Understanding key terms in commercial real estate leases can empower both tenants and landlords to make informed decisions, avoid potential misunderstandings, and prevent unexpected costs. Tenants and landlords can structure leases that benefit both parties, fostering sustainable and mutually beneficial partnerships in commercial real estate.
- Base Rent is the amount a tenant agrees to pay to occupy the property, typically set on a per-square-foot basis. Base rent typically excludes additional operating expenses such as utilities, maintenance, and property taxes. Knowing this figure is crucial as it provides the benchmark for other rent-related calculations, especially in leases with additional charges.
- Gross Rent is the total rent that a tenant agrees to pay to occupy the property, typically set on a per-month or per-year basis. Gross rent includes additional operating expenses such as maintenance and property taxes and often includes utilities.
- Additional rent (also referred to as Common Area Maintenance Charges (CAM) or Op Costs) are another critical component of commercial leases, particularly in multi-tenant properties. This rent covers the upkeep of shared spaces, including landscaping, parking lots, and hallways. Each tenant contributes to these costs proportionately, based on their leased area. Understanding the specifics of these charges helps tenants anticipate additional monthly expenses beyond the base rent.
- An Escalation Clause is a built-in rate adjustment that allows landlords to cover inflation or rising operating costs over the term of the lease. Escalation clauses may specify annual increases or adjustments based on market indexes, providing a structure for rent changes. Tenants should carefully review these clauses to understand how and when rent may increase.
- A Fixturing Period is a specific period where the tenant is given access to the premises prior to the commencement of the lease to prepare the space for operating. The tenant does not pay basic rent during the fixturing period but will often have to pay for additional rent and utilities.
- Rent Abatement is a concession offered by landlords, often at the beginning of a lease term, where rent is waived for a specific period. Often called a “free rent period,” this incentive allows tenants to settle into the property or make improvements without an immediate financial burden. Rent abatements can be beneficial for new businesses as they reduce upfront expenses.
- A Tenant Improvement (TI) Allowance is funds provided to the tenants by the landlord for the customization of the space to suit their needs. This is particularly important for companies needing specific buildouts, such as restaurants or medical offices. TI allowances help offset these costs, adding value for tenants, and potentially raising the property’s long-term value for landlords.
- The Right of First Refusal is a valuable clause for growing businesses. This provision gives the tenant the option to lease additional, adjacent space if it becomes available before the landlord offers it to new tenants. This clause is especially beneficial in competitive markets where finding new space can be challenging. This is a win-win for both parties: the tenant has the opportunity to expand, and the landlord potentially does not have to manage any vacancy.
- The Holdover Clause addresses what happens if a tenant stays in the property after the lease expires. Holdover clauses typically impose higher rent rates during this period, encouraging tenants to renew or vacate the space in a timely manner. Understanding this clause is essential to avoid unexpected costs if the tenant intends to remain in the property beyond the initial term.
- An Option to Renew offers tenants the flexibility to extend their lease for an additional term, often under pre-negotiated conditions. This option provides stability for tenants and helps landlords maintain occupancy. By exercising an option to renew, tenants can ‘lock-in’ favorable lease terms.
“Tenants and landlords might sometimes feel like they’re on opposite sides, but fundamentally, a lease arrangement is a valuable partnership that helps both parties grow their profitability. By ensuring clarity from the start, particularly around industry terminology and expectations, both landlord and tenant interests are protected and supported; the more you know!“?
- Doug Mereska | Managing Director / Broker
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Doug Mereska | Managing Director / Broker
Josh Marti | Principal, Senior Associate
Vinko Smiljanec | Associate
Director, Business Development
3 个月helpfull info for all parties thanks Dougb