Leasing is critical to commercial real estate. For industrial, retail, and office properties it is actively negotiated with the assistance of brokers. This allows for opportunities to drive revenue but comes at the expense of paying brokers commission and performing tenant improvements (TIs) to customize the space to the tenants.
Multifamily is different as it is governed by fair housing laws. Brokers are not involved and the rent is not negotiated, although the rent is often determined using revenue management software.
Leasing Steps (industrial, retail, office)
1) Exclusive Listing Agreement: agreement between an owner and listing broker agreeing that (a) broker is the exclusive agent for the leasing (not necessarily the sale) of the property, (b) the fee that the listing and procuring broker will be paid when they lease the space and (c) the duration of the agreement.
Listing Broker: Broker representing the building owner aka landlord in a transaction. The listing broker markets the property on behalf of the owner.
Procuring Broker (aka Tenant Rep Broker): Broker representing the tenant or buyer in a transaction.
2) MLR: “Make Lease Ready” – proactively performing tenant improvements to a space before there is a tenant. Sometimes referred to as "White Boxing".
3) Marketing: Broker (a) advises owner on what improvements / clean up should be made to the space to have it show the best, (b) creates a leasing brochure, (c) puts up a sign in front of the building, (d) markets space to other brokers and tenants and (e) tours prospective tenants, often with their procuring broker, through the space.
4) LOI: “Letter of Intent” – a typically non-binding agreement between owner and prospective tenant that outlines the key terms of the transaction such as lease rate, annual increases, duration of the lease, tenant improvements, options, etc.
5) Lease: a binding agreement, typically 15 pages with 20+ pages of exhibits documenting in detail the terms of the lease, typically prepared and negotiated with the assistance of legal counsel.
6) LC (lease commissions): Commission on the total base rent the tenant pays during the term of the lease (before any renewal term). Typically paid 50% upon lease execution and 50% upon tenant occupancy.
7) TI (tenant improvements): One time cost at start of lease, often expressed as a certain amount psf. Key points:
Who hires contractor? Could be landlord build or tenant build.
Who pays costs? Any of the following:
Landlord pays 100%.
Landlord pays a certain amount up to a cap and tenant pays above cap.
Tenant pays 100%
8) Tenant Move In: Tenant moves in.
Reference Sheet
Download here: Leasing Steps & Jargon
Leasing Jargon
Starting Rate: Initial lease rate over the term of the lease.
Effective Rate: Average lease rate over the term of the lease.
Lease types relative to expense pass through:
NNN (Triple Net) – typically for industrial and retail; 100% pass thru of CAM, property tax and insurance.
Base Year/Stop (typically for office) – 100% pass through of expense increases over the year in which the tenant first occupied the space (e.g., at the end of the first year of the lease/base year, the actual operating expenses are calculated and become the tenant’s base year; at the end of consecutive years, the tenant will pay all amounts above the established base year amount) .
Gross – no pass through of expenses to the tenant.
Modified Gross – pass through of some but not all expenses directly related to the leased premises.
MLA: “Market Leasing Assumptions” – Key lease terms from the underwriting or budget; include starting lease rate, growth in lease rate per year, free rent, tenant improvements, make lease ready costs, commissions and lease term.
WALT: weighted average lease term. Average lease term based on lease length weighted by tenant square feet. (bigger tenants have more impact on the WALT than smaller tenants).
Loss to Lease: gap between today's market asking rents and the average in-place rent.
Lease Trade Out: difference, usually in a %, between the previous lease rate and the new lease rate at time of renewal or replacement tenant.
Stacking Plan: Visual summary of where tenants are located in a property, usually color coded by lease expiration date.
Rentable Square Feet: The square footage of the leased premises for which rent is charged; Includes a portion of the building’s shared/common area space. Different from…
Usable Square Feet: The square feet of the leased premises exclusively controlled by the tenant as opposed to part of the common area. Both used to calculate…
Load factor: Method of calculating the total monthly rent costs to a commercial tenant; % increase of rentable square footage over usable square footage.
