Avoid Costly Surprises: Master Key Lease Terms to Safeguard Your Investment
Securing new office space? Understanding your lease agreement is critical. This guide breaks down essential terms for commercial tenants.
Letter of Intent (LOI)
The LOI outlines the lease’s foundation. Only issue an LOI if you intend to proceed in good faith. Be cautious of informal side agreements, which can become legally binding. Always have an attorney review any LOI or term sheet before signing. State laws regarding LOIs vary, so legal counsel is essential.
Tenant Improvements
Prioritize spaces requiring minimal renovations, especially in competitive markets with rising construction costs and contractor backlogs. For “shell space,” thoroughly analyze your operational needs before opting for open-plan designs. Trendy open offices and exposed ceilings can be surprisingly expensive and may not suit teams requiring focused work (e.g., programmers).
Tenant Improvement Allowance (TIA)
Understand your TIA and what it covers. Does it apply to a “warm shell”? Are ceiling grids, lights, and basic HVAC included in the base package? While turnkey deals (landlord build-out) are rare, they’re always worth pursuing. Landlords may consider them for strong-credit tenants on long-term leases, provided the build-out isn’t highly specialized. For leases over 10,000 square feet, hiring your own construction project manager is advisable when using a TIA.
Common Area Maintenance (CAM) Charges
In triple net (NNN) leases, CAM charges are passed on to tenants for building and grounds upkeep. Ensure your lease clearly defines included CAM charges and that you only pay for services rendered. Request a breakdown of previous years’ actual expenses to avoid unexpected costs.
Capital Improvements
Landlords can pass on the amortized cost of major building component replacements (roofs, HVAC) to tenants. Inquire about any items nearing the end of their lifespan and try to exclude these deferred maintenance costs from your lease for a reasonable period.
Base Year
In full-service or gross leases, landlords can pass through operating cost increases exceeding those in the first year. This is in addition to annual rent increases. Therefore, steps four and five above are crucial. Underestimated base year costs can lead to significant, unforeseen lease cost increases in year two.