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How to Read a Commercial Lease Proposal

By Javier Brown, Commercial Real Estate Agent, MGR Real Estate · DRE #01755491

You toured a warehouse in Ontario or a retail suite in Fontana, you liked it, and now the landlord's agent has sent over a proposal. It's usually two to four pages, it looks friendly, and it's full of numbers that don't all mean what they seem to mean. The proposal (often called an LOI, or letter of intent) isn't the lease itself, but almost everything important gets decided here. Once the terms are agreed in the proposal, they're very hard to change when the lease document arrives.

This guide walks through a typical Inland Empire industrial or retail proposal, line by line, so you know what to look at and what to ask.

1. The premises: what space are you actually getting?

The proposal should name the address, the suite (if any), and the square footage. Check two things:

• How was the square footage measured? In multi-tenant buildings, the number can include a share of common areas. Ask whether it's the usable area or a "rentable" figure that includes a load factor.
• What comes with the space? For industrial buildings, confirm the number of dock-high and grade-level doors, the clear height, the power, the parking, and whether any yard or truck court is exclusive to you or shared.

If the yard, parking or doors matter to your business, make sure they're written into the proposal. "Shown on tour" doesn't count.

2. Base rent and how it's quoted

Inland Empire industrial rent is usually quoted per square foot per month (for example, "$X.XX per SF per month, NNN"). Retail and office are sometimes quoted per year. Always convert it to a monthly dollar figure for your space so you're comparing apples to apples.

Then look at the word after the number:

• NNN (triple net): you pay base rent plus your share of property taxes, insurance and common-area maintenance.
• Modified gross / industrial gross: some of those costs are included in the rent, some aren't. The proposal should say exactly which.
• Full service / gross: most operating costs are included. Less common for industrial.

3. The NNN or CAM estimate

If the lease is NNN, the proposal should list an estimated monthly operating expense per square foot. Ask:

• What's included (taxes, insurance, landscaping, roof, parking lot, management fee)?
• Is it an estimate for this year, and how much has it changed in recent years?
• Is there a cap on how much controllable expenses can go up each year?

A low base rent with high or uncapped NNN charges can cost more than a higher rent with predictable expenses.

4. Annual increases

Most proposals include a fixed annual increase, written as a percentage. Over a five-year lease, the difference between two increase rates adds up. Use the lease cost calculator to see your total over the term, not just month one.

5. Free rent and the commencement date

"Free rent" usually means base rent is waived for a set number of months. Check whether NNN charges are also waived or still due. Also look at:

• Commencement date: when rent starts. Does it start on a fixed date, or after the landlord finishes any work?
• Early access: can you move in racking, cabling or equipment before rent starts?

6. Tenant improvements (TI)

If the space needs work (offices, lighting, restrooms, power upgrades, doors), the proposal should say who does it and who pays. Common setups:

• The landlord delivers the space "as-is."
• The landlord does a specific list of work at its cost (a "work letter").
• The landlord gives a dollar allowance and you manage the work.

Get the list in writing. Vague promises like "landlord to deliver in good condition" lead to arguments later. Ask specifically about the roof, HVAC, plumbing, electrical, and dock equipment being in working order at move-in.

7. Term, options and flexibility

• Term: how many years, and does that include the free-rent months?
• Renewal option: the right to extend, and how the renewal rent is set (fixed increase or "fair market value").
• Expansion or first right: important if you expect to grow.
• Assignment and subletting: if you sell your business or need less space, can you transfer or sublease?

8. Security deposit and guaranty

Landlords commonly ask for a deposit and sometimes a personal guaranty from the business owner. Both are negotiable, especially for an established business with good financials. Ask whether the guaranty can burn off after a period of on-time payments.

9. Use, zoning and permits

Make sure the proposal states your exact use, such as "warehouse and distribution of packaged food" or "auto repair." Then confirm with the city that the use is allowed at that address before you sign. This matters across the Inland Empire because uses like truck parking, outdoor storage, auto uses and some manufacturing are tightly controlled by zoning, and rules vary from Ontario to Rialto to Jurupa Valley. If a conditional use permit is needed, ask for a contingency so you can walk away if it isn't approved.

10. Responsibilities for repairs

NNN industrial leases often put repairs on the tenant, sometimes including HVAC, roof membrane or parking lot. Ask who pays for big-ticket items, and whether the landlord will warranty major systems for the first year.

How to compare two proposals side by side

Make a simple table with: monthly base rent, monthly NNN, total monthly cost, annual increase, free rent months, TI provided, term, deposit, guaranty, and options. Then compare the total cost over the term and the flexibility each one gives you. The cheapest month-one number is often not the best deal.

Frequently Asked Questions

Is a lease proposal (LOI) legally binding?

Most proposals say they're non-binding, except for certain sections such as confidentiality. Even so, the business terms you agree to usually carry straight into the lease, so negotiate them now.

Who pays the agent if I'm a tenant?

In most Inland Empire commercial leases the landlord pays the leasing commissions under its listing agreement, and the tenant's agent is paid from that. Confirm how it works on your deal before you start.

How long does it take to go from proposal to signed lease?

It depends on the landlord, the amount of work needed and how fast both sides review the lease. Start early, especially if your current lease has a notice deadline.

Should I ask for more than one proposal?

Yes. Proposals from two or three suitable buildings give you options and leverage, even if you already know which one you prefer.