Commercial Real Estate Leasing Terms and Definitions

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Are you pulling out your hair by now? Are you confused about all the industry terms and definitions when it comes to leasing a commercial space? Encountering different terminologies for the first time can be overwhelming and complicated. That is the reason we have created the “Commercial Real Estate Leasing Terms and Definitions” page.

You will want to bookmark this page to utilize it as a resource as you search for different office, flex, warehouse, industrial or Office Retail spaces. Below is a list of all the relevant terminology you will need in order to fully understand the commercial leasing process. No commercial property management company is the same. They ALL will have different types of leases and terms. Some will look much better at first glance, but when you dig deeper, you will understand that ALL the property management companies and property owners must make money; otherwise, they will go out of business. If it looks too good to be true, it probably is. Our goal is to give you the tools so you can do a true apples-to-apples comparison between each commercial property you are evaluating.

What does Additional Rent mean?

Additional Rent refers to additional charges to a tenant that are not included in the base rent they pay monthly. Additional rent items are used in almost all commercial leases to deal with costs that are shared by multiple tenants. For instance, in a multi-tenant complex or shopping mall, the cost of cleaning the common areas, paying real estate taxes, insurance, or restriping the parking lot is normally shared among all of the tenants. The charges can vary from landscaping, Common Area Maintenance (CAM) fees, after-hours service, etc. The total cost is generally divided out based on the individual tenant’s “proportionate share”, typically calculated by dividing the tenant’s leased square footage by the total area of the building.

What is Base Rent?

Base Rent is the monthly rent due to a tenant under the commercial lease agreement with the landlord. Additional rent can be added on top of the base rent, depending on the lease agreement.

What is a Base Year?

The Base Year is the ‘first year’ of a commercial space rental period that serves as a guide about how much tenants will pay for the building expenses for each succeeding year. Once the ‘first year’ ends, the landlord will calculate the building’s actual per square foot operating costs.

What is a Build Out?

A Build Out pertains to any construction work needed for the commercial space to function according to the tenant’s business requirements.

What is a Bulk Warehouse Space?

Bulk warehouse spaces are usually between 50,000-1,000,000 SQFT. These commercial real estate properties are commonly used for regional distribution of products and need ease of access by trucks loading and unloading goods. Bulk distribution warehouses are ideal for tenants such as distribution and logistics companies who ship goods to businesses or consumers. These buildings typically have 95% to 90% of the overall square footage dedicated to warehouse space, with the rest dedicated to office area. Lower parking ratios are usually assigned to this type of industrial building because there are usually fewer employees working in these spaces and little customer traffic.

What is Ceiling Height?

A building’s clear height is defined as the usable height to which a tenant can store its product on rack. This figure is measured below any obstructions such as joists, lights, or sprinklers.

What is the difference between Ceiling Height and Clear Ceiling Height?

Ceiling height is measured from the finished floor of a commercial real estate space to the underside of the roof. While Clear Ceiling Height is measured from the finished floor of a space to the underside of the lowest hanging object on the ceiling, such as lighting fixtures or a sprinkler. These are used to define up to what extent a tenant can stack their business’ storage items such as pallets or boxes.

For example, a normal ceiling height for an office nowadays is at least 9 ft. while a warehouse space is from 12 – 36 ft high.

What is an Office Space?

Office space is a common floor space for employees to work at that can be separated by cubicles or walls and doors. The office is the space where collaboration and teamwork of the workforce take place. Offices are the typical commercial spaces leased by businesses as companies need a place for their employees to work. The location of office spaces can be inside a one-story or multi-story building and normally has a multi-year lease with the commercial property management company or a landlord. There are four different classifications of office spaces. The list below contains the definitions for Class A, Class B and Class C as well as Trophy Building.

What are Office Building Classifications?

