Commercial Real Estate Terminology
Below is a list of certain terms that frequently appear in commercial leases, but have meanings that may be misunderstood or misinterpreted, thus deserving of a second look.
This requires the tenant to pay, in addition to base rent, all costs associated with the operation, maintenance and repair of the building, all real estate taxes, and utilities including repair and maintenance of the leased building’s structure and roof.
The Americans With Disabilities Act was passed by Congress in 1994 with the intent to provide persons with disabilities accommodations and access equal or similar to that of the general public.
Any amounts due under the commercial lease which are in addition to the base rent. Most typically, the additional rent charges refer to common area maintenance, real estate taxes and insurance costs.
A specified dollar amount provided by the landlord under a lease to be used by the tenant for specific purposes. For example, the landlord may give the tenant an allowance for certain tenant improvements, moving expenses, design fees, etc. Typically, if actual expense exceeds the allowance, the tenant is responsible for any excess costs. However, if the actual expense is less than the specified allowance amount, then the landlord retains the benefit of the savings.
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 and may be used to calculate base rent in such leases.
Common Area Maintenance Charges. CAM Charges include the expenses incurred by the landlord in maintaining the common areas of the building or development.
Common area is the area used in common by all tenants of an office building or multi-unit development. Common area includes building and elevator lobbies, common restrooms, corridors leading from an elevator lobby to a tenant space, parking lots, open spaces, etc.
Certificate of Occupancy (COO)
COO is a statement issued by the local governmental agency certifying that the newly constructed building is in compliance with all applicable codes and regulations and may be occupied by the tenant. Some commercial leases provide that base rent is abated for the tenant during construction and until a COO is obtained by the tenant for the leased space.
An escalation clause in a lease provides for an increased rental rate at a future time during the term of the lease. Escalations may be accomplished by several types of clauses, including: (i) fixed increases – a provision in the lease that calls for definite, periodic, pre-determined rental increases throughout the term of the lease; (ii) cost of living increase – a provision in the lease which ties the rental increases to a government cost of living index, with periodic adjustments to the rental amounts throughout the term of the lease as the index changes; and (iii) direct expense – a provision in the lease which provides that the rental amount will be adjusted throughout the term according to changes in the expenses of the property paid by the landlord, such as real property tax increases, increased insurance premiums, increased CAM Charges, etc.
An instrument which itself prevents individuals from later asserting facts that vary from those contained in the Estoppel Certificate. This instrument is typically required from the tenant by the landlord’s lender as a condition to making the loan to the landlord. The Estoppel Certificate is signed by both the landlord and the tenant and it certifies and confirms certain provisions of the lease, such as the term of the lease, the amount of base rent payable under the lease, confirmation that there are currently no defaults under the lease, and similar provisions.
Free rent may be a concession granted by the landlord to a tenant in which the tenant is excused from paying rent for a stated period during the lease term. Typically, abatement of rent for a stated period of time is granted by the landlord in instances where the tenant is making substantial improvements to the leased space in order to allow for the tenant to offset some of the upfront expenses and recoup some of the costs of the improvements to the leased space.
Fully Serviced Lease / Gross Rent
A fully serviced lease is a lease in which the stated rental amount includes all other expenses or charges that may be charged to the tenant in other lease arrangements including: CAM Charges, insurance premiums, real property taxes, etc. Another commonly used term for a fully serviced lease is a lease with gross rent.
A lease of land only, which may be vacant land or exclusive of any buildings located on the property subject to a ground lease. A ground lease is typically a net lease, on a long-term basis, commonly for thirty (30) or more years.
This term is typically used in a lease whereby the stated rent excludes the insurance, utilities, real estate taxes and operating expenses for the entire building/development. In addition to the base rent, the tenant is responsible for the payment of these additional costs, typically on a monthly basis together with the base rent, either directly or as additional rent charges. The additional charges are calculated based upon the tenant’s pro rata share of the building/development.
Expenses that cover the cost of operating an office building or development, such as property management fees, janitorial expenses, utilities, landscaping expenses, and similar day-to-day operating expenses, as well as insurance, real property taxes assessed on the premises, and a reserve for replacement of items which periodically require replacement. However, operating expenses should not include capital expenses such as resurfacing of parking lots, replacement of roof, and similar expenses.
This is a standard frequently applied in commercial leases (most typically in a sublease clause), which limits the landlord’s ability to withhold its consent. If a reasonable person would give consent to a proposed action under the circumstances (such as consent to an assignment or sublease of the leasehold interest), then so must the landlord under the reasonable consent standard.
This is the square footage for the leased premises for which rent can be charged. Typically, the rental area is the gross area of the full floor less the area of all vertical penetrations (elevator shafts, stairwells, etc.). Rentable area can be measured in several ways, but the most common calculation is according to BOMA standards.
Right of First Refusal
Right of First Refusal is a right, typically granted by the owner/landlord to the tenant, which gives the tenant the first opportunity to purchase the leased property, or lease a portion of the property, if the owner/landlord determines to sell or lease all or any portion of the property. In order to exercise the right of first refusal, the owner/landlord must have a legitimate offer from a third party which the tenant can match and exercise its right or decline. If the tenant refuses to make an offer or if the parties are unable to agree upon the terms of such sale or lease, then the owner/landlord can sell or lease to the third party offeror.
Substantial completion is generally used in reference to the construction of tenant improvements. The tenant’s leased premises is typically deemed to be substantially completed when all of the tenant improvements for the premises have been completed in accordance with the plans and specifications previously approved by the tenant. Substantial completion is sometimes used to define and determine the commencement date of the lease term.
Tenant Improvements, or TIs, are improvements to the land and/or building(s) to meet the needs and desires of the tenant. TIs may be new improvements or remodeling to the leased premises. TIs can be paid for by the landlord, by the tenant, or shared costs of the two parties, depending upon the terms negotiated and agreed upon in the lease between the landlord and the tenant.
A triple net (NNN) lease is a lease that requires the tenant to pay, in addition to the fixed rental amount, the expenses of the property leases, including real property taxes, insurance costs, maintenance expenses, utilities, cleaning charges, landscaping, etc.
This term refers to a situation where an owner makes the leased property ready for a tenant to begin business operations in the space where the tenant is required to furnish only furniture, telephone and inventory, if any. Turnkey tenant improvements are provided at the landlord’s sole cost and expense in accordance with plans and specifications previously agreed upon between the landlord and tenant. Unlike an allowance (as described above), the landlord bears the risk of construction in a turnkey situation.