Top commercial real estate terms first-time tenants need to know

Commercial real estate may be an intimidating and overwhelming sector, especially for those who will venture into it for the first time. When businesses decide that it’s finally time for them to lease an office space, it is important that they familiarize themselves with these commercial real estate terms that would help tenants in selecting the best space for their requirements. 

Subletting vs. Assignment 

Subletting and assignment are two rights of the tenants in a commercial lease. If you have an assignment or sublease clause in your agreement with your landlord, you have the right to rent or surrender a part or all your rented space to another tenant before the lease expires. 

Subletting occurs when a company transfers a portion of its lease rights to a third party for a temporary period. This is a right that the Lessor grants the Lessee to allow another party to lease the property. The agreement between the landlord and the original tenant still stands, however, the tenant should now be held responsible for the new tenant to whom they will be subletting the space. This is beneficial for seasonal businesses that operate at certain times of the year only. 

On the other hand, lease assignment refers to the process when a tenant transfers all the remaining interest and obligation of the existing lease to a third party. Technically, lease assignment is a process wherein the Lessee assigns the remainder of the lease term to an interested party because the Lessee has decided to discontinue its lease. This usually occurs when there is no pre-termination clause. This is an ideal option for businesses which are downsizing and are locked in a fixed lease term.  

Contrary to subletting, assignment happens when the original tenants don’t plan on getting the rights to the lease back. The landlord releases the tenant from all financial obligations and future liability. Additionally, a landlord may also assign their property to another landlord. Keep in mind that not all leasing contracts include subletting and assignment clauses. It would be best to check your contract and discuss it with the landlord.  

Build to Suit 

Build to suit is a way of leasing property in which the landlord builds to a tenant’s specifications. The landlord shoulders the costs of the construction and the tenant leases the space.  

Stacking Plans 

A stacking plan is a two-dimensional chart created to display the arrangement of tenants on floors in an office building. They are usually shaded or color-coded based on terms of the lease, most commonly based on contract expiration. 

Phase Take Up 

Phase take up is a lease option wherein the landlord allows the tenant to carry out the lease of all or part of the premises in gradual stages. This allows the tenant to hold of taking the extra space for a certain period without the fear of losing it to another interested party. Such phasing normally ranges between a period of 3-6 months. 

Full Service Gross Lease 

The full-service gross lease is the total amount payable which already includes the property management expenses. This usually covers utility costs, repairs, and necessary taxes. 
 

Double Net Lease (NN) vs. Triple Net Lease (NNN) 

Double net lease and Triple net lease are two types of commercial real estate leases which tenants usually pay the base rent plus other incidentals. Double net lease covers two incidentals such as property taxes and insurance.  

Triple net lease covers the base rent plus property taxes, building insurance, and utilities. This could also cover other operating and maintenance costs. The landlord assumes no costs, other than those for structural repairs. 

Incidental Expenses 

These are costs on top of the base rent. These can include property taxes, insurance, utilities, maintenance, common area costs, and repairs. 

Rent Escalations 

Rent escalations are imposed when a landlord’s operating and maintenance costs increase due to extraneous factors. This usually commonly applied annually or over another period. Many leases allow for rent escalations annually or over another period. The amount of the escalation could be determined through a specific index or be a specific dollar amount or percentage. 

Building Classifications 

Commercial buildings are usually classified into three classes: A, B, and C. 

Class A buildings are almost new, located at a highly attractive location, and are known for good maintenance. These are the most ideal and attractive for tenants but are available for lease for a much higher base rate. 

Class B buildings are average buildings with fewer amenities offered. Compared to Class A buildings, buildings under this classification are post a cheaper rent. Class C buildings are the ones operating for more than 20 years and are at the risk of needing a lot of improvement, maintenance, and repairs. While some might consider leasing offices located in a Class C building because of the cheaper lease rate, other expenses for renovation, zoning, and permit renewals must be added on top. 

Turnkey Improvements (turnkey buildouts) 

Turnkey improvements or buildouts are renovations that a landlord or property owner carries at your request upon signing a lease.  

Leasehold Improvements (tenant improvements) 

Leasehold or tenant improvements are renovations, modifications, or customizations made to a leased commercial space to make it suitable for the nature of business. Unless stated otherwise on the contract, any improvement that is attached to the building usually becomes the property of the landlord.