chapter 30 commercial leases

loft lease

-near downtown -high ceiling -exposed pipes -metal stairs

a buildings potential for generating income depends on 2 factors

1. its ability to attract tenants to rent space 2. the expenses involved in a buildings operation

If a building has 8,000 SF of rentable space with a loss factor of 14%, how many square feet are lost from the rentable space?

1120 SF

Describe the difference between a gross lease and a net lease.

A gross lease is defined as one in which the owner pays all of the operating expenses and the tenant has no responsibility for these expenses.

What is a step-up lease?

A lease containing a provision that spells out how the rent will increase periodically and gives the specific amounts and specific dates of those increases.

what is an estoppel certificate?

An estoppel certificate is a document designed to give a third party critical information on the relationship between an owner and his or her tenants.

operating stop/ tax stop clause

An operating stop in a lease stipulates an amount of operating expenses above which the tenant must bear. Often the base amount is the amount of expense for the first full year of operation under the lease.

indexed

Another way to calculate rent increases is to adjust the rent payments using a specified index such as the consumer price index (CPI). When using this method, the rent adjusts periodically according to the change in the consumer price index. warehouse is common here

The major standards used in the New York metropolitan area and Long Island are

BOMA (Building Owners and Managers Association), REBNY (Real Estate Board of New York) and AIA (American Institute of Architects)

what has become a negotiating point?

CAM Charges

proposing an equity participation

During times when the market is soft, an owner might offer a tenant an equity interest in the building as a means of attracting tenants to the building. This could be an attractive option to a tenant, because it provides a hedge against changes in the cost of leasing the space since the tenant is a partial owner of the building.

All of the floor space within the exterior walls of a building enclosed by a roof is what kind of square footage?

Gross square footage

Which term describes all of the floor area within the exterior walls of a building enclosed by the roof?

Gross square footage

improvements and alterations

If the new space will have to be customized to suit the tenant's needs, the lease should address this issue. The tenant and the owner will have to reach an agreement about who does the design, who does the work, when it gets done, and who pays for it. If the tenant is going to occupy space in a building not yet completed, the tenant will want to be certain that he or she pays for as little of the finish-up work as possible.

What is the difference between a sublease and an assignment?

In an assignment, the tenant conveys the leasehold, with all its title, rights and interests in the leased property, to another person, who then becomes primarily liable for the rent payments to the landlord. A sublease transfers only a portion of the leasehold interest to another person, leaving the original tenant directly liable for payment of the rent to the landlord.

base year

In many commercial leases, depending on how they are written, the owner will pay all of the operating expenses for the first year, also called the base year. Tenants will not have to pay any increases under the lease escalation clauses until after the base year has passed. But negotiating the base year can be tricky. Usually, landlords will give the tenant a full year of protection from increases. However, if a tenant moves into a space in May or June and does not ask for the full 12-month period, the tenant could start seeing increases in January of the next year. On the other hand, if a tenant moves into a space in September or October, some landlords will grant the next full year as the base year, which gives the tenant 15 to 16 months of protection from increases.

alternatively the responsibility for expenses can be shared between owner and tenant

In one case, the owner could pay operating expenses up to a specified amount. Then if the expenses increase above that amount during the term of the lease, either all or part of the increase passes through to the tenant and is added to the base rent.

flat lease

In some cases, rents may remain the same for the term of the lease. This is common in apartment leases, but is also used for offices. Flat rents may also apply to other leases that have relatively short terms or when there is frequent tenant turnover.

Give two reasons why a business would want to lease instead of purchase a building.

Most tenants find leasing to be more cost-effective than owning. Leasing a building allows more flexibility than owning.

Which type of insurance is typically purchased to cover the risks of leasing commercial property?

Rental interruption insurance

offering lease concessions

Some lease contracts can contain concessions that can lower the rental rates. For example, a lease can contain a free rent period. Owners tend to write concessions or discounts into leases during periods of time when there is more than a normal supply of rentable space in the area. When this is the case, an owner may give a tenant one year free rent on a five-year lease.

Why is the consumer price index important to commercial clients?

Some lease increases are based on it.

premises clause

Somewhere near the beginning of the lease is a clause that identifies the space that the tenant will be occupying. This clause is often titled "Premises." If the tenant is leasing an entire building, the clause should simply give the street address and describe any outbuildings or lots that come with it.

real prop tax clause

Tax escalation clauses are provisions that permit landlords to recover or share increased real property taxes with their tenants. The typical clause provides for tenants to pay a specified percentage of tax increases over a base tax figure.

List five items normally contained in a lease

The date of the agreement The starting date and the length of the lease The parties to the lease The description of the leased space A description of how the property can be used

loss and add on factor

The difference between the rentable and useable square footage in a building ex: if by measurement it is determined that 12% of a building is devoted to common areas, then this will become the loss factor for every lease in the building.

What does a lease do?

The lease assigns rights, duties and responsibilities between the owner (or lessor) and the tenant (or lessee).

Which statement about submetering is false?

The meter is installed by the contractor and usage is billed directly to the tenant.

which statement about sub metering is false?

