Commercial Leasing Terminology

Most people have gone through the experience of leasing an apartment and often assume that leasing commercial space is similar. Though there are some similarities, there are many differences. For starters, the commercial lease agreement will generally be longer and more comprehensive than a residential lease. In addition, the lease term generally has a longer duration than the typical six months to one year found in a residential lease.

Frequently in residential real estate, the rent is stated on a monthly basis. In commercial real estate, rent is often quoted as an amount per square foot per year. To convert this amount into a monthly amount, start by multiplying the rent per square foot amount by the number of square feet to be rented and then divide that number by 12.

There are sometimes an additional charge each month to cover expenses that are necessary to maintain and operate the property. These expenses can include real estate taxes, building insurance, and common area maintenance (CAM) expenses such as cleaning (hallways, entry points, etc), parking lot care and maintenance, lawn care, building maintenance, common utilities, etc. In a majority of newer commercial properties, these costs are paid by the tenant. This is called a triple net lease or sometimes will be shown as NNN or N/N/N. Each “N” represents one of the three major expenses: real estate taxes, insurance, and Common Area Maintenance (CAM). Usually, the owner and/or landlord will determine an estimated annual expense budget for the building and then will divide that amount over the rentable square footage of the building and a monthly amount is determined for each tenant to be paid in additional to the montly rent. At the end of each year, the owner and/or manager will reconcile the actual accrued expenses with what has been paid in during the year by the tenants in the building. Overpayments or shortfalls are reconciled with each tenant and a new annual budget for these expenses is set up for the following 12 months.

On the other end of the spectrum, there is a fully gross lease or sometimes called a full service lease. This means that the owner pays for all the expenses associated with running and operating the building including utilities and the stated price per square foot is all that is paid by the tenant. In between these two ends are a modified gross lease and a modified net lease.

It is important to understand what is going to be charged in order to accurately compare two different leasing options. For example, one space might be advertised at $12/sq ft NNN and a second space might be advertised at $15/sq ft gross. At first glance, the first option might appear to be better (from a financial perspective), but if the pass through charges exceeded $3.00/sq ft (a very likely possibility in a lot of commercial settings) then the second option might be better.

Rent is only one of the many issues that arise in commercial leasing. There are multiple other things for you to consider as a tenant looking at leasing. Some of the questions, you should think through are:

• Does the lease contain escalations for rent?
• What costs is the tenant responsible for?
• Are there any limits on passthrough costs?
• What kind of budget has been set for passthrough costs? Is this number reliable? What do these costs look like recent years?
• What improvement allowance is being provided to the tenant (if any)?
• Do you know what a typical build out should cost for the type of space requirements you have?
• What provisions will you make for parking?
• What rights do you have for signage? Are there special approval requirements?
• Have you defined your space needs for:
  • Reception?
  • Private offices?
  • Work areas?
  • Storage?
  • Conference Room?
  • Warehousing?
• Do you have special requirements for:
  • Parking?
  • Electrical?
  • Delivery areas including docks and drives?
  • Plumbing
• Does the lease contain:
  • a move-in clause?
  • a renewal provision?
  • a reasonable “fire clause”?
  • any provision for expansion?
  • any limits on repairs or types of repairs?
• Should you purchase your space or lease it?

The space in which your business operates is crucial to keeping your company running well, and Century Sales & Management, LLC would like to assist you in this process. We are frequently retained to represent tenants in lease negotiations. For more help in finding a space and entering a lease that meets your needs, please feel free to e-mail or call us at 402.437.8321.