Contracts & Leases: 103 Key Terms

By Devon Coombs, CPA, MBA · Teaching Professor of Finance, Santa Clara University · Reviewed August 2026

Leases are the contracts through which most income-producing properties generate their cash flow, so the language of leasing is central to real estate finance. Terms such as absolute net lease, base year, breakpoint, and CAM describe who pays which operating expenses and how rent is calculated, while concepts such as anchor tenant, assignment, and attornment govern the relationships among landlords, tenants, and lenders. This vocabulary supports Week 2 of the free Real Estate Finance course, which examines how real estate investments produce income through contracts and leases. Reading a rent roll or a letter of intent generally requires fluency in exactly these terms.

These terms are taught in Week 2: How Do Real Estate Investments Produce Income? Contracts & Leases of the free Real Estate Finance course; the full course glossary collects every chapter in one place.

absolute net lease: A net lease that shifts nearly all property-level costs to the tenant, often including maintenance, repairs, structural costs, roof, and major capital items.
adaptive reuse: Converting a property from its current use to a higher-value use (e.g., office to apartments). Creates value only when the new use passes all four highest-and-best-use tests after conversion costs and approval risk.
anchor tenant: A large, traffic-driving tenant (often a grocer or major retailer) that supports a center’s smaller tenants and may receive favorable rent and longer terms.
annuity: A series of equal periodic cash flows; a deferred annuity’s payments begin after a delay and must be discounted back to today.
assessed value: The value a local government assigns to a property for tax purposes, which may differ from market value and can reset on sale in some jurisdictions.
assignment: A transfer of the tenant’s entire remaining leasehold interest to a new tenant; usually requires landlord consent and may not release the original tenant.
attornment: A tenant’s agreement to recognize and pay rent to a new owner (such as a lender after foreclosure) as its landlord.
average daily rate: ADR: a hotel’s average rental revenue per occupied room per day; with occupancy it drives RevPAR.
base year: A specified year of operating expenses used as a benchmark; the tenant pays its share of expense increases above that base year.
breakpoint: The sales threshold in a percentage-rent clause above which the tenant pays a percentage of gross sales as additional rent.
build-to-suit: A development arrangement where a property is constructed to a specific tenant’s requirements, usually under a long-term lease.
CAM: Common Area Maintenance: shared costs of operating common areas (lobbies, parking, landscaping, security) allocated to tenants, usually by proportionate share of rentable square footage.
casualty: Physical damage to a property from an event such as fire, flood, or earthquake; lease casualty clauses address restoration, rent abatement, and termination.
co-tenancy: A retail-lease clause that may reduce rent or permit termination if key anchor tenants leave or occupancy falls below a threshold.
cold storage: A temperature-controlled warehouse for refrigerated or frozen goods; capital-intensive, with high power demand and specialized systems.
common area maintenance: Shared costs of operating common areas (lobbies, hallways, elevators, parking, landscaping, security) allocated among tenants and reconciled annually.
compensatory damages: Monetary damages intended to place the non-breaching party in the position it would have occupied if the contract had been performed.
condemnation: A government taking of all or part of a property through eminent domain; lease clauses allocate the award and decide whether the lease continues.
consideration: Something of legal value each party exchanges; in a purchase contract, the buyer’s promise to pay and the seller’s promise to convey.
Consumer Price Index: A widely used measure of inflation; some leases index rent escalations to changes in the CPI.
contingency: A condition that must be satisfied, waived, or resolved before a party must proceed: inspection, financing, appraisal, title, or due-diligence contingencies. Allocates risk before closing.
continuous operations: A clause requiring a tenant to remain open for business throughout the lease term.
controllable expenses: Operating costs the landlord can manage (maintenance, landscaping, management), often subject to a negotiated annual cap on increases passed to tenants. Taxes and insurance are typically uncontrollable and uncapped.
counteroffer: A response that changes a material term of an offer. It rejects the original offer and creates a new offer that the other party may accept or reject.
CPI adjustment: A rent escalation tied to changes in the Consumer Price Index (an inflation measure), often subject to caps, floors, or both, so rent rises roughly with inflation over the lease term.
double net lease: A net lease (NN) where the tenant pays base rent plus property taxes and insurance; the landlord usually keeps maintenance, repairs, and structural items.
earnest money: A deposit paid by a buyer to evidence good faith and commitment to a transaction. Not required to form a contract, but it may support remedies if the buyer defaults.
equitable title: The buyer’s right, after signing a valid purchase contract, to obtain legal title at closing, as distinct from legal title, which the seller retains until the deed is delivered.
estoppel certificate: A tenant-signed statement confirming key lease facts (rent, term, defaults, options, amendments), often required by lenders and buyers.
exclusivity clause: A retail-lease provision preventing the landlord from leasing other space in the property to a competing business.
exit cap rate: The cap rate assumed at sale, applied to the year-after-sale NOI to estimate terminal (reversion) value in a DCF.; Direct capitalization vs Discounted cash flow (DCF)
