Leasing Lingo Breakdown for Newbies
Every industry has its convoluted lingo—and retail real estate is no exception. We’ve heard it over and over from small businesses: the general terminology in commercial real estate can be incredibly confusing and daunting. If you’re a newbie to retail real estate, we’ve broken down a few basic retail leasing concepts for you.
Q: What does “Term” mean?
A: Term is the length of the lease. Initial/Primary Terms are used to define the first term of the lease. If a pre-negotiated lease extension is in the lease, it’s considered a Renewal/Option Term.
Q: Why do I need to have a “Use” clause?
A: It’s very important to clearly define what the primary use and ancillary service offerings of your business are during lease negotiations. This is considered a Use Clause. Brands and savvy property owners are going to want a defined use clause crafted in a lease to establish a tenant-specific business operation in a commercial property. A well-defined Use Clause can be beneficial when landlords are considering other lease concepts as part of the negotiation that may offer some use protection, like a tenant exclusive, within all or a portion of the property. These type of clauses are helpful for landlords to gauge whether or not a specific use can be accommodated within their commercial asset. A Use Clause is also important to have vetted for zoning purposes.
Q: does “Base Rent” include everything?
A: We wish! It all depends on the lease structure. Typically in retail leases, leases are traditionally a NNN (“triple net”) Lease. This means that the tenant is responsible for their base rent, plus their proportionate share of property taxes, insurance and maintenance to a property, and sales tax.
Q: I don’t know what NNN means! CAN YOU HELP?
A: Yes, let’s break it down! There are four primary types of commercial leases, with each having various levels of responsibility by the landlord and tenant that are defined in a lease:
Single Net Lease: The tenant is responsible for paying property taxes.
Double Net (NN) Lease: The tenant is responsible for paying property taxes and insurance.
Triple Net (NNN) Lease: The tenant is responsible for property taxes, insurance and maintenance.
Gross Lease: The tenant only pays rent, while the landlord pays for the building property taxes, insurance and maintenance.
As a business owner/operator who is about to commit to a huge investment and sign a legally binding document (aka, a lease contract), you need to fully understand how the lease is structured. Identifying the lease structure helps you understand your overall responsibilities and associated potential costs for the duration of the lease.
The devil is in the details on transactions like this! We believe securing a highly experienced retail real estate advisor and sophisticated external team is the best investment you can make for yourself and your retail journey into brick + mortar. You don’t have to be navigating the trenches solo!