Glossary

One of the most common commercial real estate lease structures is a "Triple Net Lease" (abbreviated "NNN" for short.) Under a Triple Net Lease tenants each pay, in addition to base rent, their pro-rata share of the building's operating expenses.

These operating expenses are called the "Triple Nets", where each "Net" (or "N") stands for Taxes, Insurance and Common Area Maintenance (or "CAM"). Taxes and Insurance are the property taxes and P&C insurance which the Landlord must pay on the project, and Common Area Maintenance may include all the expenses required to operate the property, like repairs, maintenance, janitorial service, trash and snow removal, landscaping and lighting, elevator inspection and certification, window washing, etc.

In a Triple Net Lease structure, the Tenant is also responsible for its consumption of utilities like electricity and water. Medical tenants often consume more utilities than the Landlord's pro-rata estimate for the building, so their spaces will sometimes be separately metered from other tenants in the project.

How to Calculate Rent under a Triple Net Lease:

There are three components to a Triple Net Lease structure that must be considered when calculating a Tenant's total rent.

1. Base Rent

2. Operating Expenses (the "Triple Nets" or "NNN's")

3. Utilities (electricity, water, etc.)

Suppose you leased 3,000 SF at a base rate of $20/SF NNN. The NNN's are estimated by the Landlord to be $10/SF per year, and the utilities are estimated at $1.50/SF per year.

Base Rent: 3,000 x $20/SF = $60,000 per year or $5,000 per month.

NNN: 3,000 SF x $8/SF = $24,000 per year or $2,000 per month

Utilities: 3,000 SF x $1/50/SF = $4,500 per year or $375 per month

Total rent is $7,375 per month.

A Request for Proposal, or RFP, is a document submitted to a Landlord by a Tenant considering a new lease or lease renewal in the building.

An RFP acts as a questionnaire to the Landlord, who reviews the Request For Proposal and responds with a formalized Proposal to lease or renew.

An RFP asks that the Landlord address much of the salient information a Tenant requires when evaluating a potential location, including:

• Proposed Lease Term

• Proposed Base Rate

• Estimated Operating Expenses

• Proposed Tenant Improvement Allowance

• Numerous other considerations

The RFP is typically prepared by the Tenant's representative and is tailored specifically to that Tenant's objectives and requirements.

Rentable Square Footage, or "RSF," is the total area of a Tenant's leased premises plus its pro-rata portion of the buildings common areas, such as lobbies, restrooms, corridors, etc. In many cases, building amenities like fitness and conferencing facilities are also included, increasing the Rentable Square Footage.

The aggregate square footage of these common areas is allocated on a pro-rata basis to each space in the building. This addition is called a "Common Area Factor" or "Load Factor" and typically falls into a range of 1.10 to 1.20 percent. Tenants occupying an entire floor of a building will have a lower Common Area Factor than that of a Tenant occupying only a portion of a floor. This is due to the lack of common corridors, restrooms, elevator banks, etc.

Usable Square Footage, or "USF," contains only the square footage actually located within the Tenant's space.

So why is this distinction important? Because Tenants typically pay lease costs based on Rentable Square Footage, and Landlords advertise available space using Rentable Square Footage, the Tenant is actually occupying a smaller physical area than stated.

Suppose you lease 3,500 RSF in a building where the Common Area Factor is determined to be 1.15 percent. What is the Usable Square Footage of your Premises?

3,500 RSF / 1.15 = 3,043 USF.

A Tenant Improvement Allowance (abbreviated as "T.I.A.") is a sum of money contributed by a Landlord to a Tenant's construction or finish-out of the leased premises.

The T.I.A. is typically negotiated on a per-square-foot basis and agreed to during negotiations between the Tenant and Landlord. The allowance may be used by the Tenant to offset design and construction costs associated with building its space.

A Tenant Improvement allowance is a negotiable item and a Tenant Representative can help you leverage the market to maximize this amount, as well as allow for maximum flexibility in how, when and on what the funds may be spent.

"FF&E" is a common abbreviation for "Furniture, Fixtures and Equipment."

These are Tenant-owned, movable items that have no permanent connection to the building or structure and are consequently easily removed.

