Glossary of Lease Terms for Commercial Real Estate
We’ve listed below some commonly used lease terms. This will help you to understand more of the terms and conditions in your lease or purchase.
ad valorem: (According to value) which refers to the value of the property used in the computation of taxes.
as-is: The existing condition of real estate, prior to any improvements contemplated under a lease.
assignment: The transfer of leasehold interest in a property to a second party.
attorn: To transfer to another or to agree to recognize a new owner of a property and to pay them rent.
BOMA: Building Owners and Managers Association which, among other things, established widely accepted methods of computing square footage in commercial buildings.
base rent: The minimum monthly rent, usually computed on a per- square-foot-per-year basis, due under the lease (see percentage rent).
base year: A specific year of a lease against which certain rent escalations and additional expense reimbursements to landlord may be calculated.
building standard: A list of materials and finishes used in the build-out, repair or restoration of a tenant’s suite.
build-out: Refers to the interior construction of a tenant’s space whether new construction or the reconfiguration of existing space.
build-to-suit: A customized design and build approach to a tenant’s space usually resulting in a single occupant building which is then leased or sold to the tenant.
certificate of occupancy: Presented by city building department to landlord or tenant after completion of tenant improvements and satisfactory inspections by city building department inspectors.
commercial property: Other than residential. Owned or leased property such as office, research, retail and industrial properties.
commission: The fee paid to a real estate broker as procuring cause and/or for his or her services rendered in a real estate transaction. May be paid by either party in a transaction; it is usually governed by a prior written agreement.
common area maintenance (CAM): An additional, annual charge often assessed to tenants for maintenance of the property’s “common area”, such as its entryways, hallways or bathrooms.
construction management: Construction supervision by a qualified manager.
demising wall: The wall which separates a tenant’s suite from another tenant’s suite, or building common areas. In most cases, a demising wall will be constructed from floor to either the building roof deck or floor deck. The wall may also be a fire rated wall (see “partition wall”).
deal: The state of agreement both parties are looking for.
eminent domain: The right of a government entity to take (condemn) property with just compensation for the public good.
escalation: The mechanism in a lease which increases the rent, usually annually. May be set forth in fixed steps, tied to increases in operating expense, or to increases in the Consumer Price Index (CPI).
estoppel certificate: A statement concerning the status of an agreement, (usually a lease) and the performance of obligations under the agreement. A third party such as a lender, relies on the statement (which is usually unilaterally executed by the tenant) for such things as making a loan on property.
fair market value (FMV): The price which the market would bring, over a reasonable period of time, for a property for sale or for lease.
flex space: A building providing use flexibility between office, and other uses such as manufacturing, laboratory, warehouse, etc. Usually provides high bays and relocation flexibility for overhead doors and other entrances.
force majeure: (An uncontrollable force) an event outside the reasonable control of the parties to a contract such as an “Act of God”, war, riots or strikes which would prevent the parties from complying with the provisions of an agreement.
go-dark: The condition that results from a tenant’s closing its business, even though the lease is still in effect. Lease language may provide a means for a landlord to void a lease and take back the leased premises if the tenant ceases to operate its business at that location.
gross lease: Commonly specifies one rental amount inclusive of rent, taxes, utilities, maintenance, etc. associated with the rental of a property.
gross square feet: Usually refers to gross area of a building by measuring from the outside of its exterior walls and including all vertical penetrations, such as elevator shafts. Also includes basement space.
ground lease: A long-term lease of land, entered into by a tenant to construct a building (at its expense) from which to conduct its business.
HVAC: Acronym for heating, ventilation and air conditioning.
hold over: The condition that results when a tenancy exists beyond the end of the term of a lease.
improvements: See “leasehold improvements”.
lease commencement date: The date upon which the lease commences and the obligations of the parties begins (see also “rent commencement date”).
leasehold improvements: Construction or improvements for the purpose of preparing the premises for the conduct of tenant’s business. Improvements permanently attach to the premises unless they are trade fixtures, and they remain with the premises after the end of term of the lease.
letter of attornment: see “attorn”.
lien waiver: A waiver of mechanic’s lien rights signed by a general contractor and his subcontractors.
load factor: The amount of square footage is a lease, in addition to a tenant’s usable square footage, which represents tenant’s pro rata share of the building’s common area/s. May also be referred to as a percentage of building’s rentable square feet.
mechanic’s lien: A claim provided for under state statutes securing the priority of payment for the value of work and materials furnished in the construction or repair of real property.
month-to-month: A lease for a specific period of time, usually one month, which automatically renews itself for the same period of time, unless landlord or tenant provide notice to terminate.
