Commercial & Investment Properties Types of Leases

Question 1

In a gross lease, the landlord pays…

Answer 1

all expenses. These include property taxes, insurance and maintenance.

Question 2

The residential lease is a common example of a…

Answer 2

gross lease.

Question 3

In a net lease, the tenant pays…

Answer 3

some or all of the expenses.

Question 4

In a triple net lease, the tenant pays…

Answer 4

all of the expenses in addition to the rent.

Question 5

A net lease, in particular a triple net lease, is commonly used by…

Answer 5

commercial tenants.

A large company may have a triple net lease and rent an entire office building.

Question 6

Percentage Lease is a lease of property in which the rent is based upon…

Answer 6

the percentage of the volume of sales made upon the leased premises, usually provides for minimal rent.

Question 7

A percentage lease is typically used with…

Answer 7

retail tenants.

Question 8

A ground lease is a…

Answer 8

long-term lease of unimproved land, usually for construction purposes

For example, a lessee may be given a 99-year ground lease for a large vacant property. The lessee will build a large multi-family building on the property.
At the end of the 99-year lease, the lessor (the original land owner) will take back the land and any improvements on the land (including the multi-family building).

Question 9

A ground lease is also known as a…

Answer 9

land lease.

Question 10

A loft lease is for the…

Answer 10

rental of floor space this is not generally divided into rooms.

Question 11

A loft lease is typically for an…

Answer 11

open, unfinished space.

Question 12

A graduated lease is a lease in which the…

Answer 12

rent changes from period to period over the lease term.

Question 13

The graduated lease contract specifies the change in…

Answer 13

rental amount, which is usually an increase in stair-step fashion.

Question 14

An escalation clause allows landlords to…

Answer 14

raise rents during the term of the lease.

Question 15

Lease escalation clauses call for the…

Answer 15

increased costs to the tenant for different reasons at specified times during the lease term. These clauses protect the property owner against increases during the lease term.

Question 16

A use clause defines how the…

Answer 16

tenant can and cannot use the space.

Question 17

Usable square footage is the area contained within a building that is…

Answer 17

actually occupied by a commercial tenant.

Question 18

Usable space typically does not include…

Answer 18

elevators, stairs, mechanical spaces, etc..

Question 19

Rentable square footage is the…

Answer 19

total area of a space, some of which cannot be used.

Question 20

Rentable square footage equals the…

Answer 20

entire space, including the usable square footage and the tenant’s pro rata share of the building’s common areas, such as the lobby, hallways, and restrooms.

Question 21

The difference between the rentable and usable area in a commercial space is known as…

Answer 21

the loss factor.

Question 22

A pro forma is an…

Answer 22

accounting statement that forecasts income and expenses for a period of time, typically five or more years.

Question 23

Pro forma statements are typically used by…

Answer 23

investors to estimate their rate of return for a particular property.

Question 24

Leverage is the…

Answer 24

use of borrowed capital (mortgage) to increase the potential return of an investment.

Question 25

Leverage is also known as…

Answer 25

“other people’s money”.

Question 26

In a Debt to Equity Ratio, debt is what the ________ ____, equity is ___ ____ ____ ___ ________ ___ __ ___ ________.

Answer 26

investor owes.

how much cash the investor has in the property.

Question 27

If a property is valued at $1,000,000, and the total debt is $600,000, with a debt ratio of 60%. The equity ratio would be…

Answer 27

40% ($1,000,000 - $600,000 = $400,000, which is 40% of $1,000,000).

Question 28

The net operating income is…

Answer 28

equal to the gross income from a building minus operating expenses.

Question 29

NOI (net operating income) is essentially the…

Answer 29

cash flow from a property before paying any debt service (mortgage payment) or taxes.

Question 30

The capitalization rate is the…

Answer 30

annual return that an investor expects to receive from a commercial property.

Question 31

The formula for Capitalization Rate is:

Answer 31

Net Operating Income / Value = Capitalization Rate

Question 32

If a property sold for $1,200,000, and the net operating income is $60,000, what is the capitalization rate for the property?

Answer 32

$60,000 / $1,200,000 = 0.05 or 5%

The Cap Rate equals 5%

Question 33

ROI is a…

Answer 33

percentage return on money invested in a property by an investor.

Question 34

ROI (Return on Investment), like COC (Cash on Cash Return), is usually calculated on a…

Answer 34

yearly basis, meaning you must multiply the monthly cash flow by 12 and divide it by the down payment.

Formula: Cash Flow (on a yearly basis) / Down Payment.

Question 35

Real estate is considered an…

Answer 35

illiquid asset because it cannot quickly or easily be sold.

Question 36

Time value of money is the idea that…

Answer 36

money available at the present time is worth more than the same amount in the future due to its potential earning capacity.

Question 37

Time value of money is a process that calculates the…

Answer 37

value of an asset in the past, present, or future.

It is based on the idea that the original investment or principal increases in value over a certain time.

Question 38

Industrial investment properties include the following:

Answer 38

– Heavy manufacturing
– Light manufacturing
– Multi-tenant
– Owner Occupied
– Self Storage
– Special Purpose
– Warehouse / Distribution