office and industrial buildings. Ask which one applies, because it changes the square footage you pay for.

Gross leasable area (GLA)

The total floor area available to tenants.

Common areas

Space shared by all tenants, such as lobbies, restrooms, hallways, parking and driveways.

Premises

The exact space the tenant is leasing, as described in the lease.

Build-out and condition

Tenant improvements (TI)

Changes made to the space to suit the tenant.

TI allowance

Money from the landlord toward tenant improvements. Usually quoted per square foot.

Turnkey

The landlord completes the build-out and the tenant moves in.

As-is

The tenant takes the space in its current condition.

Delivery condition

What state the landlord must hand over the space in, such as broom clean, with working systems.

Warm shell and cold shell

A warm shell has basic systems in place. A cold shell is a bare building with little or nothing built inside.

Restoration (surrender) clause

Requires the tenant to remove improvements and return the space to its original condition at lease end.

Deferred maintenance

Needed repairs that have been put off. Raise it before you sign.

Term, options and timing

Lease term

How long the lease runs.

Commencement date

The day the lease starts. Often not the same as move-in.

Rent commencement date

The day rent starts. Often later than commencement because of free rent or build-out.

Expiration date

The day the lease ends.

Renewal option

The tenant's right to extend, on stated terms or at market rent.

Right of first refusal (ROFR)

The right to match an outside offer on space or the building before the landlord accepts it.

Right of first offer (ROFO)

The right to be offered space first, before the landlord markets it.

Termination option (early termination)

A right for the tenant or landlord to end the lease early, often with a fee.

Expansion and contraction rights

Rights to add space, or give some back, during the term.

Letter of intent (LOI)

A non-binding outline of the main deal terms before the lease is drafted.

Industrial-specific terms

Clear height

The usable height inside a warehouse, from the floor to the lowest overhead obstruction.

Dock-high door

A loading door with a platform at truck bed height.

Grade-level door (drive-in door)

A door at ground level that vehicles can drive through.

Truck court and yard

The area outside a building where trucks maneuver and park. Yard space can be a major value driver.

Power (amps and volts)

The electrical capacity of the building. Many industrial users need more than a typical building offers.

ESFR sprinklers

Early suppression, fast response fire sprinklers, often needed for high-piled storage.

Column spacing

The distance between building columns. It affects racking and layout.

Zoning and permitted use

What the city allows in the building. Confirm your use is allowed before you sign.

Hazardous materials clause

Rules on storing or using hazardous materials. Important for manufacturing and some storage uses.

Industrial outdoor storage (IOS)

Land or yards used mainly to store trucks, trailers, equipment or materials.

Flex space

A building that combines office and warehouse or light industrial space.

Legal and protective terms

Estoppel certificate

A signed statement from a tenant confirming the lease terms. Buyers and lenders ask for these.

Subordination, non-disturbance and attornment (SNDA)

An agreement between tenant and the landlord's lender. It protects the tenant's rights if the property is foreclosed.

Quiet enjoyment

The tenant's right to use the space without interference from the landlord.

Indemnity

A promise to cover the other party's losses in certain situations.

Force majeure

Events outside anyone's control, such as natural disasters, that may excuse or delay performance.

Default and cure period

Default is a breach of the lease. The cure period is the time allowed to fix it.

Co-tenancy clause

Lets a tenant reduce rent or leave if a named neighbor moves out. More common in retail.

Exclusive use clause

Stops the landlord from leasing to a competitor in the same building.

Signage rights

What signs the tenant may put on the building or monument sign.

Parking ratio

The number of parking spaces per 1,000 square feet.

Environmental clause

Assigns responsibility for contamination. Pairs with a Phase I environmental report in many deals.

Retail terms

Anchor tenant

A major tenant, often a grocery store or national brand, that draws customers to a shopping center and helps other tenants.

Inline space

Shop space in a row of storefronts, usually smaller than the anchor space.

Pad site

A freestanding parcel at or near a shopping center, often used by a restaurant, bank or convenience store.

Percentage rent breakpoint

The sales level above which a retail tenant pays a percentage of its sales as extra rent. The lease sets the percentage and the breakpoint.

Gross sales definition

How the lease defines the sales used to calculate percentage rent. What is included or excluded, such as returns and taxes, can change the rent.

Radius restriction

Stops a tenant from opening another location within a set distance of the space.

Continuous operation clause

Requires the tenant to stay open during stated hours. Landlords use it to keep the center active.

Go-dark right

A tenant's right to stop operating while still paying rent. Anchor leases often address it.

Marketing fund and merchants association fees

Charges a retail tenant may pay for center-wide advertising and events, on top of rent and common area charges.

Tenant mix

The combination of tenants in a center, planned so they bring customers to one another.

Sales reporting and audit rights

The tenant reports sales to the landlord. The landlord may have the right to check the records.