expense reimbursement: A tenant payment that reimburses the landlord for its share of recoverable operating expenses, such as taxes, insurance, utilities, and CAM.
expense stop: A dollar amount (often per rentable square foot) up to which the landlord bears operating expenses; costs above it are passed through to the tenant.
flex space: A hybrid industrial/office property combining warehouse or light-industrial area with finished office space, leased to tenants needing both.
full-service lease: A lease (often office) where the landlord covers most operating costs in the rent, frequently with an expense stop or base year limiting the landlord’s exposure.
functional obsolescence: A loss in a property’s usefulness or value caused by outdated design, layout, or systems relative to current market standards.
furniture, fixtures, and equipment: FF&E: movable hotel/operating assets (beds, furnishings, kitchen equipment) for which owners typically maintain a capital reserve.
future value: The value of a current amount at a future date after earning a stated rate of return over time.
go-dark: A provision allowing a tenant to stop operating while continuing to pay rent, which can reduce traffic and hurt a retail center.
going-in cap rate: The first-year cap rate at acquisition (year-one NOI ÷ purchase price), expressing the property’s initial unlevered NOI yield.; Cap rate vs Discount rate
grocery-anchored center: A retail center anchored by a supermarket, valued for steady, necessity-based foot traffic that supports the smaller in-line tenants.
gross sales: A retail tenant’s total sales used to compute percentage rent; the lease defines inclusions, exclusions, reporting, and audit rights.
gross-up: A lease provision that adjusts variable operating expenses to a stabilized occupancy level so tenants pay a fair share even when the building is not fully occupied.
ground lease: A long-term lease of land on which the tenant may build and operate improvements, typically returning the land (and sometimes improvements) to the owner at expiration.
hotel franchise: A structure where the owner or tenant pays a hotel brand franchise fees for the right to use its name, reservation system, loyalty program, and operating standards, while operating the hotel itself or through an operator.
hotel management agreement: A structure where the owner retains the hotel’s economic upside and downside but pays a third-party operator a management fee to run day-to-day operations, rather than leasing the hotel for rent.
indemnity: A contractual allocation of responsibility for certain claims, losses, or liabilities from one party to another.
injunctive relief: A court order requiring a party to stop doing something or take specific action, such as preventing unauthorized use or waste of property.
investment-grade tenant: A tenant with a strong credit rating (e.g., BBB-/Baa3 or higher) whose reliable rent payments lower income risk and can support a lower cap rate, especially in single-tenant net-lease properties.
legal title: Formal, recorded ownership of real property, transferred through delivery and acceptance of a deed.
letter of credit: A bank instrument providing landlord credit support similar to a security deposit, letting the tenant preserve cash while backing its obligations.
license: A revocable permission to use property for a limited purpose, without a possessory interest in defined premises, and less than a lease.
lifestyle center: An open-air retail center combining upscale shops, dining, and entertainment, often designed as a walkable destination.
liquidated damages: A pre-agreed amount specified in the contract if a breach occurs, often tied to the earnest money deposit. Enforced only if reasonable and not a penalty.
load factor: The ratio of rentable square feet to usable square feet; because rent is often quoted on rentable area, it affects the tenant’s effective cost per usable foot.
marketable title: Title reasonably free of defects, liens, or doubts such that a willing buyer would accept it; a common condition in purchase contracts.
memorandum of lease: A short recorded document evidencing the existence and key terms of a lease, used to provide notice to third parties without recording the full lease.
metes and bounds: A legal land description that defines a parcel’s boundaries by directions and distances from a point of beginning.
millage rate: A property-tax rate expressed in mills (dollars per $1,000 of assessed value); the sum of county, city, school, and special-assessment components in some markets.
mutual assent: A genuine meeting of the minds between the parties (matching offer and acceptance) required to form a valid contract.
net effective rent: The true economic rent after spreading concessions (free rent, TI, abatements) over the lease term, a fuller measure than face/contract rent.
net present value: NPV: the present value of all expected cash flows minus the upfront cost. Positive NPV adds value at the required return; negative NPV destroys it.; NPV vs IRR
non-disturbance: A lender’s agreement not to terminate a tenant’s lease upon foreclosure as long as the tenant is not in default; the protective half of an SNDA.
non-recoverable: Costs the lease does not allow the landlord to pass through to tenants: leasing commissions, tenant improvements, certain capital expenditures, debt service, and ownership-level costs.
NPV: Net Present Value: present value of future cash flows minus the initial investment, at the required discount rate.
OER: Operating Expense Ratio: operating expenses ÷ effective gross income; a measure of expense burden, not investor return.
operating expense ratio: OER: total operating expenses ÷ effective gross income; the share of EGI consumed by operating costs. Roughly 35–50% for many stabilized multifamily assets.
parol evidence rule: A doctrine that bars oral evidence that contradicts or varies the terms of an integrated written contract.