Some examples of FF&E may include:

• Desks, tables and chairs which are not built-in

• Medical and laboratory equipment

• IT and computer equipment

• Office supplies

• Standalone kitchen appliances like coffee machines

A Right of First Refusal, or "ROFR," is a common lease provision which requires that, in the event a Landlord receives a bonafide offer from a third-party to lease a specified space, the Landlord must first offer that space to the Tenant holding the ROFR.

A Right of First Refusal is granted to a Tenant in their lease, and can carry with it a variety of provisions governing delivery of notice, response time, definition of third-party, acceptance, etc.

A ROFR is an important part of a Tenant's greater real estate strategy, as it may provide a path to contiguous expansion without the need to relocate or negotiate a new lease.

A Parking Ratio is a lease provision which stipulates the total number of parking spaces granted to a Tenant by the Landlord under the lease. It provides a consistent method for distributing the finite number of parking spaces in a building's parking lot or structure between the many Tenants and visitors of the building.

The ratio is typically expressed as number of parking spaces per rentable square feet. For example, a parking ratio of 5:1,000 RSF would provide a Tenant with five parking spaces for every 1,000 square feet they lease.

Suppose you lease 5,000 square feet of space in a building with a stated parking ratio of 3:1,000 RSF.

5,000/1,000 = 5

5 x 3 = 15 parking spaces

While a parking ratio is common to all Tenants in the building, it is nonetheless a negotiable item which can greatly impact healthcare Tenants, who typically have a higher employee density per-square-foot and more frequent and consistent visitor patterns than typical tenants.

A Full Service Lease is a lease structure where the Base Rent and Operating Expenses are together expressed as an aggregate amount called Rent. A Full Service Lease may also be called a Gross Lease.

This lease structure differs from the commonly-used Triple Net Lease structure, which passes operating expenses directly through to the Tenant, by providing a pre-determined base rate inclusive of all operating expenses.

But operating expenses often fluctuate from year-to-year. How does a Full Service Gross Lease address this? It does so through the use of a Base Year and Expense Stop provision. A Base Year is established as a benchmark for operating expenses during the first year of the lease term. The Landlord agrees to pay any increase in operating expenses after this Base Year, but only up to a certain point called an Expense Stop. If operating expenses increase beyond this threshold, the Tenant will be responsible for paying the difference.

While the Landlord ultimately decides which lease structure to utilize at the building, a Tenant Representative can help explain the complexities and differences of each, and ensure you understand precisely your obligations under the proposed lease structure.

Jones Healthcare Real Estate provides all clients with a carefully reviewed closing book at the closing of each transaction. This closing book contains all salient information about the Tenants lease, including rent schedule, operating expense history and projections, critical notice dates and response deadlines, etc.

It is important you understand precisely the implications of your lease structure on your practice. Not knowing could cost you substantial time and money!

A Letter of Intent, or LOI, is a non-binding document which is executed by both a Tenant and a Landlord, and summarizes all of the fully-negotiated terms the parties have agreed to. Typically, an executed LOI is the final step before a lease document is drafted by the Landlord. The lease draft will contain all of the terms agreed to in the Letter of Intent.

Unlike a Request for Proposal, which is a working document meant to track the fluid negotiations between both parties, an LOI is a final account of the agreed-upon terms.

A Letter of Intent is an important step in the transaction process. It signifies that both parties are prepared to provide a good-faith effort to jointly deliver a fully-negotiated and executable lease document. It also serves a reference point for agreed terms during the review of the lease document itself.

Remember that a properly drafted Letter of Intent should be non-binding on both parties, so that executing it does not hold any legal or financial implications. Until there is ink on the Lease itself, a Tenant should not be bound by any provisions!

Effective Rent is the average gross rental rate a Tenant will pay over the course of a lease after factoring in Lease Concessions like rental abatement.

Why is it important to calculate the effective rent of a proposed lease?

