Common Lease Terms When Leasing Commercial Property

If you’re getting ready to open a business and plan on leasing space, you’ll talk to commercial real estate agents or brokers who use a vocabulary that might seem foreign to you. With a little prep on your part, you’ll be using all the typical lease terms like and old pro.

Some common commercial leasing terms might vary slightly in different parts of the country, but these definitions will give you a good overview of what to expect.

Identifying the Parties

Lessor: The lessor is the person who is granting the lease and who has the legal obligations related to the lease contract; the landlord. Sometimes this is an owner, but it may also be a property management company or commercial leasing company.

Lessee: The lessee is the person leasing the space; the tenant. Although you may need to personally guarantee a lease, your business entity should be the official lessee on all documents relating to the lease.

Building Terms

Common Area Maintenance (CAM): This term describes costs for areas in a building which are not directly leased but which are a common responsibility, such as hallways, restrooms, stairways, and walkways. Most lessors add CAM costs to square footage costs to calculate lease payments.

HVAC: An abbreviation for ‘heating, ventilating, and air conditioning.’ It’s often pronounced as “H-VAC.” 

Build-out — Leasehold Improvements — Tenant Improvements: The improvements to the office or building to make it usable for the tenant. In accounting terminology, these costs are called “leasehold improvements,” and they can be depreciated as expenses.

Turn-key: An office or building that is ready to occupy. In most cases, this is a commitment by the landlord to bear the cost of any build-out.

Lease Terms

Fully Serviced Lease: A lease in which the rental payment includes other services, such as utilities, maintenance, and lawn/snow removal services. The landlord pays these fees and passes them on to the tenants in the lease. This can be a benefit to tenants as it saves from having to pay these additional fees, but the landlord may be charging more than actually is being paid for these services.

Gross Lease: A lease which includes the landlord agrees to pay for all common expenses, including utilities, repairs, insurance and (occasionally) property taxes. The cost of a gross lease is higher than for other types of leases because all of these items are included in the amount of the lease.

Net Lease: A lease which includes the square footage costs, CAM costs, and all other ownership expenses, including utilities, repairs, insurance, and property taxes.

Double Net Lease: A lease in which taxes and insurance expenses are included in the lease payment. The lessor pays maintenance costs.

Triple Net Lease: A lease which includes all taxes, insurance, and maintenance costs in the monthly payment.

Gross Square Foot: The total square footage of the building or office being leased. This figure usually includes common space. 

Sub-lease: A sublease is an agreement between the lessor and lessee to allow someone else to use all or part of the space. In some cases, a business may wish to have another business to share the space – and the rent. In other cases, the tenant may want to leave before the lease term is up, and to have someone else take over the lease, to avoid having to re-negotiate.

To learn more about how Leasecake can help you simplify commercial real estate lease management, schedule a demo with Leasecake today.