Commercial Real Estate Glossary
60+ essential CRE lease and LOI terms explained. Use this reference to understand every provision in your next commercial real estate transaction.
A
Additional Insured
A party added to another party's insurance policy to receive coverage under that policy. Landlords typically require tenants to name them as additional insured on the tenant's commercial general liability policy, providing the landlord with direct coverage for claims arising from the tenant's operations.
Assignment
The transfer of a tenant's entire interest in a lease to a new party. Unlike subletting, an assignment transfers all remaining rights and obligations. Most leases require landlord consent for assignments and may impose transfer fees or profit-sharing requirements.
B
Base Rent
The fixed minimum rent payment due under a commercial lease, typically expressed as an annual per-square-foot rate or a monthly lump sum. Base rent excludes additional rent charges such as CAM, taxes, and insurance, which are passed through separately in NNN lease structures.
Base Year
The calendar year used as the benchmark for calculating operating expense escalations in a commercial lease. The tenant pays their proportionate share of any increase in operating expenses above the base year amount. Selecting a representative base year is critical to avoiding unexpected cost increases.
Breakpoint
The sales threshold above which a retail tenant must pay percentage rent to the landlord. The natural breakpoint is calculated by dividing the annual base rent by the percentage rent rate. An artificial breakpoint is a negotiated fixed amount that may be higher or lower than the natural breakpoint.
Build-Out
The construction process of customizing a commercial space to meet the tenant's specific needs, including partitioning, electrical, plumbing, flooring, and finishes. Build-out costs are typically shared between landlord (via TI allowance) and tenant, with timelines affecting rent commencement.
C
CAM
Common Area Maintenance. Charges passed through to tenants for maintaining shared spaces such as lobbies, hallways, parking lots, landscaping, and exterior lighting. CAM charges are typically allocated based on each tenant's proportionate share of the building or center.
Casualty
Damage or destruction of the leased premises by fire, flood, or other disaster. Lease casualty provisions address restoration obligations, rent abatement during repairs, and termination rights if damage exceeds a specified threshold or restoration cannot be completed within a set timeframe.
Co-Tenancy
A lease provision that ties the tenant's occupancy or rent obligations to the presence of specified co-tenants, typically anchor tenants in retail centers. Co-tenancy provisions may allow rent reductions, operational flexibility, or lease termination if occupancy thresholds are not maintained.
Commencement Date
The date when the lease term officially begins and the tenant's obligations under the lease commence. The commencement date may differ from the rent commencement date, particularly when the landlord provides a free rent period or the tenant needs time to complete build-out before opening.
Condemnation
The government's exercise of eminent domain to take private property for public use. Lease condemnation provisions allocate the condemnation award between landlord and tenant and specify termination rights when a partial or total taking occurs.
Continuous Operation
A lease covenant requiring the tenant to remain open for business during specified hours throughout the lease term. Common in retail leases, continuous operation clauses prevent tenants from 'going dark' while continuing to pay rent, which would harm neighboring tenants and property value.
Contraction Right
A tenant's option to reduce the size of their leased premises during the lease term, typically by surrendering a specified portion of the space. Contraction rights provide flexibility for tenants whose space needs may decrease, but landlords typically require advance notice and a contraction fee.
CPI Adjustment
A rent escalation method tied to the Consumer Price Index, adjusting rent based on inflation. CPI-based escalations protect the landlord's real income but can create unpredictable costs for tenants. Many leases cap CPI increases at 3% to 5% annually to provide a ceiling.
Cure Period
The time allowed for a defaulting party to correct a lease violation after receiving written notice. Monetary defaults typically have shorter cure periods (3 to 5 business days) while non-monetary defaults allow longer periods (30 calendar days), often with extensions for diligent pursuit of a cure.
D
Default
A breach of lease obligations by either the landlord or tenant. Common tenant defaults include failure to pay rent, abandonment, and violation of use restrictions. Lease provisions should specify notice requirements, cure periods, and available remedies for each type of default.
Delivery Condition
The physical state in which the landlord is required to deliver the premises to the tenant. Common delivery conditions include warm shell (basic HVAC, electrical, plumbing stubs), cold shell (bare structure), and turnkey (fully finished to tenant specifications).
Demolition Clause
A provision allowing the landlord to terminate the lease if the landlord decides to demolish or substantially renovate the building. Tenants should negotiate minimum notice periods (12+ months), relocation assistance, and lease buyout payments when accepting demolition clauses.
E
Early Termination
A right allowing the tenant to end the lease before its scheduled expiration, typically subject to advance notice and payment of a termination fee. Termination fees commonly include unamortized TI costs, leasing commissions, and sometimes a rent penalty equal to several months of rent.