The real estate industry uses a subjective classification system that divides buildings into three qualitative categories: Class A, Class B, and Class C. Building classifications are relative and applied to all buildings that make up the competitive inventory in a market. A building that is Class A in a second-tier market may not be Class A in a first-tier market. The designations are determined primarily on the basis of building locations or submarkets, rents, building systems and finishes, and building upkeep and services. “Commercial Real Estate Terms and Definitions” – Maria Sicola CEO, Integrity Data Solutions, LLC

Trophy Building

A landmark property that is located in a highly desirable submarket, is designed by a recognized architect, and features high-end finishes and modern or efficient systems. This building commands among the highest rents in the market and is more than 80 percent occupied by the market’s premier tenants. It is highly sought after by institutional investors such as pension funds and insurance companies as well as by foreign investors. These properties are more desirable than Class A buildings. “Commercial Real Estate Terms and Definitions” – Maria Sicola CEO, Integrity Data Solutions, LLC

Class A Building

A classification used to describe an office building with rents in the top 30 to 40 percent of the marketplace. Class A buildings are well-located in major employment centers and typically have good transit, vehicular and pedestrian access. Additionally, they are located adjacent to or in proximity to a high number of retail establishments and business-oriented or fast casual restaurants. Building services are characterized by above-average upkeep and management. “Commercial Real Estate Terms and Definitions” – Maria Sicola CEO, Integrity Data Solutions, LLC

Class B Building

A classification used to describe an office building with rents that are based between those of Class A and Class C buildings. Class B buildings are in good to fair locations in major employment centers and have good to fair transit, vehicular and pedestrian access. They are located adjacent to or in proximity to a moderate number of retail establishments and business oriented or fast casual restaurants. Building services are characterized by average upkeep and management. “Commercial Real Estate Terms and Definitions” – Maria Sicola CEO, Integrity Data Solutions, LLC

Class C Building

A classification used to describe an office building with rents in the bottom 10 to 20 percent of the marketplace. Class C buildings are in less-desirable locations relative to the needs of major tenant sectors in the marketplace. They can be older, neglected buildings in good locations or moderate-level buildings in poor locations, so transit, vehicular and pedestrian access may vary. Typically, fewer amenities and restaurants are found in or near these buildings, and they are usually of moderate to low quality. Building services are characterized by below-average upkeep and management. “Commercial Real Estate Terms and Definitions” – Maria Sicola CEO, Integrity Data Solutions, LLC

What is a Commercial Retail Space?

Commercial Retail Spaces are properties or buildings that have retail shops and restaurants that are normally situated in high-traffic areas because they attract more customers. These spaces can be single-tenant buildings or multi-tenant properties. Examples of commercial retail spaces are outdoor malls, shops, grocery stores, salons, dry cleaners, drug stores, office supply stores, and fitness centers.

What is a Commercial Lease?

A commercial lease agreement is a contract between a landlord and a business to rent an office, flex, warehouse, industrial or retail space from a landlord. The lease states the rights of the commercial business tenant to the commercial property owned by the landlord. The agreement states the length of the signed contract. A commercial tenant can be anyone from a sole proprietor with a small, growing business to a major multinational corporation. Instead of buying a property, most companies prefer leasing space from a commercial property management company because it allows them to focus on what they do best and requires less capital.

What is a Common Area Maintenance (CAM)?

One of the three main components that make up operating expenses is common area maintenance (CAM), the other two being insurance and property taxes. This, in turn, makes CAM part of what is called a Triple Net (NNN) Lease. The CAM is charged on top of the tenant’s base rent as part of additional rent. CAM is used to cover maintenance costs for work done on the property’s common area, such as landscaping, parking lot striping, elevator maintenance, etc. The CAM fees are assessed on a prorated basis depending on the occupiable square feet and storage.

What is a Coworking Office Space?

Coworking office spaces are shared workspaces with other people. Space is rented out per day or month, or per year depending on the agreement, and you bring your own devices. These spaces are usually rented out by freelancers, start-ups, and small teams who want to have an office space the size of a cubicle. Renting larger office areas is available and frequently costs about the same or much more than a private office in a private multi-tenant complex. Coworking spaces also have amenities such as meeting rooms and coffee areas which are also available in some class A multi-tenant complexes. There are pros and cons to a coworking office space.

What is the difference between an Industrial Space and a Warehouse Space?

