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Common Lease Terms: The Language of Lease Accounting

Lease Term GlossaryWe’ve been helping clients manage their real estate assets for more than a decade. Often those tasked with the day-to-day responsibility of managing leases are experienced administrators or paralegals with a good working knowledge of the language of leasing. But it isn’t uncommon for someone with great organization and administration skills, but no real estate or legal background, to be asked to take on this important duty. If this describes you, don’t worry. You are not alone. Over the years, we’ve put together this handy glossary of common terms used in lease accounting and their meanings. If you are new to the field, this is a great place to start.

Base Rent - The specific amount of minimum rent that the tenant has to pay, exclusive of CAM (Common Area Maintenance), taxes, insurance or any other recurring charge.

Breakpoint- If the lease requires the tenant to pay percentage rent, the breakpoint is the amount of annual gross retail sales above which the tenant is required to pay percentage rent.   For example, if the tenant bas a percentage rent breakpoint of $875,000, the tenant only has to pay percentage rent on any gross retail sales that exceed $875,000 per year.

Common Area - The common area is the portion of the location used in common with other tenants over whom the landlord retains control (e.g. hallways, stairs) and for whose condition the landlord is liable, as contrasted with the areas of which the tenant has exclusive possession.

CAM - Common Area Maintenance. If the tenants are required to reimburse the landlord for the expense of maintaining the common areas, each tenant pays a CAM charge. The CAM charge is each tenant's reimbursement to landlord for their proportionate share of Landlord's common area maintenance fees.

Capital Expenditures – A capital expenditure is an outlay of funds for the acquisition or improvement of a fixed asset, which extends the life or increases the productivity of the asset. The installation of a new roof for the building in which the tenant's premises are contained or the repaving of a shopping center's parking lot are examples of a capital expenditure.

Consumer Price Index – A price index computed and issued monthly by the Bureau of Labor Statistics of the U.S Department of Labor.  The index attempts to track the price level of a group of goods and services purchased by the average consumer, and is widely used to measure changes in the cost of maintaining given standard of living.

Depreciation - Depreciation is the decline in value of property caused by wear or obsolescence and is usually measured by a set formula, which reflects these elements over a given period of the useful life of property.  In accounting, depreciation means spreading out the cost of a capital asset over its estimated useful life.

Eminent Domain-The power to take private property for public use by the state, municipalities and private persons or corporations authorized to exercise functions of public character.  The Constitution limits the power to taking for a public purpose and prohibits the exercise of the power of eminent domain without just compensation to the owners of the property that is taken. The process of exercising the power of eminent domain is commonly referred to as "condemnation", or "expropriation".

Estoppel Certificate - An estoppel certificate is a signed statement by a party, such as a tenant, certifying for the benefit of another party that a certain statement of facts is correct, as of the date of the statement (e.g. a lease exists, there are no defaults, rent is paid to a certain date).  Delivery of the statement by the tenant prevents (estops) the tenant from later claiming a different state of facts.

Fiscal Year – A period of 12 consecutive months chosen by a tenant as the accounting period for annual reports.  The lease defines the specific start/end dates of a fiscal year; the dates have nothing to do with the lease commencement date.

Holdover- Holdover refers to the situation where the tenant remains in the leased space after the expiration or earlier termination of the lease term, with or without the consent of the landlord.

HVAC -The Heating, Ventilation and Air-Conditioning system.

Improvement - A valuable addition made to property or an improvement in its condition, amounting to more than mere repairs or replacement. Improvements are intended to enhance property value, beauty or utility or to adapt it for new or further purposes.

Indemnification - To indemnify is to save harmless; to secure against loss or damage; or to give security for the reimbursement of a person in case of an anticipated loss falling upon him.  Indemnification occurs, therefore, when Party A agrees to hold Party B harmless against any claim or cause of action that may arise through the actions of Party A.

Lease Year - A period of time in which the specific start/end dates are defined by the lease, and which closely mirror the lease commencement and lease expiration dates.

Lien - A lien is a claim, encumbrance, or charge placed upon the asset of a debtor in order to secure the payment of a debt or performance of an obligation by debtor.

Natural Breakpoint - A natural breakpoint is a percentage rent breakpoint that is specifically tied to the amount of minimum rent that the tenant is required to pay to the landlord.

Option to Purchase - An agreement between the landlord and the tenant that grants to the tenant the right to buy a piece of the shopping center or office building within a period of time.

Percentage Rent- Percentage Rent is additional rent paid by the tenant to the landlord in the form of a percentage of any gross retail sales that exceed a specified breakpoint.

Rent Bump - The specific date on which the tenant's minimum rent increases, to its new amount.  If minimum rent will increase in the future, the increase in base rent is called a rent bump. 

Right of First Refusal - The right of the tenant to meet the terms of a proposed contract before the proposed contract is executed; e.g. tenant may buy, rent, or have some other claim to a property or premises before it may be offered to any other party.

Subordination - The process by which a person's rights or claims are ranked below those of others; e.g. a second mortgagee's rights are subordinate to those of the first mortgagee. If the 2nd mortgagee subordinates its claim to tenant's property to the claim of the 1st mortgagee in the same property, then the 2nd mortgagee has subordinated its claim to the claim of the 1st mortgagee and has agreed that the 1st mortgagee's claim has priority over the 2nd mortgagee's claim.

Subrogation - The substitution of one person in the place of another with reference to a lawful claim, demand or right, so that the party who is substituted succeeds to the rights of the party who is replaced in relation to the debt or claim, and its rights, remedies, or securities.

Tenant Allowance - Abatement in rent or other grant from the landlord, given to the tenant to finance a move or relocation or the construction of tenant's improvements.

Tenancy at Sufferance - A tenancy at sufferance arises when the tenant wrongfully holds over following the termination of the lease.

Tenancy at Will - A tenancy at will arises when the tenant holds possession of the premises by permission of the landlord, but without a fixed term.

Triple Net Lease - In a triple net lease, the tenant pays all of the expenses of the leased property, e.g. taxes, insurance, and maintenance, over and above minimum rent, leaving the landlord with little to pay other than mortgage payments.

We hope these definitions have been helpful. There are surely more common lease terms that could be added, but this should give you a good basis for understanding the terms and conditions of your leases and how they impact your business. If you are new to lease administration, don’t be intimidated and don’t be afraid to ask for help. It is a bit complex, but you’ll get the hang of it in no time.

Posted on 4/17/15 2:10 PM by The Team at AMTdirect in Lease Administration

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