Unit 11 and 12 - Landlord & Tenant and Property Management

Barb allowed a friend, Carol, to stay in her guest house when she recently lost her job. Due to Carol's misfortune, Barb has charged her no rent on the property. Recently, Barb had an opportunity to rent the guest house but Carol is refusing to leave voluntarily. Which of the following statements is true?

Since Carol stayed "beyond" her welcome, she is a tenant at sufferance and her rights can only be severed by an eviction. Once Carol has established residency, she is not considered a trespasser, even if she refuses to leave. Cutting off utilities is known as a self-help eviction and is always illegal.

What is summary ejectment? Who hears?

Summary Ejectment is the process used to evict a tenant from the property, since the broker and owner cannot self-help (change locks, turn off utilities, throw the belongings on the curb). The case is heard by a magistrate in small claims court.

What public official is tasked with hearing and deciding cases of residential evictions?

Summary ejectment is heard by a civil magistrate in small claims court. Judicial means must be used when evicting a tenant. Summary ejectment terminates the lease agreement but not the property management agreement.

Myron leased a property from Mr. Bigg, an absentee landlord. Mr. Bigg was difficult to reach and often was slow to make repairs. The furnace in Myron's unit broke down during an especially cold spell in February . Although Myron provided Mr. Bigg with a written request for the repair, Mr. Bigg has failed to fix the problem. Which of the following actions by Myron would be acceptable?

This is an example of constructive eviction and is the common law remedy for the tenant in the event of a landlord's breach. There are no circumstance in NC (short of a court order) which would allow a tenant to stay in the property and withhold rent. The tenant can't make the repair without permission and then reduce the amount of rent by the amount of the bill. Constructive eviction terminates the lease agreement but not the property management agreement.

The heating system in a residential tenant's apartment in North Carolina has failed during very cold weather. The landlord has not made the necessary repair within a reasonable amount of time after having been properly notified of the problem. Given these circumstances, the tenant has the right to

This is called "constructive eviction". If a landlord does not maintain the property appropriately, the tenant can give written notice that they are moving out (breaking any lease) and cease to pay rent from the day they move out. They can also file a lawsuit against the landlord trying to recover any rent they paid for the time the property was not maintained.

Which of the following is best described by the process of deducting vacancy and collection losses, operating expenses, and debt service from the total possible income a property could produce?

This is simply the formula for calculating Before Tax Cash Flow

How is net operating income calculated?

1) Gross Income - Vacancy & Collection = Effective Gross IncomeEffective Gross Income - Operating Expenses = Net Operating IncomeNo depreciation, debt service or capital improvements.Property taxes and repair reserves are operating expenses. 2) Value X Cap Rate = Net Operating Income

For which of the following would a landlord most likely be liable according to the law of negligence as applied to residential tenancies?

A landlord may be liable for injuries that occur on the property or on the ammenites provided. The landlord would not typically be liable for injuries that were caused by others or caused by the actions of the tenant. It is best practice to require a tenant to maintain a tenant insurance policy.

All of the following are examples of non-freehold estates, EXCEPT?

A life estate is a freehold estate (of ownership) that is not inheritable. Non-freehold estates are leasehold estates: tenancy for years, tenancy from year to year, tenancy at will and tenancy at sufferance. Note: tenancy and estate can be used interchangeably.

What is a net lease?

A net lease transfers some of the costs that would typically be paid for by the seller - TICAM - taxes, insurance and/or common area maintenance to the tenant. This is common in commercial leases that are for an extended period of time. It allows the owner to minimize the risk of rising property taxes, insurance costs and maintenance within the unit.

What is the difference between a sublease and an assignment of lease?

A sublease creates a 3 party agreement. The original tenant is bound to lease with the landlord and the new tenant agrees to pay the lease. In the event that the new tenant fails, the original tenant may be responsible to pay. An assignment of lease may or may not release liability of the oringinal tenant. The new tenant has agreed to stand in for the old tenant. The entire leasehold is transferred.

Which of the following would be an example of damage beyond normal wear and tear for which a landlord may keep a portion of the security deposit?