Industrial space is typically where the company operates, combining office space, manufacturing, and warehousing space. Industrial spaces can accommodate light to heavy manufacturing businesses and are perfect for those with several business operation types that need to be housed in one building.

Warehouse space is used for general warehousing or storing a company’s goods. Then, a percentage can be allocated for the build-out of offices, break areas, and a conference. Sometimes, other companies prefer warehouse spaces to turn into complete office space to be more creative.

What is a Net Lease?

A Net Lease is a term used to define the contractual agreement between a lessor and a lessee. The tenant pays for a part or all the taxes, utilities, insurance fees, and maintenance costs for a commercial space they will lease in addition to base rent. Commercial Real Estate companies typically use this type of leasing agreement. There are three types of Net Lease agreements: Single Net Lease (N), Double Net Lease (NN), and Triple Net Lease (NNN).

3 Kinds of Net Lease Agreements

Single Net Lease (N)

A Single Net Lease (N) is the basic form of a net lease; the tenant pays the base rent and pro rata share of the property tax associated with leasing commercial space. Only a few Commercial Real Estate companies use a single net lease agreement. This type of lease contract passes the responsibility of paying the property taxes to the tenant.

Double Net Lease (NN)

A Double Net Lease (NN) is a lease agreement wherein the tenant is responsible for the base rent, pro rata share of the property taxes, and the cost of insurance of the commercial property. This type of lease is sometimes used among multi-tenanted buildings. The landlord is liable for paying the utilities, maintenance, and other fees or costs. That way, the landlord does not worry about prorating expenses among the different tenants.

Triple Net Lease (NNN)

A Triple Net Lease (NNN) is an agreement between the landlord and the tenant wherein the lessee covers most of the costs of the commercial space they are leasing. That means the tenant pays, in addition to base rent, the pro rata share of the property taxes, property insurance, common area, utilities, and landscaping. The landlord is responsible for the roof and the structure. At the same time, the tenant is responsible for the internal upkeep of their facilities. The Triple Net Lease contract is the gold standard in the commercial real estate business.

What is an Estoppel Certificate?

The Estoppel Certificate is a signed statement that validates certain facts to be true. In commercial real estate contracts, the certificate verifies the terms and conditions and the present status of the tenant’s lease.

What is a Flex Industrial Space?

Flex industrial spaces can be used as a light industrial building, a warehouse, an office building, or all three. These spaces are usually single-story with a parking space. Flex industrial spaces are built heavy duty. Meaning, they can handle a higher storage capacity than a warehouse space, and the roofs can support additional air-conditioning units. Similar to how a flex warehouse space is described, a flex industrial space can have loading docks plus windows and doors for entrance in front of the space.

What is a Flex Space or a Flex Office Space?

A Flex or ‘flexible’ space is any single-story building that can combine both warehouse and office space. Growing businesses usually lease flex spaces because it gives more room for flexibility and creativity. Company departments can split, adjust, or expand their occupied flex space without having to lease extra commercial space. Flex office spaces are also easily customizable for businesses who want to be more creative with their office setup. The clear ceiling height for this space is usually 14 – 18 ft.

What is a Flex Warehouse Space?

Flex warehouse spaces are single-story buildings that can be 100% office space or a combination of office and warehouse space. These kinds of spaces normally have windows in front and have an overhead door in the back as a loading area for trucks or other delivery vehicles. If you need a multi-functional space, it is smart to lease a flexible warehouse space. Combining your business’s front and back end under one roof allows for having both a traditional office set up and a warehouse in a flex space.

Distribution and service businesses that use flex space or flex warehouse spaces are typically security, plumbing, and tech companies, electricians, HVAC (Heating, Ventilation, and Air Conditioning) companies, architecture firms, and client repair companies, to name a few.

What is a General Contractor?

A general contractor is the main contractor responsible for overseeing a commercial real estate construction project. It includes managing vendors and communicating information to all the involved businesses throughout the course of a building project. In the commercial real estate industry, there are different types of commercial build outs: Tenant Construction Build Out, and Turnkey Construction Build Out.

