Glossary of Commercial Leasing Terms and Definitions
Understand the Legalese Before You Sign a Commercial Lease
Before you sign a commercial lease for office or retail space, be sure you understand the terms. Here are a few of the most commonly used terms in commercial leases and their general definitions.
ADDITIONAL RENT: Additional rent refers to items that a tenant may be charged for that are not included in the usable square footage or other rent costs. These costs can include after-hours services, HVAC, common area maintenance (CAM) fees, percentage rent, and any other costs not included in the base rent.
Example: Jenna's Jewelry and Jems (JJJ) took over space in the mall for a base rent of $4,000 per month. JJJ must also pay a percentage of their monthly sales as required in their lease under the "Additional Rent" provision.
See also: percentage lease and average percentage rents charged in commercial leases.
BASE RENT: The term "base rent" refers to the minimum rent due under the terms of a lease. The lease may or may not require the tenant to pay additional rent based on a percentage or participation requirement. Oftentimes, the base rent may be the only monthly rent charge.
BOMA: The Building Owners and Managers Association is an international, professional association that provides information on office building development, leasing, building operating costs, energy consumption patterns, local and national building codes, legislation, occupancy statistics, and technological developments.
BOMA STANDARDS: BOMA publishes standards for measuring office space, lobbies on behalf of the commercial real estate industry, and hosts conventions. The industry guidelines published by BOMA are referred to as "BOMA Standards."
More information can be found on the BOMA website.
BUILDING CORE: The building core includes portions of the building that are not rented but serve all tenants indirectly. The building core includes public restrooms, ventilation shafts, electrical distribution, elevator shafts, and stairwells. In most buildings, these elements are close together, typically near the center of the building.
COMMERCIAL INDUSTRIAL SPACE: Commercial industrial space is property used for industrial purposes. Industrial purposes include heavy and light manufacturing buildings, research and development parks, factory-office property, factory-warehouse property, and industrial parks.
Industrial buildings are often a warehouse or other large, unfinished space that can be used strictly as a warehouse or for purely industrial purposes. However, many industrial spaces are converted to serve as more traditional office space, or as a combination of storage, industrial, and business use. Industrial park spaces are also now being used by many retail businesses. To attract a wide variety of businesses, many industrial parks have become more upscale so that on the surface they can be hard to distinguish from retail and business parks.
GROSS LEASE: A gross lease is a type of commercial lease that generally favors the tenant (lessee) because the landlord (lessor) pays all "usual costs" that are associated with owning and maintaining the rented space. In a gross lease, the landlord may cover costs including utilities, water and sewer, repairs, insurance, and/or taxes.
GROSS-UP: The term "gross-up" usually applies to fully serviced leases (sometimes also called full-service leases). In fully serviced leases the tenant pays fixed amounts for certain services on top of a rent for the actual space leased.
For example, the landlord pays for common area maintenance (CAM) expenses. The landlord then charges each tenant an amount based on the percent of square feet the tenant occupies. Typically if the building is not fully occupied, the expenses are still calculated for the tenant's pro-rated share of expenses.
LOAD FACTOR: Load factor is a method of calculating total monthly rent costs to a tenant that combines usable square feet and a percentage of square feet of common areas.
Usable square feet + percentage of common area square feet = rentable square feet
Common areas can include restrooms, lobby, elevators, stairwells, and common hallways. The addition of a percent of the common area expenses to monthly rent is known as the "load factor."
NET LEASE: A net lease is generally the opposite of a gross lease. In a net lease the landlord (lessor) does not cover building costs such as utilities, water and sewer, repairs, insurance, and/or taxes. These costs are included in payments required from the tenant.
There can be a few variations of a net lease. Typically variations depend on the number of costs the tenant is required to pay. A single net lease would include one of the building costs such as taxes. A double net lease would require two additional building costs such as taxes and insurance. A triple net lease would entail three building costs.
PERCENTAGE LEASE: A percentage lease typically requires a tenant to pay "base rent" and then on top of that amount, the tenant also pays a percentage based on monthly sales volumes. Percentage leases are commonly executed in retail mall outlets and other commercial retail leases.
Percentage leases can potentially be negotiated. These leases may include a monthly percentage of sales. Other variations may involve paying the lessor a sales percentage in months where the lessee’s sales exceed a specified threshold.
For example, a percentage lease might require a tenant to pay 5% of all sales that exceed more than $25,000 in any given month.
Also known as: percent lease, percentage leasing, retail lease, or participation lease
RENTABLE SQUARE FEET: According to BOMA standards, this term refers to a combination of "usable square feet" and some portion of the square feet encompassing the common area. Typically, there is a 10% to 15% difference between usable square feet and rentable square feet. Payment charged by rentable square feet will have a higher cost than usable square feet alone. Rentable square feet is typically calculated by adding the usable square feet and some percentage of the common area within the building.
For example, if a building has two tenants with Tenant A occupying 200 square feet and Tenant B occupying 800 square feet then Tenant A may be responsible for 20% of the charges for the common area.
See also: gross-up and load factor
SUBLEASE: In commercial real estate, a sublease is a lease (rental agreement) between a tenant who already holds a lease to a commercial space or property and someone (the sublessee) who wants to use part or all of the tenant's space. In a sublease, the tenant assigns certain rights that they already hold, to the sublessee.
Sublessees pay rent directly to the rightful tenant (sublessor) to either share the space with the sublessor or take over the entire space from the sublessor. A sublessor cannot legally assign rights to a sublessee if the sublessor’s lease agreement terms do not allow for subleasing.
TURNKEY: Turnkey is a term used to describe many things including employees, products, services, and real estate. When "turnkey" is used in commercial real estate it simply means that the space being rented or purchased is ready to move into. Specifically, all wiring, fixtures, flooring, and superficial decorative items (like paint and carpet) are already in place. Simply put, you could describe turnkey as a space ready to move into - just 'turn the key' and open the door.
USABLE SQUARE FEET: In commercial leasing, usable square feet simply means the square footage that is rented to be used exclusively by the tenant. it may also be referred to as net square feet. Usable square feet includes private (tenant-only) restrooms, closets, storage, and any other areas used only by the tenant.
Usable square footage is a component of rentable square footage. In some cases, certain load factors may lead to provisions for payments based on rentable square footage. Rentable square footage usually adds a tenant’s usable square footage to a percentage of the building’s common area based on occupancy.