Commercial Space Lease: Key Terms to Understand Before Signing

 

Commercial real estate leases can be complex, but understanding the key terms is a critical step in negotiating a lease that meets your needs. In this post, we'll define some of the most important commercial space lease terms and provide examples to help you better understand them.

If you're considering entering into a commercial lease agreement, make sure to read this post first! It could save you time and money.

The following terms are often found in commercial space leases:

Base Rent - Also referred to as "fixed rent," base rent is the amount paid by a tenant to a landlord for the right to use the leased space.

Base rent usually covers expenses like taxes, utilities, maintenance costs, gross income requirements (see below), amenities, insurance premiums, snow removal services, atrium cleaning services, parking lot sweeping or other outdoor maintenance costs not covered in CAM charges (see below), and any other miscellaneous operating expenses that need to be paid for using tenants' money.

It can also include an initial estimate of one-time costs needed to prepare the leased premises for its intended use by the tenant - including expanded build-out costs, painting and carpeting of the tenant's space.

Base rent is usually expressed as an annual or monthly dollar amount. It may be payable in equal monthly installments with no specific due date (typically 12 months following the Commencement Date) or may be due on a monthly basis throughout the term of the commercial lease (i.e., "net" vs. "gross" base rent).

Base Rent may include certain pass-through charges - like CAM charges (see below), assessments, taxes, utilities, insurance premiums, etc. – which are paid on behalf of tenants by their landlords to third parties like building owners associations (BOOAs) or utility providers.

The majority of commercial leases provide that these pass through charges will be added to the tenant's monthly Base Rent statement.

In commercial office lease transactions, base rent typically ranges from below market rates to well above market rates. Depending on a particular property's location and quality, it can be significantly higher or lower than average for a given geographic area.

In retail leases, the size of the tenant is often a determinant of what type of base rent amount will be paid by the tenant upon execution of a commercial lease agreement with a landlord.

Net vs Gross - "Gross" means that tenants pay their rents in full without deducting any costs associated with their occupancy (i.e., taxes, CAM charges [see below], etc.) from the "gross" amount they owe each month on their rent statement. "Net" rents are paid after these costs are deducted.

Common Area Maintenance (CAM) Charges - CAM charges cover the cost of maintaining common areas, like lobbies, elevators, bathrooms, atriums, or fitness centers. They also cover some maintenance items that may occur in tenant spaces if the nature of the property requires tenants' involvement (i.e., hallway re-paints which must be executed on a regular basis due to tenant traffic).

A building's staff is responsible for executing most repairs and maintenance activities covered by CAM charges; however, landlords will often require tenants to participate in certain projects or choose paint colors acceptable to them before they will agree to execute certain tasks (like hallway painting).

Tenants can sometimes negotiate with their landlords to have CAM charges billed "gross" (i.e., without any deductions for repairs or maintenance taken out) if they are willing to pay them in full each month.

Common Area Maintenance Charges usually include expenses like: Repairs and maintenance of common areas, lobby upkeep, building exterior upkeep, cleaning services for lobbies/stairwells/parking garages, management fees paid by the landlord to its property manager, utility expenses (electricity, gas), snow removal costs incurred during winter months by the landlord over and above the price of regular utilities , trash disposal fees charged by third parties for non-tenant related items which can't be placed within tenant spaces (i.e., office trash bins cannot be placed in hallways by tenants and must be stored on the property outside of tenant spaces), and landscaping (which can include mowing grass, removing fallen tree branches after storms).

Base year CAM charges - The rent that was paid for a given space during its last lease term prior to its new lease term with a present or new tenant is also referred to as the base rent. Therefore, if a landlord wishes to raise rents each year by 5% above inflation, they would calculate current-year CAM charges as 105% of what it had been during the previous year (i.e., an increase of 5%).