Pros and Cons of working with a General Contractor

Advantages of hiring a General Contractor:

Hiring a general contractor allows you to focus on your business during the construction process.
Hiring a general contractor saves time and money from having to contact multiple vendors for a quotation.
Using a general contractor that has great subcontractors means you don’t have to get reviews and vet vendors’ previous work.
When hiring a general contractor, you have less to worry about when managing the design and build-out process.
Managing permits and drawings are part of the package when you hire general contractors.
Usually, CAD design drawings will be provided by the general contractor or the architect that was hired.

Disadvantages of hiring a General Contractor:

The contractor has poor vendors that do shoddy work.
The contractor is too busy juggling too many jobs at once.
The contractor is expensive.
Because there are few checks and balances, a high degree of trust must be established between the business owner and contractor.
The contractor does not listen to the business owner and does what they want to do.
Job cost overruns are passed on to the business owner when the contractor makes a mistake.

Pros of working with a Property Management Company that is their Own General Contractor

At JW Management, we are our general contractor. Since we manage the construction process from start to finish, you can be assured that the design and functionality of the commercial space will be of high quality. Most of the contractors we have been working with have been with us for over 15 years, we have proven the quality of work that they provide, and our tenants are happy with the quality of their services. Furthermore, working with a property management company that is their general contractor covers a ton of background work. Meaning there is no need to get your hands dirty. The best thing at JW Management is we don’t charge additional fees to be your general contractor. We manage the build out of your project for FREE!

What is a Full-Service Space?

Full-service in real estate commercial spaces include electric, water, maintenance, janitorial, and other building operating expenses in your monthly payment to the landlord. There are no other monthly or annual charges that are billed separately. Usually, full-service office spaces are flexible for expansion of your business.

What is a General Contractor?

Pros and Cons of working with a General Contractor

Advantages of hiring a General Contractor:

Hiring a general contractor allows you to focus on your business during the construction process.
Hiring a general contractor saves time and money from having to contact multiple vendors for a quotation.
Using a general contractor that has great subcontractors means you don’t have to get reviews and vet vendors’ previous work.
When hiring a general contractor, you have less to worry about when managing the design and build-out process.
Managing permits and drawings are part of the package when you hire general contractors.
Usually, CAD design drawings will be provided by the general contractor or the architect that was hired.

Disadvantages of hiring a General Contractor:

The contractor has poor vendors that do shoddy work.
The contractor is too busy juggling too many jobs at once.
The contractor is expensive.
Because there are few checks and balances, a high degree of trust must be established between the business owner and contractor.
The contractor does not listen to the business owner and does what they want to do.
Job cost overruns are passed on to the business owner when the contractor makes a mistake.

Pros of working with a Property Management Company that is their Own General Contractor

What is a Gross Lease?

A Gross Lease is a contractual agreement between the landlord and the tenant wherein the tenant is charged a flat fee that includes rent and all other costs. These costs are property taxes, property insurance, utilities, cleaning, and maintenance. This type of lease agreement can be modified according to the needs of the tenant. For example, a gross lease may not include utilities which means the tenant will have to pay for the utilities. There are two kinds of Gross Lease agreements: Full-Service and Modified Gross Lease.

The 2 Kinds of Gross Leases are “Full-service gross lease” and “Modified gross lease.”

Full-Service Gross Lease

A Full-Service Gross Lease is one of the most direct leases wherein a tenant pays a decided fixed rent payment every month. The Commercial Real Estate owner pays for all other expenses, including operations costs and maintenance of the building or commercial space. Operation and Maintenance costs usually include property insurance, utilities, property taxes, office cleaning, and fees.

Modified Gross Lease

A Modified Gross Lease is almost the same as a Full-Service Gross Lease. A modified gross lease is a type of commercial real estate lease agreement where the tenant pays the base rent at the lease’s inception, but it takes on operation costs beyond the costs calculated in the base year of the lease. The modified gross lease passes through a pro rata share increase for items such as, property taxes, property insurance, utilities, and maintenance.

What is an Industrial Space?

