April 24, 2019
In the first edition of our Key Terminology booklet, the Denham Wolf team has compiled terms that are frequently heard over the course of a real estate project in New York City, such as RENT.
Rent is straightforward in concept; a tenant that makes regular payments to a landlord for the use of property is paying rent. In commercial real estate, however, there are several factors that influence rent, including some expenses that can grow very quickly throughout a tenant's lease term.
- BASE RENT // The initial amount of rent to be paid by a commercial tenant to a landlord, at the commencement of a lease. Typically, Base Rent is expressed in dollars per square foot on an annual basis (eg. $40/sf per year). Rentable Square Feet is used as the sizing metric for base rent. For commercial tenants, base rent usually increases from year to year; this increase is referred to as an Escalation.
- ESCALATION // When referenced in the context of commercial rent, an Escalation is an increase of a tenant’s Base Rent. The increase is typically calculated as a percentage of the base rent (eg. 3% per year).
- ADDITIONAL RENT // Expenses that are passed through to the tenant by the landlord, and that go above and beyond the tenant’s Base Rent. These expenses are often cumulative and can grow quickly; Additional Rent is sometimes the most volatile aspect of a tenant’s monthly rent. Before signing a lease, it is critical to have clarity about all of the expenses included in the passthroughs.
- FREE RENT PERIOD // Depending on the specifics of a commercial lease, there may be an opportunity for a tenant to benefit from a Free Rent Period. Free rent may be applied to the full extent of the rent amount for a specific number of months, or it may be applied as a portion of the rent for a greater number of months. If a landlord is reluctant to reduce the Base Rent or is resistant to providing a Tenant Improvement (TI) Allowance that is sufficient for the tenant, the landlord may be receptive to a Free Rent Period. Like the former two options, the latter is a concession that helps to reduce a tenant’s Effective Rent.
- EFFECTIVE RENT // Effective Rent refers to the actual rent obligation borne by the tenant. In a lease in which the Base Rent increases each year due to Escalations, the increased amount of real estate taxes that are passed through to the tenant by the landlord plus the otherwise escalated base rent equal the effective rent. For Example, if a tenant has a Free Rent Period of six months during the first year of their lease, the Effective Rent equals the full amount of Base Rent minus the value of the free rent.
Please note that, in some cases, the definitions included in our Key Terminology booklet are specific to Denham Wolf's approach to real estate and may not reflect the industry at large. In all cases, we welcome the opportunity to discuss the terms and their nuances with you.