As you embark on the important journey to rent commercial space, it’s important to understand the lingo and to be clear on some of the most important terms in a lease. Let’s jump in and explore 10 noteworthy terms.
The premises section of a lease agreement describes the property being leased, often including the address and square footage of the space (typically rentable and/or usable area).
The commencement date is when the lease begins; however, there are some nuances.
The lease commencement date is typically when the lease takes effect and the tenant begins operating in the space, and the rent commencement date is when the tenant starts paying rent. These dates are often the same when there’s no rent abatement, but it’s also common for the dates to differ.
Sometimes there’s also an early access date that allows the tenant to begin building out the space before the lease actually commences.
The term simply refers to the length of the lease.
For more detail on common lease term lengths, check out: How Long Are Commercial Real Estate Leases?
4. Base Rent
The base rent is the rent that the tenant pays excluding any additional payments like expense reimbursements or percentage rent (common in retail leases).
For example, let’s say a tenant signs a NNN lease for a 2,000 sq. ft. space at $20.00 per sq. ft. per year, and operating expenses are $3.00 per sq. ft.
Initial monthly base rent would equate to: $20/sf x 2,000 sf / 12 months = $3,333/month
Monthly reimbursements (NOT included in base rent) would equate to: $3/sf x 2,000 sf / 12 months = $500/month
So monthly base rent would be $3,333 and additional rent in the form of reimbursements would be $500, for a total payment of $3,833.
Rent escalations are simply contractual increases in base rent over time.
For more detail on escalations, check out: What Are Rent Escalations in a Commercial Lease?
Reimbursements are additional payments made by tenants to reimburse the landlord for operating expenses at the property. Reimbursements are sometimes referred to as “additional rent” in the lease.
Depending on the type of lease, you may or may not need be responsible for your pro rata share of various operating expenses. For example, base rent is all-inclusive in a full service (or gross) lease, whereas NNN leases require the tenant to pay essentially all operating expenses.
For more detail on expense reimbursements, check out: What Are Net, Gross, and Modified Gross Leases?
7. Tenant Improvements
A tenant improvement allowance is a sum of money provided to the tenant from the landlord to complete improvements to the space. Typically tied in with the buildout prior to occupancy, TIs are provided as an incentive to lure strong tenants to the landlord’s property.
For more detail on TIs, check out: What Is a Tenant Improvement Allowance?
The condition upon delivery refers to the condition of the space when the landlord hands over the keys to the tenant.
While there’s no hard and fast rule, spaces are often delivered in one of the following conditions:
- As Is
- Cold Dark Shell
- Warm Vanilla Shell
For more detail on how commercial spaces typically get delivered to tenants, check out: How Are Commercial Spaces Delivered?
A rent abatement is a slightly fancier way of saying “free rent”. It’s common for commercial landlords to provide a rent abatement for a month or more at the beginning of the lease term.
For more on rent abatements, check out: What Is a Rent Abatement in a Commercial Lease?
10. Renewal Options
Renewals are contractual options within the lease allowing the tenant to extend the agreement for a period of time upon expiration of the existing term.
For more on renewals, check out: What Is a Lease Renewal Option?