Glossary of Commercial Real Estate Terms for Tenants

Finding the right retail, office, or industrial space can be an exciting challenge for a business. Once you've made the decision to lease space, you’ll encounter a commercial real estate terminology that can be quite confusing.
 
Your tenant representative and real estate attorney will guide you and explain unfamiliar terminology, but these are terms that are helpful to know.
 
A
 
Asking Rent: This represents the rental rate offered by the landlord per rentable square foot (RSF), per year (RSF/YR) for lease. It is sometimes represented as a monthly (RSF/MO) amount depending on the local market custom. Asking Rent is the starting point of a rental rate negotiation.
 
B
 
Base Rent: The minimum or fixed amount of rent paid in a commercial lease before escalations, pass through expenses or other charges. Base Rent is determined by multiplying the total Rentable Square Footage (RSF) by the Rental Rate.
 
Base Year: In many Full-Service and Gross Leases the tenant is responsible for paying their pro-rata share of the property taxes, insurance and common area maintenance (CAM) as part of their lease agreement. The “Base Year” is the year that is tied to the actual amount of the expenses to run the property in a specified year. In a new lease, the Base Year is typically negotiated to be either the year of lease commencement or the first calendar year of tenancy. The expense amount for the Base Year is the maximum amount of expenses the owner will pay over the life of the lease per year and any expenses over the Base Year amount will be passed through to the tenant in addition to the rent.
 
BOMA Standard: The Building Owners and Managers Association (BOMA) provides guidelines on how a commercial office building or specific suite should be measured. Most office leases reference BOMA measurement standards within the lease language as a standard for measurements.
 
Building Class: Office buildings are differentiated by Class A, B, or C depending on a combination of geographical and physical characteristics. These classifications are very subjective and vary widely. Building Class is best used as a mere guideline when considering available space alternatives in a specific submarket. 
 
C
 
Commencement Letter: A letter that codifies when the lease term and the benefits of the lease began (Lease Commencement Date). Since the Lease Commencement Date starts the clock on the term of the lease and establishes the Expiration Date, a Commencement Letter should be executed by both parties.
 
Common Area: The portions of the building or project that are outside your suite and available for use by all tenants or occupants on a non-exclusive basis such as lobbies, shared restrooms, stairwells, storage rooms, and shared hallways, etc..
 
Common Area Maintenance (CAM): In a typical office lease the costs for utilities, cleaning and maintenance of the building's common areas that landlords pass through to their tenants. However, there is no industry standard on what exactly CAM charges include and as a result are almost never the same from one building or landlord or lease to another. CAM charges should be defined in your lease so there is no confusion as to what costs are included and excluded. 
 
Concession: An incentive given to a tenant by a landlord to make a lease more enticing. These most often take the form of free rent and tenant improvement allowances but may also include free parking, reduced security deposit, and/or consent to sublease. 
 
D
 
Direct Space: When you rent office space directly from the landlord of the building as opposed to renting space being offered by another tenant subletting a space that has already been leased. Since you're negotiating directly with the landlord you may be able to gain more concessions, usually in the form of free rent and tenant improvement allowances. 
 
E
 
Effective Rent: The average rent paid over the lease term by a tenant adjusted downward for financial concessions paid by the landlord (such as free rent), and upward for rent escalations and costs that are paid by the tenant (such as operating expense pass throughs). 
 
Escalation: A clause in the lease which increases the rate of rent over the term of the lease, usually on an annual basis. The most frequently used types of escalations are Fixed Percent (%), Monetary ($/sf), and Index (CPI). Most leases with a term longer than one year will have escalation. While most tenants want to focus on initial lease term rent, negotiating a lower escalation clause can have a significant impact on effective rent on a long-term lease.
 
F
 
Full-Service Lease: Also called a Gross or Full-Service Gross. Typically defined as a lease that has one, all-inclusive rental rate which includes both the base lease rate and the building standard services which are paid by the landlord (property taxes, insurance, and common area maintenance) combined into one figure. Full-Service leases are commonly found in multi-tenant office buildings.
 
G
 
Gross Lease: Also called a Full-Service or Full-Service Gross. Typically defined as a lease that has one, all-inclusive rental rate which includes both the base lease rate and the building standard services which are paid by the landlord (property taxes, insurance, and common area maintenance) combined into one figure. Gross leases are commonly found in multi-tenant office buildings.

I
 
Industrial Gross Lease: Also called a Modified Gross Lease. A lease where the tenant pays for their pro-rata share of one or more of the of the expenses related to their occupancy of the building in addition to the base rent. For example: the tenant pays base rent plus their own electric or janitorial and the landlord pays the remaining expenses. Terms of industrial gross leases vary drastically so exact details must be confirmed for each lease. Industrial Gross Leases are common in industrial or warehouse property.
 
