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Understanding The 7 Essentials of Commercial Real Estate Leasing

Navigating the commercial leasing landscape can be a daunting task, filled with complex jargon and varying regulations. Whether you're launching a new business or expanding an existing one, understanding key terms can significantly ease the process. Here are seven critical commercial real estate terms every tenant should know.

  1. Common Area Maintenance (CAM)

Common Area Maintenance, or CAM, refers to additional charges on top of base rent in properties with multiple tenants. These expenses cover the maintenance of shared areas such as parking lots, landscaping, and services like snow removal, as well as insurance and property taxes. Understanding CAM expenses is crucial as they impact your overall rental costs.

2. Types of Leases

Understanding the different types of leases is essential for any commercial tenant. Here's a breakdown of the most common lease structures:

a. Full Service Lease (Gross Lease): In a full service lease, the landlord covers all property-related expenses, including CAM costs. The tenant pays a fixed base rent. While these leases are rare today, they offer simplicity for tenants as all costs are bundled into one payment.

b. Modified Gross Lease: This lease type is more common than a full service lease. Tenants pay a base rent for the first year, with any increases in operating expenses passed on in subsequent years. This lease provides a balance between cost predictability and sharing in the fluctuation of property expenses.

c.  Net Lease: In a net lease, tenants pay a base rent plus certain property expenses such as utilities, repairs, insurance, and taxes. Net leases come in three varieties:

i. Single-Net (N): Tenant pays property tax.

ii. Double-Net (NN): Tenant pays property tax and insurance premiums.

iii. Triple-Net (NNN): Tenant pays property tax, insurance, and maintenance costs.

d. Percentage Lease: Common in retail properties, this lease requires tenants to pay a base rent plus a percentage of their sales revenue. This type of lease aligns the interests of the landlord and tenant, as both benefit from the tenant's business success.

e. Ground Lease: In a ground lease, the tenant leases the land and is responsible for constructing and maintaining any buildings on the property. These leases are typically long-term, often 50-99 years, allowing tenants to develop the property while the land remains owned by the landlord.

3.  Letter Of Intent (LOI)

A Letter of Intent (LOI) signals a commitment to proceed with a commercial real estate transaction. Written by landlords, prospective tenants, or their attorneys, an LOI outlines key terms and conditions already discussed and sets the stage for further negotiations. Though often non-binding, an LOI provides a framework that can expedite and smooth the lease agreement process.

4. Sublease

A sublease occurs when an existing tenant leases part or all of their leased property to another party. The original tenant remains responsible for the lease obligations to the landlord, while the subtenant pays rent to the original tenant. Subleasing can be beneficial for tenants needing to downsize or temporarily relocate, but it's important to get the landlord's approval and ensure the sublease terms align with the original lease agreement.

5. Tenant Improvement Allowance (TI)

Tenant Improvement Allowance refers to the financial contribution a landlord makes towards a tenant's permanent alterations to the leased space, including changes to walls, floors, ceilings, and lighting. These improvements are agreed upon in advance, with tenants covering any costs that exceed the allowance. TI is crucial for tenants needing customized spaces to suit their business needs.

6. Square Footage Types

Understanding the different types of square footage is essential when leasing commercial space. Here are the main categories:

a. Usable Square Footage: This is the amount of space within a commercial property designated for exclusive tenant use, excluding common areas like restrooms and lobbies. Usable square footage is the actual space the tenant can use for their business operations.

b. Rentable Square Footage: This includes both the usable square footage and a portion of the common areas. Rentable square footage is the total space for which the tenant is charged rent, reflecting the share of common areas they benefit from.

7. Build-Out vs. Build-To-Suit

Understanding the difference between Build-Out and Build-To-Suit can help tenants negotiate better terms and ensure their space meets business needs:

a. Build-Out: A build-out involves customizing or constructing the interior space of an existing commercial property to meet the specific needs of a tenant. This process can include installing partitions, flooring, HVAC systems, and electrical work. The costs and terms of a build-out are negotiated between the landlord and tenant, with clear agreements on who bears the expenses.

b. Build-To-Suit: In a build-to-suit arrangement, the landlord constructs a new building tailored to the specific requirements of the tenant. This type of lease is ideal for tenants with unique needs that cannot be met by modifying existing spaces. Build-to-suit agreements typically involve long-term leases, ensuring that the landlord can recoup the construction costs over time.

By familiarizing yourself with these essential terms, you'll be well-equipped to tackle the complexities of commercial leasing. Partnering with our experienced team will elevate your confidence and decision-making, ensuring your business goals are met seamlessly. Our dedicated professionals are ready to guide you every step of the way, making the leasing process smooth and stress-free. Trust us to help you find the perfect space that aligns with your vision and needs. We look forward to assisting you in achieving your commercial real estate aspirations!


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