A commercial lease uses terms that most business owners and property owners rarely see anywhere else. This glossary explains the most common ones in plain English, from NNN and CAM to TI allowances, escalations, renewal options, subleases and shell condition. Each definition is short. Where we have a full guide on a topic, we link to it.
This glossary is general information, not legal advice. Lease terms vary, so always read how your own lease defines them.
Lease types
What is a commercial lease agreement?
A commercial lease is a contract between a landlord and a business tenant that sets the rent, term, permitted use, who pays which expenses, maintenance duties and the rights of each side. Unlike residential leases, most commercial lease terms are negotiable.
What is NNN in commercial real estate?
NNN stands for triple net. In a triple net lease, the tenant pays base rent plus a share of the property's three main costs: real estate taxes, insurance and maintenance (including common areas). Full guide: What is a triple net lease?
What is a gross lease?
In a gross lease, the tenant pays one rent and the landlord pays the property's operating expenses out of it. Gross and NNN rents cannot be compared directly until you add the expenses to the NNN rent.
What is a modified gross lease?
A modified gross lease is in between gross and NNN. The tenant and landlord split the expenses as the lease specifies. For example, the tenant may pay its own utilities and janitorial while the landlord pays taxes and insurance. The split varies from lease to lease.
What is a full-service gross lease?
Common in office buildings, a full-service gross lease includes the operating expenses, taxes and often utilities and janitorial in the rent. The tenant usually pays its share of increases above a base year. See how to negotiate a commercial office lease.
What is a base year?
In a full-service or modified gross lease, the base year is the year whose operating expenses are included in your rent. In later years you typically pay your share of any increase above that amount.
Rent and costs
What is CAM in commercial real estate?
CAM stands for common area maintenance: the cost of maintaining shared areas such as parking lots, landscaping, lobbies, snow removal and common lighting. Tenants usually pay their pro-rata share. Full guide: What is CAM in a commercial lease?
What is a commercial lease escalation clause?
An escalation clause sets how the rent increases during the term, for example by a fixed percentage or a fixed dollar amount each year, or by an index. Over a long lease, the escalation rate matters as much as the starting rent. See what expenses to negotiate in a commercial lease.
What is a pro-rata share?
Your pro-rata share is your space's percentage of the building or center, usually by square footage. It determines your share of CAM, taxes and insurance.
What is net effective rent?
Net effective rent is the average rent over the term after accounting for free rent and allowances. It lets you compare offers that package concessions differently. See how to determine the right asking rent.
What is the difference between rentable and usable square footage?
Usable square footage is the space you actually occupy. Rentable square footage adds your share of common areas such as lobbies, corridors and restrooms. Office rent is usually charged on rentable square feet. The ratio between the two is called the load factor.
What is a security deposit in a commercial lease?
Money the tenant gives the landlord as protection against default. The amount is negotiable and often depends on the tenant's credit. Some leases allow a letter of credit instead.
Build-out and space condition
What is a tenant improvement (TI) allowance?
A TI allowance is money the landlord contributes toward building out the tenant's space, usually quoted per square foot. It is one of the most negotiated terms in a lease. Full guide: How to negotiate tenant improvement allowances.
What does shell condition mean?
Shell space is delivered unfinished, often with only the structure and basic utilities. The tenant builds out the interior.
What does turnkey commercial space mean?
Turnkey space is finished by the landlord to an agreed plan, ready for the tenant to move in.
What is a build-to-suit commercial property?
A building designed and built for one specific user, who then leases or buys it. Full guide to all three: Shell, turnkey and build-to-suit space.
Options and rights
What is a commercial lease renewal option?
A renewal option gives the tenant the right, but not the obligation, to extend the lease for a set period, usually by giving notice by a deadline. The renewal rent may be fixed, set by a formula, or set at fair market rent.
What is a right of first refusal or first offer?
A right of first refusal (ROFR) lets the tenant match an offer another party makes for nearby space or the property. A right of first offer (ROFO) requires the landlord to offer the space to the tenant before marketing it to others.
What is an exclusive use clause?
Common in retail, an exclusive use clause stops the landlord from leasing other space in the center to a competing business.
What is an early termination option?
A right to end the lease before it expires, usually after a set date, with notice and a termination fee.
What is a commercial lease assignment?
An assignment transfers the tenant's entire lease to a new tenant, who then deals directly with the landlord. The original tenant often stays liable unless released.
What is a commercial sublease?
In a sublease, the original tenant stays the tenant and rents all or part of the space to a subtenant. Full guide: Sublease vs. assignment.
Risk and obligations
What is a personal guarantee in a commercial lease?
A personal guarantee makes the business owner personally responsible for the lease if the business cannot pay. Landlords often ask for one from newer or smaller businesses. Its amount and duration can often be negotiated, for example limited to a set number of months of rent or ending after a period of on-time payments.
What is a holdover?
Holdover is when a tenant stays after the lease expires without a new agreement. Leases often charge a higher holdover rent.
What is a restoration clause?
A requirement that the tenant remove its improvements, cabling or equipment and return the space to a set condition at the end of the lease.
The deal process
What is a commercial letter of intent?
A letter of intent (LOI) is a short, usually non-binding document that lists the main business terms before the lease is drafted. Full guide: How a commercial letter of intent works.
What is a commercial lease commission?
The fee paid to the brokers who arrange the lease. In many commercial leases the landlord pays it, often based on the total rent over the term, and it is shared between the landlord's and tenant's brokers. Full guide: Who pays the broker when you lease commercial space?
What is tenant representation?
A broker who represents the tenant in finding space and negotiating the lease. See why your business needs a tenant representative.
What is landlord representation?
A broker who represents the property owner in pricing, marketing and leasing space. See why owners need landlord representation.
Need help with a lease?
Fred's Properties helps tenants and property owners across Northern Virginia understand and negotiate commercial leases. Learn about our tenant representation and landlord representation services, or browse properties for lease.
Next step
Have a lease or a proposal you want to talk through? Call Fred at 703-505-3501 or send us a message. Have a real estate attorney review the final lease before you sign.