Industrial spaces are a combination of office and warehouse space. This space can handle light to heavy manufacturing and production of companies while still having space for an office. Industrial spaces can be flexible; they can serve as an office, a storage space, and house manufacturing all in one location. Larger companies prefer to lease industrial spaces because of its flexibility and size.

Examples of companies that use industrial spaces are manufacturing, distribution warehouses, light industry, heavy industry, distribution centers, general warehousing, data centers, research and development companies, etc.

What is a Lessee in terms of Commercial Real Estate Lease?

There are two parties in a lease agreement, a lessor and a lessee. A Lessee is another term for Tenant. The Lessee or Tenant is the one who leases to occupy an office, flex, warehouse, industrial, or retail space owned by a commercial property management company or landlord.

What is a Lessor in terms of Commercial Real Estate Lease?

A Lessor is another term for Landlord. The Lessor or Landlord leases or lets a commercial real estate property to a tenant or tenants.

What is a Long-Term Commercial Real Estate Lease?

A Long-Term Lease is a lease agreement wherein the duration of the lease is usually three to seven years. Typically, long-term commercial leases average five years but also have the ability to be extended to seven to ten years or longer, depending on the landlord and/or tenant’s requirements.

What is a Medical Space?

A medical space is an office space used by practitioners to set up their healthcare practices. The spaces are designed with specialized patient rooms and labs. These medical office spaces also have room for specialized medical equipment such as x-ray and CT scanning machines. Medical offices are leased to create a more accessible location for medical practitioners for outpatient consultations or other medical-related services.

The number one reason a practice would desire to be located in or near a medical district would be its affiliation with the nearby hospital itself or other complementary practices that are affiliated with the hospitals. Being located on a Hospital Campus is not the right fit for all healthcare-related practices. But for the providers that find value in the benefits described above can be the perfect location to feed off the medical district.

What are Commercial Real Estate Multi-Tenant Properties?

Multi-Tenant Properties, as the name suggests, are leased by multiple tenants. That means numerous companies are leasing the building and sharing in the overall cost. These commercial real estate properties will usually have a shorter lease term of 3 to 7 years. Multi-tenant properties can consist of an office, flex, warehouse, industrial or retail space. The property owner manages any maintenance or upkeep of the overall space. Examples of multi-tenant properties are Westgate Plaza and 1625 W Mockingbird. JW Management focuses on multi-tenant commercial real estate properties in Dallas, Arlington, and Fort Worth.

What is an Occupancy Cost?

Occupancy Cost is the total cost of leasing a commercial space. In multi-tenant properties, the costs are evenly divided using a pro rata share formula. The occupancy costs are base rent, real estate property taxes, property insurance, and general cost associated with running and maintaining the entire property. Occupancy costs are usually higher for new commercial real estate owners due to the escalating real estate prices in the market. A landlord that fully owns property does not have the cost of the banknote and financing that is factored into the occupancy cost. For example, JW Management fully owns all our properties, which allows us to have a competitive edge in the marketplace.

What is a Percentage Lease?

A Percentage Lease is a type of leasing agreement wherein the business that is leasing the space pays a tenant base rent. In addition, a percentage of the business tenant’s gross income is also paid to the landlord. An agreed-upon percentage by both parties is discussed during the negotiation process. This type of rental agreement is like doing business with a “Shark” like “Mr. Wonderful,” Kevin O’Leary on Shark Tank. Many times, a percentage lease will cause your business to pay more rent than the market rate of a typical lease. JW Management DOES NOT do percentage leasing.

What does Pro Rata Share of a Commercial Real Estate Lease mean?

The pro-rata share is the percentage of expenses shared by the tenant for the office, flex, warehouse, industrial, or retail business park or building. In most leases, the pro-rata share is calculated as a fraction of the tenant’s demised square footage divided by the total square footage of the commercial real estate business park.

What does Rent Escalation mean?

A Rent Escalation is an increase in the monthly rental payment. Normally a commercial lease escalation will increase annually or through renewal options on your lease agreement. A typical leasing agreement will have an annual rent escalation clause. The reason lease agreements have an escalation clause built into them is to increase the annual rate of the rent to include the cost of increases in operating costs and inflation.

