Chapter 30

What are the standards used in NY & LI?

-BOMA (Building Owners & Managers Association) -AIA (American Institute of Architects)

Wha is considered when evaluating a tenant and a lease proposal?

-Financial Statements -Credit Ratings -Analyst Reports on the firm or industry -Bank Relationships -Existing debts & Obligations

Agricultural Leases

-Hunting 1 year -Farming 3+ years

Loft

-Located near downtown - High Ceilings -1 Large Room -Floor to ceiling windows -Exposed brick -Metal Stairs and handrails

Industrial Property Leases

-Most 3-5 year -Net Lease

Insurance Clauses

-Property & Liability Insurance - Rental Interruption Insurance -Leasehold Insurance (if lease is cancelled beyond tenant control)

Retail Properties Leases

-Small business 1-2 yrs -Large Business longer terms

What's the average amount of time for a commercial lease?

10 years

Fixed Percentage Increases

A flat fixed-annual-percentage increase in base rent is a way of escalating rent by increasing it by a fixed percentage each year

Security Deposits

A guarantee payment of rent that safeguards against a tenet's destruction of the property. It may be established by: contracting for a lien on the tenets property, requiring the tent to pay a portion of the rent in advance, requiring the tenet to pay post security, or requiring the tent have a third party guarantee the payment of the rent.

Proportionate Shares of Occupancy

A lease escalation clause based on percentage of property the tenant occupies

Flat Lease

A level-payment lease with no escalation clause. Also known as a gross lease.

Indexed

Adjust rent payments with a specified index s/a CPI (Consumer Price Index). In this method the tenant doesn't know what the charges will because it is based on inflation.

Operating Stop

Amount of operating expenses above which the tenant must bear.

Base Rent

Amount paid by retail tenants in percentage leases regardless of the level of the sales generated by the tenant's business.

Lease Escalation Clause

An agreement in which both 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.

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.

What does a lease do?

Assigns: -Rights -Responsibilities -Duties

Maintenance, Utilities, and Code Compliance

Clause that discusses the tenant's responsibilities to take care of his or her own rented space (or for the entire building, if the tenant is the sole tenant)

Parking, Signs, Landlord's Entry, and Security

Clauses in the lease that deal with practical understandings the tenant has with the owner about such things as parking and business signs.

Common Area Maintenance

Costs charged to the tenants associated with maintaining mutually used common areas

Step Up

Displays how the rent will increase periodically and gives the specific amounts and dates. Most common in office, warehoue and retail sales

What is the most commonly used porter's wage?

Enable building owners to recover significantly more than they would by billing direct operating expenses.

Loss or Load Factor

Equal to the percentage that gets tacked on to your space to account for your pro-rata share of the common area space

Consumer Price Index (CPI)

Every month the Bureau of Labor Statistics of the U.S. Department of Commerce publishes the CPI, which indicates changes in the cost of living to act as a price indexing scale for the landlord to use in measuring the loss/gain of the dollar.

Estoppel

Give a third party critical information on the relationship between an owner and his or her tenants

Which lease escalation clause passes on prorated increases in taxes, heat, and maintenance to the tenant? a) Direct operating b) Operating/Tax stop c) Proportionate shares of occupancy d) Consumer Price Index

The direct operating lease escalation clause passes on prorated increases in taxes, heat, maintenance and other direct costs but excludes capital improvements and management fees.

Overage Rent

The percentage rent paid over and above the guaranteed minimum rent or base rent; calculated as a percentage of sales in excess of a specified breakpoint sales volume.

Assignment

The tenant conveys the leasehold, with all its title, rights and interests in the leased property, to another person

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

Submetering

The tenants pay the owner or the owner's contracting service company for the electricity they use

Term Clause

This clause describes the length of the lease and specifies the starting and ending date

Percentage Rent

This method is commonly used in shopping & retail. Rent is based partially on the tenants sales volume.

Direct Operating

This type of lease escalation clause 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.

Sublease

Transfers only a portion of the leasehold interest to another person.

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.

