Know Your Lingo: 6 Key Terms for Commercial Tenants

Whether you’re just starting your first company, or looking to expand your operation, navigating the commercial leasing process can be complex and confusing, with few standard rules and lots of complicated jargon. As you begin your search for the ideal office, retail, or restaurant space for your business, here are a few of the most important commercial real estate terms you’ll need to know. Common Area Maintenance (CAM) – Also known as operating expenses, CAM expenses are common in commercial properties that include more than one tenant. CAM expenses are added on top of a tenant’s base rent to cover areas or aspects of the property that multiple tenants benefit from. This may include everything from maintenance of parking structures and landscaping, to services like snow removal, to insurance and property taxes. Gross Lease – Sometimes called a full-service lease, this is a lease agreement in which a commercial landlord pays all expenses associated with owning and operating a property, which includes CAM expenses. The tenant, in turn, pays a flat “base rent” sum. While full gross leases are rare in today’s market, modified gross leases are more common. In this arrangement, the tenant pays a base rent amount for one year. After that, any increase in operating expenses above the first year are passed on from landlord to tenant. Modified gross leases are most common in office buildings and warehouses. Letter of Intent (LOI) – Also known as a term sheet, a letter of intent indicates your commitment to move forward with a commercial real estate transaction. A letter of intent may be written by a landlord, a prospective tenant, or their respective attorneys. This letter summarizes any key issues you’ve already discussed, as well as other requests or stipulations related to a potential lease. While letters of intent are often legally non-binding, they provide a roadmap for future negotiations, and often result in a quicker, more amicable deal. Net Lease – Sometimes called a pass-through lease, this is a lease agreement in which the tenant pays a base rent, along with certain agreed-upon expenses typically associated with owning a property, including utilities, repairs, insurance, and taxes. Net leases come in three varieties: single-net, in which the tenant only pays property tax; double-net, in which the tenant pays property tax and insurance premiums; and triple-net (NNN), in which the tenant pays all of the above plus repairs and maintenance costs. Tenant Improvement Allowance (TI) – This defines contributions by the landlord toward a tenant’s permanent alterations to their space. These include changes to walls, floors, ceilings, and lighting, among other elements. These improvements and their expenses are usually enumerated and agreed upon up front, with the tenant agreeing to pay any costs that exceed this amount. Usable Square Footage – This is the amount of space in a commercial space that is reserved for exclusive use by the tenant. Usable space is different from “rentable square footage”, which may include common areas like restrooms and lobbies. When looking for a commercial lease that can sustain a growing business, it’s crucial that you investigate your usable square footage to ensure that the space is consistent with your needs and vision.