The meter is installed by the contractor and usage is billed directly to the tenant.

Subordination, non-disturbance, and attornment agreement (SNDA)

The subordination, non-disturbance and attornment agreement (commonly abbreviated as an "SNDA agreement") is the document that an owner, tenant and lender often use to describe and verify how their rights do and will overlap. This agreement addresses how and when the rights of tenants will be secondary to the rights of lenders or, sometimes at the lender's option, superior to the rights of the lenders.

proportionate shares of occupancy

The tenant's lease will specify the percentage of the space that tenant occupies. Then, in addition to the rent, the tenant will be responsible for paying its proportionate share of any increases in operating costs. For example, if there is a tax escalation clause, whenever the property taxes go up, the tenant will be expected to pay a proportionate share of that increase.

lease contents

The terms of the lease include legal considerations that are intended to guard the interests of both the owner and the tenants over the life of their association. The lease also specifies how the tenant will make payments over the life of the lease

gross sq footage

This is all of the floor area within the exterior walls of a building enclosed by the roof.

porter's wage escalation formula

This is an indexed escalation formula, used primarily in New York City or by New York area landlords. This formula replaces or can be in addition to operating expenses. The porter's wage escalation is based on the contract entered into every three years between the local building services union and a coalition of New York building owners. The formula provides that the rent will increase a specific amount per square foot based on a specified increase in a porter's hourly wage.

percentage rent

This is commonly used in leases for shopping centers and other retail establishments. With this method, the rent is based partially on the tenant's sales volume. The owner charges the tenant a minimum rent that the tenant will pay regardless of the amount of sales.

direct metering

This means that a multiple dwelling has one electric meter for the entire building and the owner pays the utility for all electric consumed in the building. The use of electricity by tenants is not regulated or billed in any manner. Their electric usage is included in the rent.

tenant relocation option

This option allows the owner to relocate the tenant to another space in the same building during the term of the lease. As you can see from our discussion, owners and tenants can have variations in their willingness to incur various levels of risk. For this reason, it's not uncommon to see variations in lease provisions for different tenants within the same building.

What does the right of first refusal in a lease give the tenant?

This option gives the tenant the right at the end of the lease term to renew the lease of the same space at the current market rate, before it's offered to other tenants.

right of first refusal

This option gives the tenant the right at the end of the lease term to renew the lease of the same space at the current market rate, before it's offered to other tenants.

net lease

as one in which the tenants pay the operating expenses. This is also called a full-service lease. Usually with a net lease the management fees are still paid by the owner rather than the tenants. You may have heard the term net-net-net lease or triple-net lease to refer to a lease that requires the tenant to pay the fixed expenses of property taxes, insurance and maintenance in addition to the other operating expenses and the rent. With a triple-net lease, the tenant bears the entire risk of all the unexpected changes in the operating expenses.

security deposits

at cash will be available if the tenant fails to pay the rent or doesn't make other payments required under the lease. Unlike residential landlords, who in many states may not ask for more than two months' rent as a deposit, commercial landlords may demand whatever amount they think they need as a cushion to cover rent and other tenant financial obligations.

direct operating

ause passes on prorated increases in taxes, heat, maintenance and other direct costs. The lease should exclude capital improvements and management fees from this calculation, as well as other types of costs.

the initial rent that a tenant pays is called:

base rent

Which type of space includes the useable square footage minus closets, pantries, and toilets?

carpetable SF

common areas

commercial building include lobbies, elevators, escalators, hallways, public restrooms and utility areas.

costs involved in maintaining mutually used areas common areas are referred to as

common area maintenance or CAM charges. In large regional centers and malls, utilities for heating, cooling and lighting may be apportioned to each tenant, along with charges for cleaning the area, as CAM charges.

CAM stands for

common area maintenance.

what is an indexed lease based on?

consumer price index

assignment

conveys the leasehold, with all its title, rights and interests in the leased property, to another person. That person, called the assignee, becomes primarily liable for the rent payments to the landlord, while the original tenant remains secondarily liable.

natural break-even point

defines when an investment will generate a positive return. The owner can lower the percentage that the tenant pays in order to help the retail tenant reach the break-even point. As the retailers' business improves, the owner can gradually raise the percentage.

These pass-through expenses could be limited to a few expense categories or to all of them,

depending on how the agreement is written. If a tenant leases only part of the building, the pass-through expenses would be prorated, based on how much space that particular tenant actually leases. One benefit of this type of lease arrangement to the owner is that only increases in expenses are passed through to the tenants, but any decrease in expenses is kept by the owner.

Which lease escalation clause passes on prorated increases in taxes, heat, and maintenance to the tenant?

direct operating

When evaluating a tenant, the owner considers all of the following EXCEPT which?

employee background

lease clause

estricts a commercial tenant's use of the rented space by indicating what business activities are allowed by the tenant

For example, if the landlord quotes the size of a suite at 5,000 square feet "rentable," with a 12% loss factor, you would

first multiply 5,000 times 12% to compute the "lost" area of 600 square feet. Subtracting 600 from 5,000 would yield an approximate useable size of 4,400 square feet.