A tenant does not have a defense for leaving the landlord with a broken window. Small holes in wall for pictures or art are considered normal wear and tear. Carpet cleaning should not be charged to security deposit unless it is filthy beyond normal wear and tear. Worn carpet in a high traffic area is considered normal wear and tear. Damage caused by everyday activities, when tenants are being careful, would be considered normal wear and tear - dirt or dust on the walls or windows, repairs to appliances based on age of the unit, scuff marks. Crayon, nail polish, motor oil, or burns to walls, trim or carpet are damages that can be charged against the security deposit.

According to the North Carolina Tenant Security Deposits act, which of the following is true regarding the accounting for a tenant's security deposit?

A tenant's security deposit can be used to pay bills that could prevent future service due to non-payment. The property manager has 30 days to provide an accounting for how the security deposit has been used. A property manager must maintain a trust or escrow account and is not permitted to be bonded. The lease agreement and property management agreement may contain a provision allowing for the retention of interest from the security deposit to cover the costs of maintaining the account.

What are the trust account requirements? Must a brokerage have a trust account?

A trust account must be opened in an FDIC insured bank that is approved to do business in North Carolina (brick and mortar, online or located in another state). The account must state that it is a Trust or Escrow account. A brokerage is not required to open a trust account unless they are engaged in an activity that requires one. In brokerage sales - whether commercial or residential - would not require a trust account as the closing attorney can act in this capacity. In property management, since any payment that the broker takes possession of has to flow through the trust account, would require the brokerage to one an account. Sales and rental transactions can flow through the same trust account. A brokerage would need to open a separate account for each Homeowner Assocation that is managed.

A commercial tenant was given a lease for 3 years exactly, with no rights for renewal. This lease would be described best as a(n)?

An estate or tenancy for years is defined as a "fixed-term" lease. Periodic tenancies allow for renewals or terminations, with notice. Life estates and defeasible estates are freehold estates.

A family rented a beach house for a two-week vacation. Their leasehold interest in the beach house is an estate

Any definite period of time that does not automatically renew itself is considered a lease (or estate) for years. Periodic tenancies will have some statement about automatic renewal or the need to give notice to terminate. An estate at will is one with no binding terms....no period of time, no promise to stay or promise to pay. An estate at sufferance happens when a tenant stays past (holds over) the time when they should have vacated the property.

According to the North Carolina Tenant Security Deposit Act, landlords

Any tenant security deposits must be held in a trust account until the tenant has actually moved out of the property. Once the tenant has moved out, the landlord/property manager has 30 days to either refund the deposit or provide the tenant with a detailed accounting of what the deposit was used for.

A tenant dies while in the middle of a 1 year lease. All of the following statements are true, EXCEPT

Death does not terminate a lease, although the tenant is bound to breach the lease unless the heirs complete the lease term.

When preparing an operating budget for a managed apartment complex, the broker-property manager will consider all of the following to be "operating expenses" EXCEPT:

Debt service (mortgage interest and principle) is NOT an operating expense

What are the 4 major types of leases (hint: depends on renewal / notice / breach)?

Estate for years: Definite end date. No notice required. May be for any time period so long as it automatically terminates. Estate from year to year: Automatically renews for succesive periods unless notice is provided based upon the lease agreement. Estate at will: Either party can terminate without notice. Estate at sufferance: Lease has ended and the tenant is holding over - not giving up possession.

When considering a tenant applicant for an apartment, the property manager may lawfully consider all of the following factors EXCEPT the

Families with children are protected under the Fair Housing Laws. It is illegal to discriminate against a tenant because of children in the family. It is furthermore illegal to even have a discussion about the number of children in a family. The subject is off-limits in residential real estate transactions (both sales and leases).

What is the primary duty of a property manager?

Generate the greatest rate of return for the owner while complying with laws and rules. A property manager will advertise and show the property, screen tenants, execute lease agreements on behalf of the owner, collect rent, handle repairs, handle evictions and then re-rent the property.

How do you calculate effective gross income?

Gross Income - Vacancy and Collections = Effective Gross Income NOTE: EGI may also be called Total Anticipated Revenue

A long-term lease of unimproved land on which the tenant will construct a building is called a

Ground leases are leases where the tenant rents the bare ground from the land owner and then the tenant pays to construct improvments (building, cell tower, etc) on the property for their use while they are renting the property. These leases are usually for a very long period of time.

A property was built in 1971. You are a property manager. What do you need to do?