party to be charged: The party against whom a contract is being enforced; under the Statute of Frauds, the written agreement generally must be signed by this party.
pass-through: An operating cost the landlord charges back to tenants under the lease (also called an expense reimbursement or recovery), commonly property taxes, insurance, utilities, and CAM, usually by proportionate share.
Phase II: A Phase II Environmental Site Assessment: physical sampling and testing performed when a Phase I identifies potential contamination concerns.
power center: A large retail format dominated by several big-box anchor stores with limited small-shop space.
present value: The value today of a future cash flow, found by discounting it at a required rate of return.
proportionate share: A tenant’s pro-rata portion of a property (usually its rentable square footage divided by the building’s) used to allocate CAM and other recoverable expenses.
proration: The allocation of recurring property costs and income (taxes, rent, utilities) between buyer and seller as of the closing date, so each pays only for the period it owns the property.
punitive damages: Monetary damages intended to punish especially wrongful conduct (e.g., fraud or malice); generally not available for ordinary breach of contract.
reconciliation: The annual true-up comparing a tenant’s estimated monthly expense payments (e.g., CAM) to the landlord’s actual costs, resulting in an additional charge or credit to the tenant for the year.
recording: Filing a deed or other instrument in public land records to provide notice and protect an interest against later claims; recording is generally not the act that transfers title.
recoverable expenses: Operating costs (taxes, insurance, CAM, utilities, certain admin fees) the lease lets the landlord pass through to tenants. Non-recoverable items (leasing commissions, TIs, debt service, ownership costs) stay with the landlord.
rent commencement: The date the tenant must begin paying rent, which may fall after lease commencement and possession, for example after a free-rent period or build-out. Modeling it separately is essential for accurate cash-flow timing.
rent escalation: A lease provision that increases rent over the term through fixed dollar or percentage steps, CPI/inflation adjustments, or percentage rent. Escalations affect future income and the landlord’s ability to mark rent to market.
rentable square feet: Usable square feet plus the tenant’s proportionate share of common areas such as lobbies, hallways, and restrooms; rent is often quoted on this basis.
replacement reserves: Amounts set aside for future capital replacements (roofs, HVAC, flooring). Excluded from NOI in a strict presentation, but lenders and investors may deduct them for cash flow after reserves.
required return: The minimum rate of return an investor demands for a given level of risk; used as the discount rate in a DCF.
rescission: Cancellation of a contract that returns the parties to their pre-contract positions, available for certain defects or breaches.
RESPA: The Real Estate Settlement Procedures Act: a consumer-protection law for residential mortgage settlement. Loans for business, commercial, or agricultural purposes are generally exempt.
revenue per available room: RevPAR: a hotel performance metric equal to occupancy × average daily rate (or rooms revenue ÷ available rooms).
right of first offer: A tenant’s right to be offered space (or a purchase) first, before the landlord markets it to others.
right of first refusal: A tenant’s right to match a bona fide third-party offer (to lease or buy) before the landlord accepts it.
security deposit: Tenant funds held by the landlord that may be applied against unpaid rent or damages, subject to the lease and applicable law.
single net lease: A net lease (N) where the tenant pays base rent plus property taxes only.
SNDA: Subordination, Non-Disturbance, and Attornment agreement: governs the relationship among tenant, landlord, and lender if the property is foreclosed.
specific performance: A court order requiring the breaching party to perform the contract, such as compelling a seller to convey unique real property rather than just pay damages.
Statute of Frauds: A legal rule requiring certain contracts (including most for the sale of real property) to be in writing and signed by the party against whom enforcement is sought.
sublease: A transfer of less than the tenant’s full leasehold interest (part of the space or term); the original tenant typically remains liable to the landlord.
subordination: A tenant’s agreement that its lease is junior to the lender’s mortgage; usually paired with non-disturbance protection in an SNDA.
tenant improvement allowance: A landlord-funded amount (often per square foot) to help a tenant customize its space; an economic concession usually modeled below NOI as a leasing cost or capital expenditure.
terminal value: The estimated sale value at the end of the holding period, commonly NOI in the year after sale ÷ exit cap rate. Often the largest component of DCF value.
TI allowance: Tenant Improvement allowance: landlord funding to build out a tenant’s space, typically recovered through rent, term, or credit and modeled as a leasing/capital cost.
trade fixtures: Equipment a tenant installs to conduct its business (shelving, signage, kitchen equipment). Unlike ordinary fixtures, trade fixtures usually remain the tenant’s property and may be removed at lease end, subject to restoration duties.
unlevered yield: A return that ignores debt financing: a going-in cap rate is the property’s unlevered NOI yield in year one.
usable square feet: The space a tenant actually occupies, excluding its share of common areas.
work letter: The lease exhibit that specifies the scope, approvals, deadlines, payment, and responsibility for cost overruns of tenant improvement work.

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