Triple Net ("NNN") Lease
A lease agreement on a property where the tenant or lessee agrees to pay its prorata share of real estate taxes, building insurance, and maintenance (the three "nets") on the leased space in addition to Base Rent. NNN Leases are typically associated with retail leases.
Gross Lease
A type of commercial lease where the landlord pays for the building's property taxes, insurance, and maintenance. The tenant’s total rent obligation is expressed in the Base Rent. A gross lease can be modified to meet the needs of a particular building's tenants. Gross leases are typically associated with office and industrial leases.
Modified Gross Lease
A lease agreement where the tenant pays Base Rent at the lease's inception but in subsequent years pays the Base Rent plus a proportional (prorata) share of some of the other costs associated with the property, such as property taxes, utilities, insurance and maintenance (the NNNs).
Tenant Improvements
The customized alterations a landlord constructs within a rental space, as part of a lease agreement, in order to configure the space for the needs of that particular tenant.
Tenant Allowance
The amount a landlord is willing to reimburse a tenant for improvements the tenant constructs within the rented space. It is usually expressed in a per -square-foot or total dollar sum. This amount is decided upon during lease negotiations. Typically, the tenant will receive the Tenant Allowance 30 days after tenant delivers proof of paid contractor invoices and all lien releases to landlord.
FF&E
Movable Furniture, Fixtures, or other Equipment that have no permanent connection to the structure of a building or utilities. These items depreciate substantially but definitely are important costs to consider when valuing a company, especially in liquidation. FF&E cannot be included as part of the Tenant Allowance or Tenant Improvements.
Term Commencement Date
The agreed upon start date for the the term of the lease. Typically, the “TCD” is the date upon which landlord delivers the leased premises to the tenant.
Rent Commencement Date
The agreed upon start for the payment of rent pursuant to the lease. The “RCD” often commences upon the earlier of several events. For example, a lease may provide that the RCD shall be the earlier of i) 90 days after the landlords delivery of the premises to tenant (the “TCD”); and ii) tenant’s opening for business. This language incentives the tenant to open for business within 90 days. Otherwise, tenant will unfortunately have to pay rent prior to opening his/her business.
Option (“Option to Renew”)
A Lease Option grants the tenant an option, or several consecutive options, to renew the lease for a set term or several set terms after the expiration of the initial term of the lease. The Lease Option clause sets a specific time frame within which the tenant must provide written notice to landlord that tenant intends to exercise the option. Often, tenants fail to timely exercise their options and subject themselves to increased rental rates or jeopardize their ability to remain in the location altogether.
Fair Market Value (“FMV”)
An estimate of the market value of a property, based on what a knowledgeable, willing, and un-pressured buyer would probably pay to a knowledgeable, willing, and un-pressured seller in the market. FMV most often comes into play when a tenant exercises an option to renew its lease at Fair Market Value.
Certificate of Occupancy (“C of O”)
A document issued by a local government agency or building department certifying a building's compliance with applicable building codes and other laws, and indicating it to be in a condition suitable for occupancy. Typically, tenants are responsible for obtaining a “C of O” from the applicable government agency. Obtaining a “C of O” can sometimes be a condition to the Rent Commencement Date.
Exclusive Use
Most often found in retail shopping centers, an Exclusive Use clause grants a tenant the exclusive right to sell a particular good within the shopping center. For example, Starbucks leases typically include a clause granting them the exclusive right to sell coffee products for onsite and offsite consumption. As a result, the landlord cannot lease another space in the shopping center to a competitor such as Coffee Bean & Tea Leaf. Exclusive Use clauses protect tenants from competition within the shopping center.
Parking Ratio
A measurement of parking provided within a property expressed in the ratio of parking spaces to building square footage within the property. Most often, the parking ratio is expressed by stating the number of parking stalls per 1,000 square feet of building area. For example, a 10,000 square foot building with 40 parking spaces has a parking ratio of 4 per thousand (square feet 4/1,000 SF). Every municipal zoning code delineates the required parking for different commercial real estate uses. Some typical required parking ratios are shown below:
Retail: 4/1,000 SF
Office: 3/1,000 SF
Industrial: 2/1,000 SF
Restaurants: 10/1,000 SF
Co-Tenancy Requirement
A common clause in retail lease agreements that allows tenants to pay reduced rental rates or terminate their lease if key tenants vacate the property or a certain amount of square footage within the property becomes vacant. For example, most small shops within a mall may reduce their rent to zero if an anchor tenant, such as Macy's or Nordstrom's, vacates the property. The rent remains zero until such time as a new anchor opens in the vacated space.
Common Area
Areas within a property available for common use by all tenants, (or) groups of tenants and their invitees. Tenants often pay their prorata share of the cost to maintain the Common Area.
Percentage Rent
Extra rent paid in addition to Base Rent based on a percentage of gross sales. The percentage rent kicks in after a certain amount of gross sales are met. The point at which percentage rent is paid is called a “breakpoint” and can either be a natural or artificial breakpoint. If the breakpoint is never met, the tenant is only obligated to pay the minimum rent.
Artificial Breakpoint
An artificial breakpoint is a dollar amount of sales both tenant and landlord agree upon. For example, a landlord might negotiate that 5% of gross sales over $800,000 should be paid in percentage rent. If the gross sales are $1,000,000, then the renter pays 5% of $200,000, or $10,000 in extra rent.
Natural Break Point
To calculate the natural breakpoint the base rent is divided by the established percentage. For example, a retail tenant that pays $45,000 in annual rent who has negotiated a percentage rent of 5% would have a natural breakpoint of $900,000 ($45,000/.05). For every dollar in gross sales over $900,000, the tenant would owe 5% to the landlord in the form of percentage rent. If the tenant had a total of $1,000,000 in gross annual sales, the tenant would owe an additional $5,000 in percentage rent (5% * ($1,000,000 - $900,000)). The logic behind the natural breakpoint is that a retailer should only pay the percentage rent on sales over and above what is required to pay the minimum rent. In other words, taking 5% of $900,000 in sales would equal the minimum rent payment of $45,000, so it makes sense that the percentage rent requirement would only kick in after this minimum rent breakpoint is achieved.