NNN: See triple-net below.
net lease: Structured such that a base rent for a rental property is paid to landlord. In addition, other charges such as utilities and building property taxes, insurance and maintenance are also payable by tenant. Sometimes referred to as triple net or absolute net lease.
notice of commencement: Legal notice to the county’s register of deeds that remodeling/improvements will be undertaken at an address.
notice of furnishing: Legal notice by a subcontractor or supplier that it furnished labor or materials, subsequent to the notice of commencement, thereby establishing the legal right to be paid for the services rendered.
operating expenses: The costs associated with operating income producing property usually before interest and income tax expense, but including property taxes, insurance, repairs and maintenance, replacement reserves.
option: A term in a lease for the rights either tenant or landlord may have with respect to one another, usually with stipulations regarding timing of those rights.
partition wall: A wall constructed to create work areas such as offices or conference rooms. Depending on security needs, a partition wall may not be constructed to the roof or floor decking, but may terminate at lower point such as a suspended ceiling.
party wall: Usually located in a fraternity house.
pass-through expense: An expense associated with tenancy in which landlord “passes through” to tenant certain increases in building operating expenses occurring after a base year in the lease.
percentage rent: Provides for a rent to be paid as a percentage of retail sales, usually quarterly or annually. Often coupled with a base rent.
planned unit development (PUD): A zoning category in which each of the proposed buildings or uses are approved in advance as a part of a parcel’s overall use. Usually preserves large common or open areas on a site.
premises: In commercial real estate, the description of the leasehold and the specific square footage for which the parties enter into a lease.
punch list: A list of incomplete or unacceptable construction items which upon remedy and completion will usually complete the obligations of the contractor under a construction contract.
real estate broker: A person licensed to act as an agent for another person or business to negotiate a lease or purchase of a leasehold or property, respectively, for a fee.
real property: The land and anything permanently attached to the land such as buildings, parking lots, landscaping, or other items which would otherwise be classified personal property if not attached, excluding fixtures designed to be removable and reusable (see “trade fixtures”).
renewal option: Lease language that provides the means for tenant to give landlord notice of its intent to renew (extend) the lease.
rent commencement date: The date upon which the rent and usually the term of the lease begins. May be different from the lease commencement date when certain obligations must be fulfilled such as the construction of tenant improvements.
rentable area: Denotes the number of square feet in a commercial building deemed to be rentable, according to BOMA. May include a common area load factor or allowance for building amenities such as hallways and lavatories.
sale-leaseback: A financing arrangement usually designed to raise capital for the property owner or obtain favorable income tax results.
security deposit: Generally, a deposit of money by a tenant with a landlord to secure performance of a lease.
setback: Zoning requirement that requires a building or an improvement to be set back a certain number of feet from the property line.
shell space: The interior condition of either a new or existing building without improvements or finishes. Typically denotes floor, windows, walls and roof of an enclosed premises. May include some electrical or plumbing improvements, but not demising walls.
special assessment: Any special charge levied against real property for public improvements the benefit the assessed property.
subordination agreement: An agreement by which the tenant agrees to the priority of a mortgage over the leasehold interest, or other claim held by the tenant on the property.
substantial completion: The point during construction at which the contractor is ready to turn the property over to the tenant or client for acceptance and final punch list. Usually occurs upon the issuance of a certificate of occupancy.
tenant representation: Arrangement whereby a prospective tenant engages a real estate broker as its exclusive agent in negotiating a lease for commercial space. Also known as a “buyer’s broker.”
tenant’s use clause: Lease language which specifies the business activities tenant will engage in at the leased premises.
trade fixtures: Certain fixtures installed at the premises which are unique to tenant’s business, and which may generally be removed by tenant at the end of the term of the lease.
triple net: Generally, refers to the requirement for the lessee to pay for its share of the property’s taxes, insurance and operating expenses.
usable square feet: Denotes the number of square feet in a commercial building or suite deemed to be usable by BOMA.
white box: The interior condition of either a new or existing building or suite in which the improvements generally consist of heating/cooling with delivery systems, lighting, electrical switches and outlets, lavatories, a finished ceiling, walls that are prepped for painting, and a concrete slab floor. Also called a “vanilla box”.