Escalation
The mechanism by which base rent increases over the lease term. Common structures include fixed annual increases (e.g., 3% per year), CPI adjustments, or fair market value resets at specified intervals. Tenants should negotiate caps on escalation amounts to maintain cost predictability.
Estoppel Certificate
A signed statement by the tenant confirming the current status of the lease, including rent amounts, term, security deposit, and any defaults. Estoppel certificates are typically required by lenders and purchasers during property financing or sale transactions.
Exclusive Use
A lease provision granting the tenant the exclusive right to operate a specific type of business within the property or shopping center. Exclusive use clauses protect the tenant from direct competition within the same project and should define the protected use category with sufficient specificity.
Expansion Option
A contractual right giving the tenant priority access to additional space in the building as it becomes available. Expansion options may take the form of a right of first offer, right of first refusal, or a must-take obligation at predetermined terms.
Expense Stop
A fixed dollar amount per square foot representing the landlord's maximum contribution toward operating expenses. The tenant pays any operating expenses exceeding the expense stop. Unlike base year provisions, expense stops provide more cost certainty since they are set at a specific dollar amount.
F
Fair Market Value
The rental rate a willing landlord and willing tenant would agree upon for comparable space in the relevant market. Fair market value is commonly used to determine renewal option rent, with disputes resolved through broker opinion appraisals or binding arbitration.
Force Majeure
A contract clause excusing performance obligations when prevented by events beyond a party's reasonable control, such as natural disasters, pandemics, government orders, or war. Force majeure provisions should clearly define qualifying events and specify whether rent abatement applies during the force majeure period.
Free Rent
A period at the beginning of the lease term during which the tenant is not required to pay base rent. Free rent is a concession provided by the landlord to offset the tenant's build-out costs and is typically limited to base rent, with the tenant still responsible for operating expenses.
G
Go-Dark Clause
A lease provision allowing the tenant to cease operations while continuing to pay rent. Go-dark rights are valuable to tenants facing underperforming locations but can harm co-tenants who rely on foot traffic. Landlords often resist go-dark provisions in anchor leases.
Gross-Up
An adjustment to operating expenses that projects what costs would have been if the building were fully occupied (typically 95%). Gross-up protects the landlord from absorbing a disproportionate share of fixed costs when the building has vacancy, but tenants should verify which expenses are eligible for gross-up.
Guaranty
A personal or corporate obligation to fulfill the tenant's lease obligations if the tenant entity fails to perform. Personal guaranties are common for privately held companies and may be limited in duration, amount, or scope. Good guy guaranties, common in New York, limit liability to the period of occupancy.
H
Holdover
The period when a tenant remains in possession of the premises after their lease has expired without executing a renewal. Holdover rates are typically 150% of the total rent (base plus additional rent) and may increase to 200% after a specified period.
I
Indemnification
A contractual obligation requiring one party to compensate the other for specified losses, damages, or liabilities. In commercial leases, mutual indemnification provisions allocate responsibility for claims arising from each party's actions or negligence within or related to the premises.
K
Kick-Out Clause
A provision allowing the tenant to terminate the lease early if specified performance metrics are not met, such as minimum sales thresholds. Kick-out clauses provide tenants with an exit strategy for underperforming locations, typically exercisable after an initial operating period.
L
Landlord's Work
Construction and improvements performed by the landlord to prepare the premises for tenant occupancy, as specified in the lease or work letter. Landlord's work typically includes base building systems, code compliance, and restroom facilities, with standards and timelines defined in the lease.
Late Fee
A charge imposed on the tenant for failing to pay rent by the due date, typically structured as a percentage of the overdue amount (3% to 5%) or a flat fee. Late fees must be reasonable and proportionate to the landlord's actual damages to be enforceable in most jurisdictions.
Letter of Credit
A bank-issued financial instrument that serves as an alternative to a cash security deposit. Letters of credit allow the tenant to use their capital for business operations while providing the landlord with an unconditional draw right upon tenant default. LOCs must be kept current and renewed before expiration.
Load Factor
The ratio of rentable square footage to usable square footage, representing the tenant's share of building common areas. A load factor of 1.15 means the tenant pays rent on 15% more square footage than they exclusively occupy. Lower load factors indicate more efficient floor plans.
LOI
Letter of Intent. A non-binding document outlining the key business terms of a proposed commercial real estate lease or purchase before a formal agreement is drafted. LOIs establish the negotiating framework for rent, term, tenant improvements, and other material provisions.
N
NNN (Triple Net)
A lease structure where the tenant pays base rent plus their proportionate share of property taxes, insurance, and common area maintenance costs. Triple net leases shift most operating cost risk from the landlord to the tenant, making the landlord's rental income more predictable.
