10 Commercial Real Estate Lease Terms to Know
Understanding the intricacies of lease agreements is essential for both landlords and tenants. Whether you’re a seasoned investor or a budding entrepreneur, familiarizing yourself with common lease terms will aid you in making informed decisions and navigating the leasing process with confidence. Let’s take a look at ten key terms that are fundamental to commercial real estate leases, accompanied by examples to illustrate their significance.
1.) Base Rent:
Base rent is the fixed amount of rent paid by the tenant to the landlord for the use of the leased premises. For instance, a retail tenant might agree to pay $5,000 per month as base rent for their storefront in a shopping mall.
2.) Percentage Rent:
Percentage rent is additional rent paid by the tenant based on a percentage of their gross sales revenue. For example, a restaurant in a shopping plaza might agree to pay 5% of their monthly gross sales as percentage rent in addition to the base rent.
3.) Lease Term:
The lease term refers to the duration for which the lease agreement is valid. An office lease might have a term of five years, starting from January 1st, 2024, and ending on December 31st, 2028.
4.) Common Area Maintenance (CAM) Fees:
CAM fees are charges paid by tenants to cover the costs of maintaining and operating common areas within a commercial property. This could include expenses for landscaping, parking lot maintenance, and security services.
5.) Security Deposit:
A security deposit is a sum of money paid by the tenant to the landlord as security against potential damages or default on lease obligations. For instance, a retail tenant might provide a security deposit equivalent to one month’s rent.
6.) Renewal Option:
A renewal option grants the tenant the right to renew the lease for an additional term upon expiration, subject to certain conditions. For example, a tenant may have the option to renew their lease for another five years at the same rental rate.
7.) Sublease:
A sublease is a lease agreement between the original tenant (sublessor) and a new tenant (sublessee), transferring some or all of the leased premises for a portion of the remaining lease term. For instance, a retail tenant might sublease a portion of their space to a coffee shop operator.
8.) Tenant Improvements (TI):
Tenant improvements are alterations or modifications made to the leased premises by the tenant to meet their specific needs or preferences. This could include interior renovations, installation of fixtures, or branding elements.
9.) Escalation Clause:
An escalation clause allows for periodic increases in the base rent or other charges over the lease term. For example, a lease agreement might include an escalation clause that stipulates a 3% annual increase in base rent.
10.) Assignment:
Assignment is the transfer of the tenant’s rights and obligations under the lease agreement to another party (assignee), with the landlord’s consent. For instance, a retail tenant might assign their lease to a new business owner upon selling their business.
Understanding these key terms is crucial for navigating commercial real estate leases effectively. Whether you’re a landlord negotiating lease terms or a tenant seeking the right space for your business, familiarity with these terms empowers you to make informed decisions and protect your interests in the leasing process.
Disclaimer: The information provided in this article is for educational and informational purposes only. It is not intended to be, nor should it be construed as, financial, legal, or investment advice. Readers are advised to consult with qualified professionals, such as financial advisors, attorneys, and/or real estate experts, before making any financial decisions or entering into any commercial real estate transactions. The author and publisher of this post make no representations or warranties regarding the accuracy, completeness, or suitability of the information provided herein. The use of this information is at the reader’s own risk.
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