Have the seller complete the Lead Based Paint Disclosure and provide the buyer with the pamphlet Protecting Your Family from Lead In the Home.

Which type of lease would be most likely associated with an apartment rental?

It is common for residential leases to be gross leases - with rent being charged at a fixed rate. A net lease is common in commerical property since the lease term is for a longer period of time and protects the owner from increases in property taxes, insurance and common area maintenance. A percentage lease is common in retail rentals, where the tenant pays a base rent as well as a percentage of sales. An index lease allows the rent to rise or fall based upon changes in the index through an escalation clause.

What is the Tenant Security Deposit Act?

Law that governs the amount of money that can be held as a security deposit, where the funds must be deposited, the permitted uses of the funds and requirements for reporting. The funds must be held in an FDIC insured bank that is approved to do business in North Carolina, with the words "Trust" or "Escrow" in the account name to identify that it is "other peoples money". Limit: 2 weeks if week to week, 1.5 months if month to month, 2 months for longer lease term Reporting: 30 days from end of lease or 60 days with interim reporting. Cannot access the funds until the lease ends

A buyer purchases a property with a tenant in place with 9 months remaining on a one year lease. Which of the following is most correct regarding this scenario?

Lease agreements transfer with the property and the new owner must fulfill the term

What would the spendable income due to a property owner as a result of owning rental property be called?

Leverage refers to the power of borrowing money and has nothing to do with spendable income. Equity is the buildup of cash value over time that an owner has in a property as they pay down debts. Net Operating Income is CLOSE to spendable cash, but you would still have to remove the debt service payments to get to cash flow (spendable cash)

What type of business ownership has members / managers?

Limited Liablility Company (LLC). Taxed like a partnership with the limitation on liability like a corporation.

In commercial real estate leases, what is the type of lease that exists when the tenant pays a monthly rent plus some or all of the costs associated with owning/maintaining the property such as maintenance, insurance, and property taxes?

Net leases are leases in which the tenant pays rent PLUS separately pays all the other expenses normally associated with ownership of the property. A Full Service lease is a lease usually used in office space where the tenant pays one amount which includes all expenses (even electric, water, internet, phone, janitorial). A percentage lease is usually used in retail settings where the monthly amount varies because it is tied to some percentage of the tenant's sales for that month. A graduated lease is simply one where the rent rises on a preset schedule.

In what type of lease does a tenant pay a portion of prorata expenses of the property as part of the overall lease?

Net leases require that the tenant pay a portion of the costs of the property, such as TICAM charges (Taxes, Insurance, Common Area Maintenance). Percentage lease are typical of retail properties and are based on a percentage of sales. Full service leases include all services, often including janitorial, utilities, etc

What is the Residential Rental Agreement Act? What types of property does the law apply to?

North Carolina legislation that is more resrictive than the national Uniform Residential Rental Agreement Act, where the rights and obligations of the landlord and tenant are mutually dependent. The tenant needs to pay rent, follow the rules and not damage the property. The landlord has to provide safe, fit and habitable premises, must not impact the tenant's quiet enjoyment and is responsible to make repairs. The RESIDENTIAL Rental Agreement Act applies to......wait for it......RESIDENTIAL rentals.

All of the following would typically be found in a property management agreement EXCEPT

Note that automatic renewal IS possible in property management agreements, but not in sales agency agreements. A property management agreement should definitely specify how the fee will be collected and how often financial reporting must be done. It would not, generally, limit how many employees the broker might use to show the propertyÂ....that will be up to the broker property manager.

In order to be relieved from liability after an assignment or sublease the original tenant should seek ________.

Novation - a new party for an old party which releases the old party from liability.

A commercial tenant assigns the remainder of his 10 year lease term to another tenant. Which of the following is true regarding this scenario?

Novation releases liability in the event that the new party does not perform. When the lease is assigned the new lessee will be primarily responsible, however if they fail the original tenant is secondarily liable.

What is the difference between an Operating Budget, Profit & Loss Statement and Cash Flow Report?

Operating Budget = Project the expected income and rate of return by estimating gross income, vacancy & collections and other operating costs. Profit and Loss Statement: Record of actual revenue and expenses incurred by a business in a given period of time, which lets a company know if it made a profit or loss. Cash Flow Report: Shows the aggregate change in a company's cash position resulting from money flows - rent collected vs expenses paid.

