Chapter 30 - Commercial Leases

Industrial leases tend to be for

3 to 5 years.

What is a lease escalation clause?

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

What is an estoppel certificate designed to do?

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.

What is Porter's Wage Escalation Formula?

An indexed escalation formula 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.

Which of the following are types of lease escalation clause?

Base year Consumer Price Index Proportionate shares of occupancy

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

Carpetable SF

What is an indexed lease based on?

Consumer price index

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

Gross

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

What is the loss factor?

The difference between the rentable and useable square footage in a building.

What does a lease do?

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

Why might tenants leasing industrial property prefer to have very long-term leases?

They might have this preference if they are installing expensive equipment that would be very difficult to move.

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.

What is the base year?

Typically, the base year is the first full year of operation. However, it can be less than 12 months or more than 12 months, depending on what the owner and tenant negotiate at the time the lease is signed.

A lease restricts a commercial tenant's business activities in what clause?

Use clause

What is rentable square footage?

Useable square footage, plus a portion of the common areas.

What is the difference between direct metering and submetering of electric usage?

With direct metering, the tenant purchases electricity directly from a utility company. In the case of submetering, the tenants pay the owner or the owner's contracting service company for the electricity they use.

Most _______ leases need to address the issue of environmental concerns.

agricultural

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

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. A net lease is defined as one in which the tenants pay the operating expenses.

What is a step-up lease?

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

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

The owner may ask for a/n ____________ to assure that cash will be available if the tenant fails to pay the rent or doesn't make other payments required under the lease.

security deposit

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.

Why is the consumer price index important to commercial clients?

Some lease increases are based on it.

Which of the following lease clauses would protect a tenant if the property is foreclosed upon?

Subordination, non-disturbance and attornment

Which statement about submetering are true?

Tenants pay the property owner for their electric usage. It reduces the cost of electricity to the tenant. The meter is installed by the owner's contractor and read by the service company.

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

Percentage lease

Which of the following are common types of insurance purchased to cover the risks of leasing commercial property?

Property and liability insurance Rental interruption insurance Leasehold insurance

How is useable square footage determined?

Rentable square footage - (Rentable square footage x loss factor)

Flat leases are most common in which type of property?

Residential

With what type of lease do the tenants have the right to approve leases being negotiated with competitors?

Retail

Which lease clause would address the issue of a tenant needing to make changes to the leased space?

Improvements and Alterations clause

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

Operating/Tax stop