Suppose a Tenant is considering a 5-year lease where the Landlord has offered three months of rental abatement outside of the primary lease term. Although rent will be abated for the first three months of the lease, the Tenant will likely still be responsible for operating expenses, utilities and parking charges during those three months. That sum must be included in order to calculate an accurate total occupancy cost. Additionally, the rental abatement is offered outside the term, which means after the first three months there are still 60 paying months (5 years) remaining on the lease.

A Tenant Representative will help you navigate the complexities of commercial real estate by providing detailed financial breakdowns and projections.

Lease Concessions are both the economic and non-monetary compromises a Landlord will agree to in a lease negotiation with new or renewing Tenants.

These include, but are not limited to:

• Rental Rate Reductions.

• Tenant Improvement Allowances: cash contributions to fund Tenant's build-out.

• Rental abatement: months where the Tenant may occupy the space rent-free.

• Lower annual rent escalations

• Allowances to offset moving or set-up costs

• Branding and signage rights for Tenant's logo and colors to be displayed on the building, monument sign or elsewhere.

• Increased deliverables to the spaces (Electricity, HVAC, plumbing, etc.)

• Rights of Renewal and/or Rights of First Refusal on additional space in the building

• Personal guaranty burn-offs

• Exclusivity rights barring a similar practice from leasing within the building or complex

Shell Space is raw space which contains only the elements of the building structure and envelope. Shell space is in raw condition, and is ready to accommodate a Tenant's build-out. Essentially a concrete box, it is a blank canvas and provides maximum flexibility for interior design and construction.

Commonly, Shell Space is referred to in two forms:

• Cold, Dark Shell: this is raw space with no HVAC or Lighting installed

• Warm Shell: raw space with some ductwork and minimal lighting installed.

Second Generation Space is existing space which has previously been built-out and occupied by one or more Tenants. Second-generation space contains interior walls, doors, ceilings, lighting, HVAC, carpeting, plumbing and fixtures from the previous Tenant.

Commonly, Landlords may elect to return second-generation space to shell condition. This is sometimes referred to as White Box Space. White Box Space has been partially demolished by the Landlord following the vacating of a previous Tenant, and will often contain ductwork and lighting, making it a blank canvas for the next Tenant.

It is important to understand the difference, as there are economic implications respectively associated with preparing both types of space for occupancy.

Annual Escalations are pre-determined increases in base rental at scheduled intervals during the course of a Tenant's lease. They may also be referred to as Rent Bumps.

Commonly, Annual Escalations are either expressed as a percentage or exact dollar amount and typically occur at the annual anniversary of the first month of the lease term.

Suppose you enter a five-year lease with a base rate of $20.00/SF and for 2.5% annual escalations. The lease schedule would look like this:

• Year 1: $20.00/SF

• Year 2: $20.50/SF

• Year 3: $21.01/SF

• Year 4: $21.53/SF

• Year 5: $22.07/SF

A Tenant Representative will provide financial analysis and breakdown during your real estate evaluation, and ensure that you fully understand all economic assumptions and implications inherent to a proposed transaction.

A Subordination, Non-Disturbance and Attornment agreement, or SNDA, is an agreement entered into between a Tenant and the Lender to a Landlord.

An SNDA holds that Tenants leases are subordinate (the "S") to the mortgage, and attorn (the "A") or recognize the lender as the new landlord in the event of foreclose.

The Non-Disturbance provision in the agreement (the "ND") provides that in the event of a foreclosure or sale, the Tenant's lease will not subsequently be foreclosed on.

SNDA agreements are a critical element to a Tenant's peace-of-mind under their lease.

A Renewal Option is a lease provision which grants the Tenant the right to extend the lease upon expiration of the current lease term, either at pre-determined rates or at rates to be determined at the time of renewal.

Renewal Options carry with them specific timeframes for notice and response, and if the Tenant fails to notify the Landlord of its intent to renew within this timeframe the option may expire. Renewal Options often contain specific language relating to the "Fair Market Value" determination of the rental rates and concessions applicable to the renewal term. It is not uncommon for long-term leases to contain more than one renewal option, which may be exercised subsequently and allow Tenants to remain in place for decades.

Renewal options are an important component to a Tenant's long-time flexibility and strategy. They can also be a source of leverage in the market for Tenants contemplating a relocation.