Commercial Real Estate 101 – Chapter 3: Rent

Chapter 3 Rent.jpg

A lease abstract is a document that summarizes specific, key information from a lease agreement. Leases can be lengthy documents with confusing legalese. Lease abstracts allow users to easily reference and review fundamental lease terms to ensure that both the tenant and landlord are in compliance with applicable obligations, timeframes, etc.

This series will go through a typical lease abstract and explain the various terms and what is important for a tenant to understand.  

Basic Annual Rent

  • Tenant’s rental obligation expressed in per square foot terms.
  • What’s important – Understanding the rental rate structure, i.e. full service, triple net, etc.

Renewal Rent

  • Tenant’s rental obligation expressed in per square foot terms for any renewal terms.
  • What’s important – Understanding how the renewal rent will be calculated, i.e. market rate, percentage of market rate, then escalated rent, etc. Provisions may include “greater of” or “lesser of.” Inclusion of objective measure of calculating then market rate, i.e. three broker arbitration.

Rent Abatement/Free Rent

  • Amount of time, generally expressed in months, in which tenant shall have beneficial occupancy of the leased premises without having to pay rent.
  • What’s important – Rental rate structure. In triple net leases, generally only the basic annual rent abates (tenant is responsible for paying triple net costs and utilities during the rental abatement period). Free rent inside the term vs. outside the term.

Security Deposit

  • Amount of money required by landlord to secure tenant’s obligation to pay rent and perform its responsibilities under the lease. Generally expressed in terms of number of months’ rent.
  • What’s important – Determined after a review of tenant’s financials. Based on tenant’s financial strength or lack therof, landlord may require multiple months’ rent as a security deposit, in which case burn down provisions may be negotiated. Minimum security deposit is generally one month’s rent.

Late Fee

  • Amount charged to tenant for late payment of rent. Generally expressed as a percentage of the amount due.
  • What’s important – the amount and timeframe after which tenant is penalized for nonpayment.

Interest

  • Rate of interest charged for any overdue payments in addition to other fees.
  • What’s important – the interest rate amount, timeframe after which interest accrues, how the rate is determine, i.e. greater of x% or the highest non-usurious rate.

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