With what kind of lease does the owner pay all of the operating expenses?

gross

step-up

how the rent will increase periodically and gives the specific amounts and specific dates of those increases. Using this method, the tenant has no surprises, since he or she always knows the amount and date of each increase in the rental payments. For example, the base rent will be $30 per square foot and will increase $2 per square foot for the next five years on the anniversary date of the lease. This type of lease is common in office, warehouse, and retail leases.

Which of the following is NOT a type of lease escalation clause?

indirect operating

estoppel certificate

is a document designed to give a third party critical information on the relationship between an owner and his or her tenants. The third party is frequently a prospective purchaser of the owner's property or a lender who will be secured by an interest in that property. Typically, the deal that the owner is making requires the owner to obtain such certificates from his or her tenants and present them to the third party for use in its "due diligence" review of the property.

gross lease

is defined as one in which the owner pays all of the operating expenses and the tenant has no responsibility for these expenses. With a gross lease, the owner bears the risk of all unexpected changes in operating expenses.

Useable Square Footage

is the footage within the tenant's space and excludes such things as elevator shafts, public restrooms, heating and air conditioning equipment areas, and public stairwells.

Underwriting the lease is a very critical aspect of risk assessment, because

it ultimately affects the cash flow produced by a property and therefore its value. Additionally, if the tenant defaults on a lease because the business fails and then petitions the court for bankruptcy, the tenant may be allowed to continue to occupy the space and conduct business, while paying little or no rent during the reorganization process.

If an environmental issue occurs when the agricultural property is leased, who is ultimately responsible for the issue?

landlord

Many long-term commercial leases contain a/n _____________in which the parties agree to a rent adjustment based on set increases in taxes, insurance, maintenance and other operating costs.

lease escalation clause

many long-term commercial leases contain a

lease escalation clause in which the parties agree to a rent adjustment based on set increases in taxes, insurance, maintenance and other operating costs.

Which type of insurance protects the tenant if the lease is canceled due to circumstances beyond the tenant's control?

leasehold Leasehold insurance protects a tenant if the lease is canceled due to circumstances beyond his or her control and the tenant has to rent elsewhere at a higher rent.

The difference between the rentable and useable square footage is the

loss factor

The difference between the rentable and usable square footage in a building is commonly known as the

loss or load factor

When the landlord pays the electric usage for the entire building based on one meter, this is called

master metering

direct metering and sub metering

metering of apartments can take the form of either direct metering or submetering. With direct metering, the tenant purchases electricity directly from a utility company which installs the electric meter, reads the tenant's electricity usage and bills the tenant at a residential rate. In the case of submetering, the tenants pay the owner or the owner's contracting service company for the electricity they use. The electrical usage is measured by a submeter installed by the owner's contractor and read by the service company. Submetering has the advantage of reducing the cost of electricity to the tenant, since the bulk rate paid by the owner, even when combined with the owner's meter-reading and billing costs, is normally significantly less than the residential rate.

reasons to lease

most tenants find leasing more cost-effective than owning, esp when a business owner requires less space

lease renewal

new the lease for a specified rent amount when the lease expires. T

Which lease escalation clause stipulates that the tenant will pay operating expenses above a certain amount?

operating/ tax stop

If the sales volume exceeds a certain amount, the owner calculates the rent on a percentage of that amount. The calculated amount is called

overage rent

other reasons to lease

owning a building reduces flexibility of business ex: if it wanted to move, would have to sell prop which takes capital

What type of lease can help an owner reach a natural break-even point?

percentage lease

common lease clause

persons who need to lease commercial or industrial space generally have different needs than residential tenants. Commercial leases are generally much longer in duration and much more expensive.

consumer price index (CPI)

rate of rent escalation

how is useable sq footage determined?

rentable sq footage - (rentable sq footage x loss factor)

Flat leases are most common in which type of property?

residential

most leases do not allow

sublease or assignment without owners consent

What is the loss factor?

the diff between rentable and usable sq footage in a building

what document assigns rights, duties, and responsibilities between the owner and the tenant?

the lease

term clause

the length of the lease and specifies the starting and ending dates. Even though it may seem straightforward, this clause can be tricky. For example, some leases start as of the date the lease is signed, even though the tenant has not conducted business for even a day.

sublease

transfers only portion of lease to another person

What is the footage within the tenant's blic stairwells?

usable sq footage

What is rentable square footage?

usable sq footage plus a portion of common areas

Carpetable Square Footage

useable square footage - that is every area that can be used as workspace - minus things like closets, pantries, toilets and the like.

retail space

varies... if the business is small, the tenant may lease space for only one or two years. Larger businesses may be willing to commit to much longer lease terms. Most shopping centers have percentage leases with minimum rents.

In New York, what is the amount of security deposit allowed for commercial rentals?

whatever amount landlord thinks is necessary

rentable sq footage

ypically the useable square footage, plus a portion of the common areas. The difference between useable and rentable square feet is usually 10 -15 percent, with rentable square feet reflecting a higher cost than useable square feet.