What is a Short-Term Commercial Real Estate Lease?

A Short-Term Lease can be a month-to-month lease, a lease that lasts up to twenty-four months. They are usually considered temporary leases, and most property owners will not enter into these agreements. Most short-term leases are only considered for existing tenants that temporarily need additional space. Sometimes a property owner will start moving leases to short-term leases prior to a major remodeling of a building or prior to selling the property for a change of use.

What are Commercial Real Estate Single-Tenant Properties?

Single-Tenant Properties are occupied by a single business. These properties usually have a lease term of at least 10 to 20 years. Single-Tenant properties are also characterized by Triple-net leases (NNN). Triple net means that the tenant’s rent is net of real estate taxes, operating expenses, and insurance costs. However, please note that the tenant covers any rehabilitation or maintenance of the space, such as, but not limited to, repair or replacement of HVAC vents, plumbing repairs, and repainting of walls.

What is a Sublease?

A sublease is an agreement where another business agrees to take over part or all existing leases. This type of lease involves multiple parties. The original tenant still retains their name on the commercial property lease agreement with the landlord. The practice of subleasing can also be referred to as sublet or subletting.

What are Tenant Improvements for Commercial Real Estate Properties?

Tenant Improvements are modifications made to the leased commercial space by the tenant depending on their business needs. Improvements usually entail modifications to walls, ceilings, flooring, light fixtures, doors, window treatments, etc. Tenant Improvements do not only cover the inside of a leased office, flex, warehouse, industrial space, or retail; modifications can be done outside of the premises as well. The improvements are paid for by the tenant, landlord, or both.

What is a Tenant Improvement Allowance (TI)?

Tenant Improvement Allowance (TI) is an amount that was agreed upon by the landlord and the tenant to allow the tenant to make basic construction improvements on the new commercial space. Landlords usually get the TI from the tenant through the lease payments paid during the tenant’s stay. Basic finish out usually only covers paint, carpet, cove base, ceiling, lights, and basic electrical outlets (It does not cover network cabling and telephone wiring).

Why would there be NO Tenant Improvement Allowance?

In some cases, there are no tenant Improvement allowances. Some of the reasons why it is not provided are:

The location of the commercial property is in high demand. Typically, Class A buildings are in high demand and are well-located in major employment centers. Usually, the buildings have good transit, vehicular and pedestrian access.
They are located adjacent to or in proximity to a high number of retail establishments or fast, casual restaurants.
Proximity to sports stadiums and entertainment venues are in high demand.
The building services are characterized by above-average upkeep and management.
The space is pre-built out for a future tenant’s needs.
The customizations are specific to the prospective tenant.
On the other hand, the properties could be older, neglected buildings in good locations or moderate-level buildings in poor locations, and the landlords do not have the finances to invest in their own properties.

Why would there be a Tenant Improvement Allowance?

In other cases, there is a Tenant Improvement Allowance. Some of the reasons why it is provided are:

The location of the commercial property in a low demand area. Typically, Class C buildings are in low demand and are in the bottom 10 to 20 percent of the marketplace.
The buildings are in less desirable locations relative to the needs of major tenant sectors in the marketplace. They can be older, neglected buildings in good locations or moderate-level buildings in poor locations, so transit, vehicular and pedestrian access may vary.
Crime rate is usually higher in the area, especially in the late evenings.
Building services are characterized by below-average upkeep and management (leaky roofs, little to no landscaping, poor lighting, reported break-ins, etc.)
Typically, fewer amenities and restaurants are found in or near these buildings, and they are usually of moderate to low quality.

What is a Warehouse Space?

Warehouse space is commonly leased by businesses that store and distribute products. Because of the space’s high ceiling clearance, companies can install pallet racks and use rolling stairs or forklifts inside the warehouse building to move products that are stored in the warehouse. Warehouse spaces usually have a combination of office space in the building for their administrative and sales employees. They will also have double doors or roll-up doors for shipping and delivery. The warehouses can either be street level, semi-dock high or dock high for large trucks to deliver and receive goods. Many large trucks have liftgates on them to accommodate the different delivery heights at a warehouse.