How to Read a Commercial Lease

A building is bought for fifty-six million dollars on the strength of a rent roll. Every number on that rent roll comes from the leases. Not one of them is in the leases.

The commercial lease is the most economically consequential document in real estate and the one least matched to its readers. It is written by lawyers, organized by legal topic. Rent is in one article, the escalation mechanism in another, the definition that controls it in a third, and the exception that undoes the definition in an amendment executed four years later. Nothing in its structure signals which clauses move money.

Meanwhile the people whose decisions depend on it are not lawyers - they are acquisitions analysts, asset managers, lenders, appraisers and leasing agents.

This book reads the lease as a financial instrument.

• The abstract - reducing a ninety-page lease to one working page, in the reading order that finds problems fastest, with the three tests that catch most errors
• Net effective rent - the number that makes two deals comparable, straight-line and on a present value basis
• Tenant improvements - the work letter, amortized improvements, and who owns what you paid for
• Gross, modified gross and net - what each structure actually shifts, and why the label tells you nothing
• Operating expense recoveries, in full - the pool and its exclusions, the tenant's share, the gross-up, base years, expense stops, and the three kinds of cap
• Real estate taxes - and the reassessment problem that changes a building's income on the day it is sold
• Options - renewal, termination, contraction, first offer and first refusal: the rights that appear on no rent roll and are worth real money
• Escalation - fixed, indexed, collared, and what an "inflation-linked" lease actually protects
• Assignment, subletting, recapture and change of control
• Default and security - and why a six-month letter of credit covers twenty-seven percent of the exposure
• Retail - use clauses, exclusives, and co-tenancy provisions that trigger together
• Casualty, condemnation, insurance and what the lender reads
• The model and the value bridge - pricing every clause at the asset's capitalization rate

One building, one anchor lease, every number reproducible on paper:

• A lease at 32.00 a foot with eight months free and a 75.00 allowance produces a net effective rent of 21.38 - and a competing offer at 28.50 with no concessions is worth 5.99 a foot more
• One sentence about grossing up operating expenses: 33,125 dollars a year, 530,000 dollars of value
• A renewal beats re-letting the same space at the same rent by 87.67 dollars a foot over five years - so a landlord can rationally concede nearly forty percent of market rent and still be ahead
• Five ordinary clauses in one ordinary building: 1.75 million dollars, three percent of the asset

Also included: a complete lease abstract template field by field, forty red flags, three timed practice cases with full solutions, the questions worth asking a seller, a property manager and a leasing agent, and a glossary.

There is no sample clause language in this book, deliberately - drafting varies so much that memorizing one formulation is a liability, and what does not vary is the question each clause answers. The book asserts no jurisdiction's law, and no property, landlord, tenant or lender is named. This is a guide to commercial architecture: not legal advice, and not a substitute for it, but it will make you a considerably better client of the people who give it.