Non-Disturbance
A lender's agreement that the tenant's lease will not be terminated if the lender forecloses on the property. Non-disturbance provisions protect the tenant's right to continue occupying the premises under the existing lease terms, regardless of changes in property ownership through foreclosure.
O
Operating Expenses
The costs of operating and maintaining a commercial property, including property taxes, insurance, utilities, janitorial services, management fees, and repairs. Operating expense pass-through structures determine how these costs are allocated between landlord and tenant.
P
Percentage Rent
Additional rent calculated as a percentage of the tenant's gross sales above a specified breakpoint threshold. Common in retail leases, percentage rent aligns the landlord's income with the tenant's success. The natural breakpoint is calculated by dividing base rent by the percentage rate.
Permitted Transfer
Lease assignments or sublettings that are pre-approved and do not require the landlord's consent. Permitted transfers typically include transfers to affiliates, subsidiaries, or successors by merger or acquisition. The definition should be broad enough to accommodate normal corporate restructuring.
Permitted Use
The specific business activities the tenant is authorized to conduct in the leased premises. Permitted use clauses range from narrowly defined (specific product categories) to broadly stated (general office use). Tenants should negotiate the broadest practical use clause to preserve operational flexibility.
Punchlist
A list of minor deficiencies or incomplete items identified during the final walkthrough of construction work that must be corrected before the space is considered fully delivered. Completion of punchlist items should not delay commencement, but a holdback of TI funds ensures the work gets finished.
R
Radius Restriction
A lease provision prohibiting the tenant from opening a competing location within a specified geographic radius of the leased premises. Common in retail leases with percentage rent provisions to prevent tenants from diverting sales to a nearby location.
Recapture
A landlord's right to terminate the lease and take back the premises when a tenant requests consent to assign or sublet. Recapture provisions can effectively prevent tenants from profiting on favorable lease terms by eliminating the sublease opportunity entirely.
Renewal Option
A contractual right allowing the tenant to extend the lease term for additional periods under specified conditions. Renewal options typically require advance written notice (6 to 12 months) and may set rent at fair market value, a fixed increase, or the greater of the two.
Rent Commencement
The date when the tenant's obligation to pay rent begins, which may be later than the lease commencement date. Rent commencement is typically the earlier of a specified number of days after landlord delivery or the date the tenant opens for business.
ROFO
Right of First Offer. A contractual right requiring the landlord to offer available space to the existing tenant before marketing it to third parties. Unlike a ROFR, the tenant negotiates price directly with the landlord rather than matching an outside offer.
ROFR
Right of First Refusal. A contractual right that allows the tenant to match any third-party offer received by the landlord for adjacent space or the property itself. The tenant must match the exact terms of the bona fide third-party offer within a specified response period.
S
Security Deposit
A sum of money held by the landlord as financial protection against tenant default, property damage, or lease violations. Security deposits for commercial leases are typically one to three months of base rent and may be structured as cash, letter of credit, or a combination.
SNDA
Subordination, Non-Disturbance, and Attornment Agreement. A three-part agreement between the tenant, landlord, and lender that subordinates the lease to the mortgage, protects the tenant from eviction upon foreclosure, and requires the tenant to recognize the new owner.
Subletting
The leasing of all or a portion of the tenant's space to a third party while the original tenant retains their lease with the landlord. The subtenant has no direct relationship with the landlord, and the original tenant remains liable under the master lease.
Subordination
A provision requiring the tenant's lease to be subordinate to any mortgage or deed of trust on the property. Tenants should always condition subordination on receiving a non-disturbance agreement protecting their lease rights if the lender forecloses.
T
Tenant's Work
Construction and improvements performed by the tenant to customize the premises for their specific business needs. Tenant's work is typically funded by the TI allowance and must comply with landlord-approved plans, building codes, and the lease's alteration provisions.
Term
The duration of the lease, measured from the commencement date to the expiration date. Initial lease terms for commercial properties typically range from 3 to 10 years, with longer terms providing rent certainty and shorter terms offering flexibility. Renewal options extend the overall tenancy period.
TI Allowance
Tenant Improvement Allowance. A dollar-per-square-foot contribution from the landlord toward the cost of customizing the space to meet the tenant's needs. TI allowances are typically disbursed upon completion of work, with the tenant fronting construction costs.
U
Usable vs Rentable SF
Usable square footage is the actual space within the tenant's demised premises. Rentable square footage includes the usable area plus a proportionate share of common areas (lobbies, corridors, restrooms). The difference is expressed as the load factor, typically 10% to 20% in office buildings.
W
Waiver of Subrogation
An agreement between landlord and tenant that their respective insurance carriers will not seek recovery from the other party for covered losses. Waivers of subrogation prevent the landlord's insurer from suing the tenant (or vice versa) after paying a claim, reducing litigation risk.
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