Are you getting ready to dive into the commercial real estate market? If you happen to be looking for a space to rent for your business, you will want to go into the process knowing relevant terminologies. From A to Z, there are hundreds of commercial lease terms that are frequently used. Here is a quick look at some of the most misunderstood ones:
Triple Net (NNN)
This refers to a type of lease structure and/or the operating costs of a commercial property. In the case of a type of lease, a NNN lease is a lease in which a tenant pays a base $ amount in addition to all of the costs associated with the property. These operating costs include taxes, insurance, common area maintenance (CAM) and utilities (the “NNNs”). If the property is shared with other tenants, the NNN costs are shared on a prorata basis. Most landlords prefer this lease structure as it usually pushes much of the management and inflation risk onto the tenant.
Common Area Maintenance or CAM
This is often confused with NNN. The CAMs are the costs to maintain the common or shared areas of the property such as insurance, exterior lighting, snow removal and/or landscaping to name a few. The CAMs are one component of the larger NNN charges a tenant will be responsible for.
Full-Service Lease
This term refers to an all-inclusive type of rent in which the lease is structured so that it will include real estate taxes and most operating expenses. If any operating expenses go over the base amount specified for the year (see “Base Year”), the tenant will be responsible for those expense increases or benefit from any decreases.
Base Year
This is a clause that is commonly found in ‘full service’ commercial leases. It allows for the landlord to raise the rent at a future date in order to reflect any changes in the expenses that the landlord pays. These increases (or even decreases) in operating costs are compared to the “Base Year” and then the difference is passed on to the tenant. This is one of the most often overlooked components of a lease and therefore can be an unexpected shock when billed. However, if addressed at the time the lease is being negotiated, it can be a fairly insignificant financial risk for the tenant.
Usable/Rentable Square Footage
Usable square footage is the actual square footage that is occupied and used exclusively by the tenant. Think about it in terms of it being the tenant’s actual suite. Rentable square feet include footage containing common hallways, lobbies, restrooms and any other type of area that might be used by the tenant along with other tenants of the building. The amount of common area is calculated by the building architect and this factor is added to the usable square footage to arrive at a rentable square footage, which is what the tenant pays rent on. This is typically around 10 – 18% more footage than the usable square footage alone and is called the “load factor.” A high load factor can be acceptable, especially if the common areas of the building provide a true benefit to the tenant and their clients.
Tenant Improvements
This term identifies any sort of improvements to the property that are made by the tenant or on behalf of the tenant. If you will be making a lot of improvements, you might be able to negotiate with the property owner to get as many of these costs covered as possible. The tenant improvement allowance is the amount that a landlord will cover in regards to these improvements. Costs that are higher than this amount will be paid by the tenant. Typically, tenant improvement costs are paid by the Landlord in an office lease and by the tenant in a retail or industrial lease, however, it is always negotiable and subject to market trends.
Are you planning on looking into leasing commercial real estate in the near future? While you’re brushing up on your vocabulary, you may also want to download our free 12 Point Checklist When Leasing an Office Space.