Reference Sheet
Download here: Leasing Steps & Jargon
Broker Listing Agreement
General
Parties to Agreement: Owner and listing broker (outside broker does not sign this agreement)
Listing Period: Start and end date; typically, 6-12 months
Listing Broker: Individual broker landlord is hiring
Listing Team: Any other members who will work on the assignment
Outside Broker: Defined as any other broker than the listing broker and team; an outside broker may be involved in finding a tenant and earn a commission
Property: Address
Leasing
Scope of Work: Listing broker is hired to lease vacant space for an owner
Commission Amount: Example (amounts vary between markets and product types):
6% for months 1 - 60 | 3% for months 61 – 120; nothing after 10 years
100% to listing broker if no outside broker involved | 50/50 to listing and outside broker if outside broker is involved
Payment Timing: Example - 50% paid at lease execution | 50% paid when tenant takes possession of premises
Re-Leasing: Listing broker may be required to re-lease space if tenant vacates within 1 year
Responsibilities: Describes listing broker’s marketing plan and obligations
Marketing Budget: Owner may provide a specific marketing budget
Exclusions: Renewals and expansions may be excluded from earning a commission; property sales are typically excluded
Payment if Termination: Rights of listing broker to earn commission after listing agreement termination/expiration; example of process: listing broker may provide a list of active prospects listing broker is working with; if lease is executed within an agreed upon period (ex. 3-6 months), then listing broker will be paid a commission.
Sale/Disposition
Scope of Work: Listing broker is hired to sell a property for an owner
Commission Amount: Example (amounts vary between markets and product types):
1-3%+ of the sale price; higher price properties earn lower %; may or may not have a provision for payment to an outside broker for finds the buyer
Payment Timing: 100% at closing through escrow
Responsibilities: Describes listing broker’s marketing plan and obligations
Marketing Budget: Owner may provide a specific marketing budget
Payment if Termination: As negotiated between listing broker and owner; sometimes similar concept to leasing with listing broker providing a list of active prospects
Reference Sheet
Download here: Broker Listing Agreement
Lease Agreement Structure
A summary of items with ** are often included in a 3-6 page letter of intent (LOI)
General
Landlord**: legal name on the lease; often assigned to new owner if property is sold; typically, a single purpose LLC – example: 123 Main Street, LLC
Tenant Name**: legal name on the lease
Guarantor**: list if another party is guaranteeing the lease; example: parent company
Premise**: actual space tenant is leasing; could be a suite or a building or multiple buildings; a visual of this may be shown in an exhibit
Square Feet**: size of the suite tenant is leasing
Building**: lease may reference a building that the suite is a part of
Center**: lease may reference a center that the building is a part of
Parking**: may list tenant’s parking rights
Permitted Uses**: short description of how tenant will use the premises
Signage**: list any signage rights
Key Dates
Effective Date: date of the lease
Start Date**: date the lease starts aka commencement date
End Date**: date the lease ends aka expiration date
Early Possession: if applicable, date the tenant can access the space prior to start date
Delivery Date: if applicable, date landlord must have space ready for tenant if landlord is building tenant improvements for tenant; further detailed in exhibit
Rent & Other Financial Obligations
Rent Schedule**: rent is $ or SF; if reviewing for potential acquisition during due diligence, this will be used to compare to underwriting model
Free Rent**: if any
Advanced Rent**: amount; typically, first month’s rent due at lease execution
Security Deposit**: amount; typically, an amount equal to the last month’s rent
Reimbursements**: see below; aka NNN charges aka CAM charges; typically, details are provided relative to what these charges include and don’t include; monthly estimates paid with annual reconciliation in first quarter of the year based on actual expenses
Late Charges: when rent due and late fees
Holdover Rent: typically, a percentage of last rent if tenant does not vacate; example 150%
Reimbursement types related to expense pass through:
NNN aka Triple Net (industrial and retail) – 100% pass thru of CAM, property tax and insurance. Tenant will pay it’s prorata share of expenses (ex. 10K SF tenant in 100K center pays 10%)
Base Year/Stop (typically for office) – 100% pass through of expense increases over the year in which the tenant first occupied the space (e.g., at the end of the first year of the lease/base year, the actual operating expenses are calculated and become the tenant’s base year; at the end of consecutive years, the tenant will pay all amounts above the established base year amount)
Gross (multifamily) – no pass through of expenses to the tenant
