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The Commercial Leasing Process
When leasing commercial real estate, it is important you understand the entire leasing process, terminology, and standard practices before engaging in negotiations with the help of your InCitySpace Tenant Representative or directly with the landlord on your own. The information below will give you a basic understanding on how commercial real estate leasing works and will better prepare you as you begin to search for space.
1. KNOW THE BASIC LEASING TERMS
It is very important you know what certain terms mean to make your search more productive as well as conversations with agents and landlords.
SF or SqFT = Sqaure Feet - The usual method by which rental space is defined. It is the area of that space, calculated by taking length times width. For example, a room 30 feet by 60 feet has an area of 1,800 square feet.
Base Rental Rate - This is the lease Rate/SF/Year before any NNN fees, utilties, maintenance costs, or other operating costs.
Rate Per Square Foot per Year - Commercial space is usually advertised in terms of rate/SF/Year. For example, 2000 square feet at $30/SF/Year would equal $5,000 per month ($60,000/Year). Simply multiply the Rate/SF/Year by the available square feet for lease, then divide by 12 months. This gives you your monthly lease payment. You can also use our handy Lease Rate Converter to quickly do the math.
Triple Net (NNN) Lease - A NNN lease requires tenants to pay all utilities, insurance, taxes, and maintenance costs. NNN fees are expressed in terms of Rate/SF/YR. You would add the NNN Rate/SF/Year to the Base Rental Rate/SF/YR to get the gross rate. For example, if the Base Rental Rate is $30/SF/Year and NNN fees are $5/SF/Year, the total rental rate would be $35/SF/Year. In a building with multiple tenants, each tenant pays their portion of the building's total NNN fees based on the SF of each tenant's commercial space.
Gross Lease - A Gross Lease is the opposite of a NNN Lease. The landlord (i.e., lessor) pays for all property charges usually included in ownership. These charges can include utilities, taxes, and maintenance, among others.
Tenant Improvement Allowance (TI) - In some cases, the landlord may be willing to give a rent credit or even pay for improvements upfront that need to be done for the Tenant's business. A TI allowance is an amount of money agreed on between the tenant and landlord, which the landlord agrees to put forth to make the necessary improvements to the space. TI Allowances are usually expressed in terms of $/SF. For example a TI Allowance of $20 on 5000 SF would be $100,000.
Build Out - The construction or improvements of the interior of a space, including flooring,walls, finished plumbing, electrical work, etc.
Rental Concession (FREE RENT) - A portion of the term of a lease when no rent is required. It is offered by a landlord as a rental concession to attract tenants.
Example: In order to attract tenants to the new office building, the landlord is offering a 3-month rent-free period to all tenants who sign a 5-year lease. Free rent is very common in markets with high commercial vacancy.
Letter of Intent (LOI) - An informal, usually non-binding, proposal presented to the landlord by the tenant indicating their serious desire to move forward with negotiations. A LOI will ouline the desired terms including lease term, base rate, TI allowance, free rent, etc. In most cases, there will be 1 - 3 rounds of negotiations between the parties before the terms of the LOI are agreed upon. The final LOI serves as the ouline for the final binding lease.
Rent Commencement - The date upon which the tenant begins to pay rent to the landlord. In many cases, if there was a free rental period, rent commencement may start 1, 2, 3 or more months afte the lease start date.
Sublease - The leasing of space from one tenant to another tenant. When a tenant decides to move, expand, downsize, or goes out of business, but still has time remaining on their existing lease, the tenant can sublease all or a portion of the space to anothe tenant. This is quite common in high vacancy markets.