Commercial Lease Glossary for Founders

Commercial real estate has its own language, and much of it appears in the first proposal a landlord sends. These definitions are short on purpose. They describe how each term is generally used, but your lease's own definitions control, and they vary from building to building. Where a term carries legal weight, have your attorney review the actual language.

1. Skim all four groups once so the words are familiar when you hear them on a tour.
2. When a proposal or letter of intent arrives, mark every term you could not explain to a colleague.
3. Look each one up here, then ask your broker how that building's version differs from the norm.
4. Before signing, confirm with your attorney that the lease defines each term the way the business deal intended.

• Base rent: the fixed price for the space itself, usually quoted per rentable square foot, before any building costs billed on top.
• Escalation: a scheduled increase in base rent during the term, written as a percentage, a fixed step or an adjustment tied to an index.
• Abatement (free rent): a period when some or all rent is waived as a concession. Check whether it covers base rent only or the full payment.
• Operating expenses: the costs of running the building, such as cleaning, maintenance, staff, insurance and management, shared among tenants.
• CAM (common area maintenance): a similar concept to operating expenses, used more often in retail and industrial leases.
• Additional rent: any amount you owe under the lease beyond base rent, including your share of operating expenses and taxes.
• Base year: in a gross lease, the starting year whose costs are included in your rent. You pay your share of increases above it.
• Pro rata share: your portion of building costs, calculated as your rentable area divided by the building's rentable area.
• Gross lease: a structure in which rent includes most building costs. Also called full service.
• Net lease: a structure in which the tenant pays operating expenses, taxes and insurance separately on top of rent. Triple net is the fullest version.
• Tenant improvement allowance (TI): money the landlord contributes toward building out your space, usually stated per square foot.
• Security deposit: cash held by the landlord as protection against default. Young companies are often asked for a larger one.
• Letter of credit: a bank's promise to pay the landlord if you default, used in place of a cash deposit.
• Net effective rent: a proposal's rent after concessions such as free rent and allowances are spread across the term, used to compare offers.

Money terms interact. A generous allowance or free rent period is typically paid for through a longer term or a higher rate, which is why offers should be compared as a whole.

• Premises: the specific space you are leasing, as described and usually drawn in an exhibit to the lease.
• Usable square feet: the area inside your suite that you actually occupy.
• Rentable square feet: usable area plus a share of the building's common areas such as lobbies, corridors and restrooms. Rent is charged on this figure.
• Load factor: the ratio that converts usable area to rentable area. A higher load factor means you pay for more space you do not occupy exclusively.
• Shell condition: unfinished space, sometimes with bare floors and exposed ceilings, that needs a full build-out. Definitions of cold, warm and vanilla shell vary, so ask what is included.
• Second-generation space: space previously built out for another tenant. Reusing the existing layout can save time and money.
• Spec suite: a suite the landlord has built out in advance to a general design so a tenant can move in quickly.
• Test fit: a quick floor plan prepared by an architect to check whether your team and rooms fit a particular space.
• Work letter: the lease exhibit that sets out who designs, builds and pays for the build-out, and on what schedule.
• Building standard: the default finishes and materials the landlord uses. Anything above it is usually at your cost.

• Term: the length of the lease, from commencement to expiration.
• Renewal option: your right to extend the term on stated conditions, often at fair market rent, if you give notice within a set window.
• Fair market rent: the rent a comparable tenant would pay for comparable space at the time. The lease should say how it is determined if the parties disagree.
• Expansion option: a right to lease additional, identified space at a set time or on set terms.
• Right of first offer (ROFO): the landlord must offer you a particular space before marketing it to others.
• Right of first refusal (ROFR): you may match a third party's offer on a particular space before the landlord accepts it.
• Termination option: a right to end the lease early, usually on advance notice and payment of a fee.
• Assignment: transferring your entire lease to another party. It generally requires the landlord's consent.
• Sublease: renting all or part of your space to another party while you remain responsible to the landlord.
• Permitted transfer: an assignment or sublease the lease allows without consent, often to an affiliate or a successor in a merger or acquisition.
• Use clause: the provision that states what you may do in the space. A narrow clause can limit lab, assembly or other non-office activity.
• Holdover: staying in the space after the lease expires. Leases typically charge a premium rent and may add liability for the landlord's losses.
• Restoration (surrender): your obligation to return the space in a stated condition, which can include removing cabling and specialty installations.
• SNDA: a subordination, non-disturbance and attornment agreement with the landlord's lender, intended to let you stay if the building is foreclosed on.
• Guaranty: a promise by a person or another company to cover the tenant's obligations if the tenant does not.

For a fast-growing company, this group often matters more than the rent. Expansion, sublease, assignment and termination rights decide whether the lease can change when the business does.

• Tenant representative: a broker who represents only the tenant's interests in the search and negotiation.
• Listing broker: the broker hired by the landlord to lease the building. They represent the landlord.
• Market survey: a broker's summary of the available spaces that meet your requirements.
• RFP (request for proposal): a document sent to several landlords asking each to propose terms on the same set of points.
• Letter of intent (LOI): a summary of the agreed business terms, usually non-binding, that the lease is then drafted from.
• Lease commencement date: the day the term begins and your obligations under the lease start.
• Rent commencement date: the day you begin paying rent, which can fall later than lease commencement.
• Substantial completion: the point at which the build-out is finished enough for you to occupy, apart from minor items.
• Punch list: the list of small items left to finish or correct after substantial completion.
• Estoppel certificate: a statement you sign, usually at a lender's or buyer's request, confirming the status of your lease.
• Certificate of insurance: proof that you carry the coverage the lease requires, typically due before you move in.

If a term in your proposal is not on this list, ask. Explaining lease language in plain English is part of what we do for clients at every step, from the first survey to the signed lease.