Natural Break-Even Point

When an investment will generate a positive return.

Master Metering

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

Which type of lease includes fluctuating periodic rent increases and a low base rent? a) Flat lease b) Indexed lease c) Step-up lease d) Percentage lease

b) Indexed lease Since the rent increases with indexed leases are uncertain based on the consumer price index, it's common for the owner to accept a lower base rent than he or she might in the case of a step-up method.

A prospective buyer is given critical information on the relationship between the owner and the tenants through a(n)L a) Subordination, non-disturbance, and attornment. b) Use clause c) Estoppel d) Sublease

c) Estoppel

Which type of insurance protects the tenant if the lease is canceled due to circumstances beyond the tenant's control? a) Liability b) Property c) Rental interruption d) Leasehold

d) 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.

Which statement about submetering is false? a)Tenants pay the property owner for their electric usage. b)It reduces the cost of electricity to the tenant. c) The meter is installed by the owner's contractor and read by the service company. d)The meter is installed by the contractor and usage is billed directly to the tenant.

d)The meter is installed by the contractor and usage is billed directly to the tenant. When a contracting utility company installs the meter and bills the tenant directly, it is known as direct metering, not submetering.

Pass-Through Expenses

expenses such as electricity, insurance, and property taxes that are billed directly to tenants on the basis of rentable area that they occupy

Triple Net Lease

the tenant pays the real estate taxes, maintenance, and insurance

Use Clause

Indicates what business activities are allowed by the tenant.

What's the purpose of the term "rentable sq ft"?

Landlords quote this term and then lower it to make it seem like they're offering a deal

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

Common Areas

Lobbies, elevators, escalators, hallways, public restrooms and utility areas.

What are 2 factors that determine a building's income generating potential?

- Ability to attract tenants - Expenses involved in operation

Reasons Businesses Lease

- Cost Effective - Owning Reduces Flexibility - Repair & Maintenance - Can't Downsize or Upscale

What factors determine commercial square footage?

- Gross Sq Ft: all floor area - Usable Sq Ft: Excludes elevators, restrooms HVAC space and stairs - Carpetable Sq Ft Usable Sq minus things that aren't carpeted - Rentable Sq Ft: Usable Sq Ft + some common areas. Usually 10-15% higher than usable

Lease Terms for Different Properties

- Hotel & Motel: daily basis - Homes & Apartments: yearly basis sometimes longer/shorter - Office Buildings: 3-5 years

What are the 2 common rent calculation methods?

- Indexed - Percentage Rent

What are common lease provisions?

- Use Clause -Subordination, Non-Disturbance and Attornment -Estoppel -Sublease/Assignment -Electric Service

Tax Stop

Stops a landlord from paying property taxes above a certain amount.

Subordination, Non-Disturbance and Attornment

Subordination: his 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. Non-Disturbance: guarantees tenants that their rights to their premises will be protected (that is, "non-disturbed") on defined conditions within their control Attornment: term attornment refers to the consent to a transfer of a right. It usually describes a situation where a tenant accepts being a tenant of the new landlord by staying on location after the sale of the leased property.

Real Property Tax Clause

Tax escalation clauses are provisions that permit landlords to recover or share increased real property taxes with their tenants.

Net Lease

Tenant pays operating expenses (Full Service Lease).

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

Percentage lease

Equity Interest in the Building

Provides a hedge against changes in the cost of leasing the space since the tenant is a partial owner of the building.

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

Retail

Improvements and Alterations

If the new space will have to be customized to suit the tenant's needs, the lease should address this issue.

Premises Clause

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. If the tenant is only leasing part of the building, the lease will need to describe the space more precisely to include any access to storage rooms, conference rooms, parking, kitchen facilities, and other areas.

Lease Concession

Lower rental rates

How to calculate Usable Sq Ft?

Multipling Rentable Sq Ft by the loss factor and subtracting from the rentable sq ft.

Underwriting a Lease

Originate leases directly and assume the risk of the transaction upon lease inception.

Gross Lease

Owner pays all of the property's operating expenses