Gross Lease. Net Lease. Tenant Allowance. “Good Guy” clause. Commercial leasing in New York City has its own unique vocabulary that’s different from almost every other office market in the world. And as the office market looks towards the future, new acronyms like LEED-NC, LEED-CS, and LEED-CI can make the building surveying process even more overwhelming. BMO has selected a few of the most important terms you’re likely to run across during your search and defined them for you below. And of course we’re always available to answer any questions that you may have.
Anchor Tenant: Typically the largest tenant within a given office building. For new construction, signing an anchor tenant can serve the critical function of allowing the developer to close on its construction loan for the new building.
“As-Is” Condition: A tenant’s acceptance of a given space subject to the exact conditions existing at the time the lease is signed, including any physical defects, temporary walls, or other conditions within the space.
Base Rent: A set amount within a lease agreement that serves as the minimum rent the tenant will owe during the term, which will typically increase year-to-year according to provisions in the lease.
Build-Out: The physical construction that takes place within the leased space according to the tenant’s plans and specifications. Frequently, this construction is paid for out of a Tenant Finish Allowance that is negotiated with the landlord in connection with the lease.
Common Area Maintenance (CAM): CAM, or additional rent, is assessed to a tenant on top of the Base Rent for its proportionate share of expenses necessary to maintain the common areas of the building (lobby, elevators, bathrooms, etc.) that are shared by all tenants. Depending on the lease, the specific expenses that are included within CAM can vary widely.
Comparables: A list of similar properties or spaces – in size, year built, quality of construction – located within a given target submarket or geographic location, typically used by your broker to establish a fair market lease rate for your desired property.
CPI: Acronym for Consumer Price Index, which is a measure of inflation and is typically tied to increases in Base Rent in order to protect the landlord’s revenue stream from swings on account of inflation.
Demised Premises: A fancy legal term for the leased space.
Escalation Clause: Depending on the lease, an escalation clause provides for the rent to increase during the term of the lease in order to reflect increases in the landlord’s cost of operating the building and can be set in any number of ways, from periodic set increases, to increases tied to the Consumer Price Index, or increases over a pre-established Base Year.
Energy Star: Energy Star is a national energy performance rating that ranks a building’s energy performance relative to similar buildings nationwide on a scale of 1-100. A score of 75 is required in order for a building to receive the designation, which means that the building performs better than 75 percent of peer buildings in the EPA’s database, which is prepared by the Department of Energy’s Energy Information Administration during its quadrennial Commercial Building Energy Consumption Survey (CBECS). The program is voluntary and self-reporting: based on the information that an owner or property manager enters into the online system about the building – size, location, number of occupants, etc. – the Energy Star program estimates how much energy the building would use if it were the best performing, the worst performing, and every level in between. The system then compares the actual entered source energy data to the estimate to determine where the building ranks relative to its peers.
“Good Guy” Clause: A standard clause in New York City commercial leases that is a form of limited personal liability, obligating the guarantor (typically a principal of, or investor in, the tenant’s business) to be personally responsible for the rent that is owed between a tenant’s default date and the date it moves out of the premises. For example, if the tenant goes bankrupt, it has an incentive to vacate the space as quickly as possible, but will not be responsible for the remainder of the lease term if it cooperates and moves out (i.e. acts like a “good guy”). Note that if a tenant provides a sufficiently large security deposit, a landlord may be willing to waive the “good guy” clause requirement.
Gross Lease: A lease structure under which the tenant pays the landlord a fixed sum for rent which includes all expenses: taxes, insurance, maintenance, and utilities. Under a pure gross lease, there is no CAM assessed against the tenant. Note that most New York City office leases are a form of modified gross lease, where the tenant will be responsible – depending on the lease – for at least some operating expenses and/or CAM.
LEED: Acronym for the U.S. Green Building Council’s (USGBC) Leadership in Energy and Environmental Design Green Building Rating System. Launched in 2000, LEED is a tool that provides third-party verification that a building, home, or community was designed and built using strategies aimed at achieving high performance in five key areas of human and environmental health: sustainable site development, water savings, energy efficiency, materials selection, and indoor environmental quality. The various LEED rating systems are developed through a consensus-based process that is led by USGBC’s LEED Committees and are typically updated in a four-year cycle.
LEED-CI: LEED for Commercial Interiors. LEED rating system for commercial interior construction; used for spaces that are undergoing a complete interior fit-out of at least sixty percent of the certifying gross floor areas.
LEED-CS: LEED for Core and Shell. LEED rating system used for buildings that are undergoing new construction or major renovation on its exterior shell and core mechanical, electrical, and plumbing units, but not a complete interior fit-out.
LEED-EB: LEED for Existing Buildings: Operations & Maintenance. LEED rating system for existing buildings undergoing improvement work or little to no construction.
LEED-NC: LEED for New Construction. LEED rating system used for buildings that are undergoing new construction or major renovation – or gut rehab for low- and mid-rise residential – and a complete interior fit-out.
Loss Factor: The percentage of a gross area of space that is lost from the tenant’s use on account of walls, windows, elevators, and other building infrastructure. In Manhattan, the general rule of thumb for calculating the loss factor is approximately fifteen percent. The loss factor is tied closely with the concepts of “usable square feet” and “rentable square feet;” the former is the actual square footage that the tenant will occupy. The latter is the sum against which rent will be assessed (on a per square foot basis) and from which the loss factor will apply.
Net Lease: In a pure net lease, the tenant is responsible for most – if not all – of the costs associated with operating the property, including taxes, insurance, and maintenance (known as the “triple net lease.”) Triple net leases are generally found in the industrial real estate sector and not in the New York City commercial office market.
Office Liability Insurance: Insurance coverage that New York City landlords almost universally require tenants to procure prior to taking possession of space.
Security Deposit: A money deposit provided by the tenant to the landlord in order to secure the signing of the lease.
Tenant Improvement Allowance or Tenant Finish Allowance: Typically attached to the lease in the form of a “Work Letter Agreement,” tenant allowances establish a fixed amount of money that the landlord will provide – typically on a per square foot basis – toward improvements within the leased space.