Commercial real estate has its own language—and for operators navigating leases, site selection, or new market entries, clarity matters. You don’t need to become a broker or developer, but you do need to understand the key terms that affect your budget, timeline, and leverage.
This glossary isn’t about definitions alone—it’s about practical application. Here’s what operators really need to know about the terms that shape the deals they’re signing.
Cap Rate (Capitalization Rate)
What it is:
A measure of return on a real estate investment, calculated by dividing a property’s net operating income (NOI) by its purchase price.
Why it matters:
Even if you’re leasing, understanding cap rates helps you evaluate how your tenancy affects a property’s value—and how landlords view your lease.
Co-Tenancy Clause
What it is:
A lease term allowing rent reductions or lease termination if a key tenant (like an anchor store) vacates.
Why it matters:
Your customer traffic might depend on who else is in the center. Co-tenancy clauses give you options if major traffic drivers disappear.
Contingency
What it is:
A condition that must be satisfied before a deal proceeds—common examples include financing, zoning approvals, or inspections.
Why it matters:
Contingencies help you manage risk and avoid jumping into a deal before you’re ready.
LOI (Letter of Intent)
What it is:
A non-binding agreement outlining the main terms of a lease or purchase before legal documents are drafted.
Why it matters:
The LOI sets the tone. Clear, specific LOIs help prevent delays and misunderstandings later.
TI (Tenant Improvement) Allowance
What it is:
Funds provided by the landlord to build out or customize your space.
Why it matters:
TI can make or break your project budget. Understand what’s covered, who controls the spend, and what your out-of-pocket costs might be.
Rent Commencement Date
What it is:
The date you start paying rent—often different from when you take possession.
Why it matters:
Know when the clock starts. Misunderstanding this date can cause cash flow surprises.
NNN (Triple Net Lease)
What it is:
A lease where you pay base rent plus taxes, insurance, and maintenance.
Why it matters:
Many operators focus on base rent only—NNN charges can add up fast and must be factored into your total occupancy cost.
Exclusive Use Clause
What it is:
A lease term preventing landlords from leasing nearby spaces to direct competitors.
Why it matters:
You don’t want to share a center with someone offering the same product or service. This clause protects your turf.
Build-to-Suit
What it is:
A property developed specifically for your use, often from the ground up.
Why it matters:
This can be a great solution for growing brands, but it comes with long timelines and typically longer lease terms.
Base Rent vs. Effective Rent
Base Rent:
What’s listed in the lease.
Effective Rent:
The true average over the term, factoring in incentives like free rent or TI.
Why it matters:
Effective rent gives you a more accurate view of what you’re actually paying.
Escalation Clause
What it is:
A lease term that increases your rent annually, either by a fixed percentage or tied to CPI.
Why it matters:
Escalations impact long-term costs. Understand what you’re agreeing to—and run the math.
Shell Condition / Warm Shell / Vanilla Shell
What it is:
Describes how much work is done on a space when delivered (from bare bones to semi-finished).
Why it matters:
The starting condition of your space impacts your TI needs, timeline, and construction budget.
Option to Renew
What it is:
The tenant’s right to extend the lease for another term, often at pre-negotiated or market rate.
Why it matters:
Offers flexibility and leverage—especially if the location turns out to be a winner.
Personal Guarantee
What it is:
Makes you (personally) liable if your business defaults on the lease.
Why it matters:
This puts your personal assets at risk. Negotiate for limits or explore “Good Guy Guarantees” if possible.
Use Clause
What it is:
Defines what business activities are permitted in the space.
Why it matters:
Too narrow, and it could limit your future growth. Too vague, and it could conflict with other tenants. Strike the right balance.
Possession Date
What it is:
When you gain access to the space to begin build-out—not necessarily when rent starts.
Why it matters:
This is your construction launch date. Get it in writing to protect your timeline.
Gross Lease / Modified Gross Lease
Gross Lease:
Landlord pays most property expenses.
Modified Gross Lease:
You split some costs.
Why it matters:
Understanding your lease structure helps you project occupancy costs accurately.
Punch List
What it is:
A list of final items the landlord must complete before you take full possession.
Why it matters:
A solid punch list avoids future disputes and ensures you’re handed a functional space.
Final Word: Language Builds Leverage
Knowing the right terminology helps operators communicate clearly, make better decisions, and avoid costly surprises. The strongest operators we work with aren’t just great at what they do—they’re sharp about what they sign.
Need a partner who speaks the language and has your back at every step? We’re here to help.