Modified Gross – pass through of some but not all expenses directly related to the leased premises
Delivery Conditions & Tenant Improvement (TI) Costs
Condition of Space at Start of Lease**: required by landlord at delivery; landlord ideally wants condition to be “as-is”; specific requirements may be listed in an exhibit
Landlord TI Build**: if landlord is building tenant improvements; typically, referenced in exhibit
Tenant TI Build**: if tenant is building tenant improvements; typically, referenced in exhibit
TI Allowance**: tenant improvement amount and deadlines provided by landlord to tenant if the tenant is constructing the improvements; further detailed in exhibit
TI Cost to Landlord**: tenant improvement amount and deadlines paid by landlord if the landlord is constructing the improvements; further detailed in exhibit
Tenant Options/Rights
Renewal**: number of, notice date, renewal period duration, rent
Termination**: notice date, costs
Expansion**: Right of First Offer, Right of First Refusal, notice, duration, LL costs; Right of First Offer (ROFO): right to make an offer to lease; Right of First Refusal (ROFR): right to match any offer landlord receives
Purchase**: notice date, ROFO, ROFR, ongoing or one time
Sublease**: if allowed and under what conditions
Landlord Options/Rights
Relocation: notice date, costs
Termination: notice date, costs
Alteration Rights & Maintenance Obligations
Tenant Alteration Rights: procedure for approval by landlord for tenant request to modify utilities and add trade fixtures (machinery and equipment)
Tenant Maintenance Obligations: tenant typically maintains interior of premises
Landlord Maintenance Obligations: landlord typically maintains exterior of premises
Condition of Space at End of Lease: what is required by tenant at lease expiration
Defaults, Damage or Destruction, Condemnation
Default: what constitutes a default, what are the notice provisions, what are the cure rights and obligations; ex: non-payment of rent or abandoning the premises
Damage or Destruction: what happens in the event the premise is damaged or destroyed; typically, either party may terminate if it will take 60+ days to restore
Condemnation: what happens in the event the premise is condemned; typically, the lease terminates without penalty to either party
Other Tenant Obligations
Estoppel: when required; unilateral statement signed by tenant for benefit of an owner and/or lender stating the key terms of the lease
Financial Statements: when required; typically, for the benefit of a buyer or lender
SNDA: when required; subordination and non-disturbance agreement: tri-party agreement between landlord, tenant, and lender agreeing that the lease is still in effect if lender forecloses on the landlord; benefits both tenant and lender
Other Information
Landlord Broker**: list name and company
Tenant Broker**: list name and company
Notices: formal conditions to notify the other party relative to lease issues such as defaults, exercising options, etc
Exhibits
Premises and/or Building and/or Center: site or space plan
Rules & Regulations: various rules imposed by landlord on tenant relative to use of premises, building, and center
Guaranty: if any; will list requirements of guarantor, who will sign this document
Hazardous Materials List: form of list that tenant must complete relative to use of hazardous materials; typically for industrial tenants
Rent Payment Instructions: details on where and how tenant will pay rent
Tenant Information: form that tenant fills out with contact information; may have different contacts for the premises, accounting, and business teams
Tenant Insurance Requirements: (see below); a more detailed summary of requirements; tenants typically share this with their insurance broker who then provides proof of insurance to landlord in the form of an insurance certificate naming landlord as additional insured
Tenant Improvement Details: will say whether landlord or tenant is constructing; timeline for completion; estimate of costs, who pays costs and who is responsible for cost overruns; do not sign lease until space plan is agreed to and fully priced by a contractor
Notice of Lease Term Dates: form of notice that will be used if the start of lease is tied to the completion of any tenant improvements; will list start and end date of the lease along with rent schedule and dates
Move Out Standards: requirement by landlord on the tenant relative to how the premises must be left at time of tenant move out; the more detailed the better
Tenant Insurance Requirements
Liability: enter amount required
Umbrella: enter amount required
Property: enter amount required
Business Interruption: enter amount required
Auto: enter amount required
Workers’ Compensation: enter amount required
Employer’s Liability: enter amount required
Reference Sheet
Download here: Lease Agreement
Disclaimer: This information is provided to help you better understand commercial real estate. It is based on my experience over 20+ years. There is no guarantee that this information will allow you to be successful. No guarantee is provided as to the accuracy of the information. It is provided for educational purposes only.