L
 
Lease Commencement Date: The date when lease term and the benefits of the lease commence. Lease Commencement Date may or may not be the same as Rent Commencement Date. For example, a lease may commence on the Lease Commencement Date for the purpose of completing tenant improvements. After the space is ready for occupancy, The Rent Commencement Date triggers the start of the tenant’s free rent period or when the tenant’s first month of rent is officially due. Since the Lease Commencement Date starts the clock on the term of the lease and establishes the Lease Expiration Date, a Commencement Letter should be executed by both parties.
 
Lease Expiration Date: The date when lease term and the benefits of the lease expire. 
 
Lease Term: The length of the lease usually stated in years, or months. 
 
Load Factor (LF): The add-on factor in your rent equation that accounts for the building common areas outside your suite (lobbies, shared restrooms, stairwells, storage rooms, and shared hallways, etc..). Load Factors commonly range between 10% and 20%. Usable Square Footage (USF) X Load Factor (LF) = Rentable Square Footage (RSF).
 
M
 
Modified Gross Lease: Also called an Industrial Gross Lease. A lease where the tenant pays for their pro-rata share of one or more of the of the expenses related to their occupancy of the building in addition to the base rent. For example: the tenant pays base rent plus their own electric or janitorial and the landlord pays the remaining expenses. Terms of industrial gross leases vary drastically so exact details must be confirmed for each lease. Modified Gross Leases are common in industrial or warehouse property.
 
O
 
Operating Expenses (OPEX): The costs associated with maintaining and operating a commercial property. A significant portion of Full-Service or Gross rent comes from operating expenses. Operating expenses are made up of Property Taxes, Insurance, and Common Area Maintenance (CAM). 
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P
 
Parking Ratio: Relationship of parking spaces available per Rentable Square Footage (RSF). Typically shown as N:1,000 RSF.
 
Pass-Through: In Full-Service and Gross Leases, specified operating expenses “pass through” from the landlord to the tenant. These expenses can include any combination of property taxes, insurance, and common area maintenance (CAM). The expense amount for the Base Year (typically either the year of lease commencement or the first calendar year of tenancy) is the maximum amount of expenses the owner will pay over the life of the lease per year and any expenses over the Base Year amount will be passed through to the tenant in addition to the Base Rent. 
 
R
 
Rent: The negotiated compensation for which the tenant will be responsible for payment to a landlord. Rent structures vary depending upon the services provided. For example, Full-Service rents include Base Year operating expenses and are significantly higher than Triple Net (NNN) rents where operating expenses are paid in addition to the base rent.
 
Rent Commencement Date: The date when a tenant is obligated to begin paying rent. Rent Commencement Date may or may not be the same as Lease Commencement Date. For example, a lease may commence on the Lease Commencement Date for the purposes of completing tenant improvements. After the space is ready for occupancy, The Rent Commencement Date triggers the start of the tenant’s free rent period or when the tenant’s first month of rent is officially due. 
 
Rentable Square Footage (RSF): The usable (actual and exclusive) square footage plus a load factor (portion of the building’s shared or common space such as lobbies, shared restrooms, stairwells, storage rooms, and shared hallways, etc..). Each tenant pays for these common areas in proportion to the amount of space they lease in the building. Typically, rents are based on rentable (RSF) not usable square footage (USF).
 
Rental Rate: The cost to occupy commercial space, commonly quoted as a dollar amount per square foot of space per year. Rental rates are based on rentable (RSF) not the usable square footage (USF) of a property. 
 
S
 
Sublease: An agreement between a tenant whose lease has not yet expired, a new tenant looking for space, and the property owner. Sublease space can be found at below market rates, but trade-offs may include limited or no flexibility on tenant improvements, renewal options, and financial liability.
 
T
 
Triple Net Lease (NNN): A lease where the tenant pays for their pro-rata share of all the expenses related to their occupancy of the building in addition to the base rent. Each “Net” refers to Property Taxes, Insurance and Common Area Maintenance (CAM). NNN leases are most common in retail and single-tenant office properties.
 
U
 
Usable Square Footage (USF): The actual and exclusive space you occupy inside your suite where you conduct your business. Usable Square Footage does not include common areas of a building such as lobbies, shared restrooms, stairwells, storage rooms, and shared hallways.
 
V
 
Vacancy Rate: Expressed as a percentage, the total amount of available space compared to the total inventory of space in a building or market. An office vacancy rate of 10% in a market is roughly considered to be market equilibrium. For example, markets with vacancy rates above 10% tend to be tenant friendly markets.