Property managers routinely do all of the following EXCEPT:

Property Managers manage all income, expenses, maintenance, and ongoing operation of the property. The money generated by the property as cash flow belongs to the owner and thus would be used as the owner (not the manager) sees fit.

Which of the following tasks would generally NOT be authorized under a standard property management agreement?

Property management has nothing to do with sales. If a broker is going to market the property for sale, they need a listing agreement, not a property management agreement. If they want to market the property for rent and for sale at the same time, they need BOTH a property management agreement and a listing agreement.

When advising about rental rates for a property what should the property manager give more weight to?

Rental rates of comparable properties - using the market data (sales comparision) approach. While the broker will consider the owner's desires, the market will dictate the amount that can be charged.

Which of the following would NOT be a duty that a broker-property manager would likely perform on behalf of an owner?

Securing financing (getting a loan) is a function of the owner, not the property manager. All of the other items would absolutely be expected of a property manager

Which of the following methods may a landlord use to seek relief from a tenant who has breached a lease?

Summary ejectment is the same as eviction (also, judicial eviction). Self help evictions (changing locks, cutting out power) are always illegal. Constructive eviction is the tenant's right to get out of the lease based on the landlord's breach and distraint of chattel means to hold the tenant's personal property unitl he/she pays. Summary ejectment terminates the lease but not the property management agreement.

According to the North Carolina Tenant Security Deposit Act, which of the following is NOT a permitted use of a tenant security deposit?

Tenant security deposits may be used for DAMAGE but not ordinary wear and tear. A TSD may also be used to cover unpaid rent, costs for breaching a lease, costs of re-renting the property after a breach, etc.

A residential landlord Is evicting a tenant for nonpayment of the rent due under a lease. Which of the following statements is correct regarding this situation?

Tenant security deposits must always be held in a trust account whether the person holding it is a licensed real estate agent or not. Even private landlords can and should open a trust account to hold tenant security deposits. A tenant security deposit must remain in the trust account untouched until after the tenant has vacated the property. Basic and normal cleaning is an expectation of the landlord and cannot be charged against a tenant security deposit.

Which of the following statements concerning the North Carolina Residential Rental Agreements Act is true?

Tenants in residential leases have few actual responsibilities. They must pay the rent on time and they must maintain the safety and cleanliness of the property. They can never withhold rent even if the landlord has not done what they should. Landlords are always responsible even if hiring a property manager. Tenants and landlords in residential leases cannot negotiate away the responsibility of repairs.

The Tenant Security Deposits Act would apply to all of the following properties, EXCEPT

The Tenant Security Deposit Act applies to all residential leases. It does not apply to commercial leases.

Which of the following tasks would a property manager NOT be given in most cases under a property management agreement?

The broker is responsible for anything that happens before arriving at "Before Tax Cash Flow". The owner is responsible for that money because it belongs to them.

Which of the following expenses would NOT be taken into account for a rental property manager who is attempting to maximize the Net Operating Income of property that they manage?

The calculation of Net Operating Income does NOT take into account any monthly mortgage payments (debt service) on the property.

Who handles summary ejectment proceedings?

The case is heard in small claims court through a Magistrate. Summary ejectment is the legal term for eviction of a tenant. A landlord / property manager must use judical means to end the tenancy (can't self-help by removing belongings or turning off power).

Covenant of Quiet Enjoyment

The tenant's use of the property is not disturbed by others making a claim - landlord must pay the mortgage and taxes to ensure that the property is not foreclosed on. The landlord and his/her representatives must make an appointment to be at the property and not just show up to perform work / show the property.

A lease may be terminated in all of the following ways, EXCEPT

The death of a tenant does not automatically terminate the lease agreement as an heir may be able to perform or a claim can be made against the tenant's estate. Breach may end a lease if not cured. An agrement by the landlord and tenant to take less than what was originally agreed to is known as accord and satisfaction. An estate for years terminates without notice as it has a definite end date - which can be for a week, a month, a year or 10 years.

How is the management fee determined?

The fee is negotiable between the brokerage and the cllient. It is often a percentage of gross rent collected. A flat fee can be charged as well. Example: A property has 10 units that rent for $1,500 per month per unit. The property experienced a 3% vacancy and collection loss. If the management fee is 12% of gross rent collected, how much will the firm earn in one year? Gross Income: 10 units X $1,500 X 12 months = $180,000 V&C Loss: $180,000 X 3% = $5,400Effective Gross Income: $180,000 - $5,400 = $174,600Management Fee: $174,600 X 12% = $20,952

A Lessor and Lessee enter into a lease agreement that requires the lessee to take care of all repairs in exchange for a reduced rent. Recently, a plumbing issue arose that caused the only toilet in the house to become inoperable. The lessee had been ill and unable to make the repair. Which of the following answers is most accurate in this circumstance?

The landlord can never waive the obligation to keep the property fit and habitable, so to say that the tenant is responsible for "all" repairs would be a violation of public policy, which is known as abrogation. The tenant will not be in breach for having the landlord fulfill his legal obligation. Constructive eviction terminates the lease agreement but not the property management agreement.

All of the following are considered to be rights of a tenant in a residential lease, EXCEPT

The landlord does not have to renew the lease at the end of the lease term. A tenancy for years terminates without notice on a definite end date. The tenant has the right of possession and quiet enjoyment to use the property for legal purposes. The tenant has a leasehold interest while the landlord has a leased fee interest.

Which of the following would be a result of the government exercising its right of eminent domain on a property that is subject to a residential lease?

The lease will be terminated by eminent domain action (operation of law). The tenant has no stautory protection against condemnation however may be compensated for moving expenses.

A lessee is several weeks delinquent with his rent payment. The lessor becomes angry with the tenant and locks the tenant out of the apartment when the tenant goes to work. Which of the following is true regarding this scenario?

The lessee may recover damages as landlords must follow statutorily prescribed remedies to remove a tenant. Holdover tenants have protections under the law until the culmination of the judicial eviction process

Which of the following best describes a landlord's interest in a rented property?

The owner gets the fee and therefore has a leased fee interest. The tenant has possession or a hold on the property and therefore has the leasehold interest. A defeasible estate is one that can be defeated - which is either determinable or conditional. An estate at sufferance occurs whent he tenant will not vacate after the tenancy has ended. The owner must use judical means.

All of the following would allow a tenant to terminate a residential lease early, except

The owner of the property can hire a new property manager or decide to self manage. The termination of the property management agreement does not terminate the lease. The termination of a lease does not terminate the property management agreement.

According to the NC Tenant Security Deposit Act, which of the following is NOT a permitted use of a tenant security deposit?

The tenant security deposit may never be used to cover items defined by the state as "wear and tear". "Wear and Tear" items include things like dirty carpet, worn out blinds or curtains, old carpet, etc. The security deposit can be used for actual damage done to the property by the tenant or costs that are associated with some breach of the lease by the tenant. Remember that no money under ANY circumstance can be removed from a tenant security deposit until after the tenant has vacated the property.

Which of the following describes the PRIMARY responsibility of a broker-property manager?

These are all items that should be the focus of a property manager, but 3 is definitely at the top of the priority list.

In a commercial lease, the landlord agreed to make certain improvements specific to the tenant's use and to amortize these improvements into the lease payment. This is an example of which of the following?

Upfit is the customization of a space to fit the tenants needs and the amount is often based on the length of the lease term. A sale and lease back is just that the sale of building to an investor who then leases it back to the seller. A net lease is where the tenant takes on some or all of the taxes, insurance and common area maintenance. A full service lease includes utilities, security or cleaning services, with the landlord responsible for taxes insurance and common area maintenance.

If an office space needs to be "upfit" in order to rent the property, the property manager is considering the possibility of

Upfit means customization. Certain tenants in commercial rentals need the building modified to work for them. They often ask the landlord to make these modifications for them. This process of the landlord paying to modify the property to suit the needs of the tenant is called upfit.

What is a percentage lease?

Used in retail leases - where the tenant pays a base rent + a % of sales in rent to the owner. Example: Tenant agrees to pay $1,000 per month + 5% of sales over $100,000. The tenant has sales of $1,000,000. The tenant will pay $12,000 in base rent + $45,000 % rent ($900,000 X 5%).

What is a ground lease?

Where the tenant leases the ground, often an extended period of time: 100 years with an automatic renewal, and the tenant pays to build improvements.