Leasing & Property Management

Question 1

Lease
Leasehold
Leasehold Estate
Less-Than-Freehold

Answer 1

both an instrument of conveyance and a contract between principal parties to uphold certain covenants and obligations. As a conveyance, it conveys an interest, called the leasehold estate, but does not convey legal title to the property.

Question 2

Four Principal Types of Leasehold Estates

Answer 2

• estate for years: has a specific lease term
• estate from period-to-period: the lease term automatically renews
• estate at will: has no specified lease term
• estate at sufferance: a tenancy without consent

Question 3

Legal Essence of a Valid Lease

Answer 3

it conveys an exclusive right to use and occupy a property for a limited period of time in exchange for rent and the return of the property after the lease term is over.

Question 4

Landlord

Answer 4

Owner

Question 5

Lessor
Tenant
Lessee

Answer 5

Renter

Question 6

Tenant’s Rights

Answer 6

A lease conveys a leasehold interest or estate that grants the tenant the following rights during the lease term:
- exclusive possession and occupancy
- exclusive use
- quiet enjoyment
- profits from use

Question 7

Tenant’s Obligations

Answer 7

• pay the rent on time
• maintain the property’s condition
• comply with the rules and regulations of the building

Question 8

Landlord’s Rights

Answer 8

In conveying the leasehold estate, the landlord acquires a leased fee estate, which entails the rights to:
- receive rent
- re-possess the property following the lease term
- monitor the tenant’s obligations to maintain the premises

Question 9

Landlord’s Obligations

Answer 9

• provide the necessary building support and services
• maintain the condition of the property

Question 10

Death of Tenant or Landlord

Answer 10

A tenant’s estate remains liable for payment of rent if the tenant dies; the landlord’s estate remains bound to provide occupancy despite the landlord’s death.

Question 11

Conveyance of Leased Property

Answer 11

The landlord may sell, assign, or mortgage the leased fee interest. However, transferring and encumbering the leased property do not extinguish the obligations and covenants of a lease. Buyers and creditors, therefore, must take their respective interests subject to the terms of the lease.

Question 12

Lease Contract Requirements: Parties

Answer 12

The principal parties must be legally able to enter into the agreement; i.e., meet certain age, sanity, and other requirements.

Question 13

Lease Contract Requirements: Property Description

Answer 13

The lease must identify the property by legal description or other locally accepted reference.

Question 14

Lease Contract Requirements: Exclusive Possession

Answer 14

The landlord must provide an irrevocable right to exclusive possession during the lease term, provided the tenant meets all obligations.

Question 15

Lease Contract Requirements: Legal & Permitted Use

Answer 15

The intended use of the property must be legal. A use that is legal but not permitted does not invalidate the lease but constitutes grounds for default.

Question 16

Lease Contract Requirements: Consideration

Answer 16

The lease contract must be accompanied by consideration to the landlord for the rights conveyed. How the consideration is paid does not affect the lease’s validity, so long as the parties comply with the terms of the lease.

Question 17

Lease Contract Requirements: Offer & Acceptance

Answer 17

The parties must accept the lease, and communicate their acceptance to the other party, for the lease to take legal effect.

Question 18

Lease Contract Requirements: Signatures

Answer 18

The landlord must sign the lease to convey the leasehold interest. A tenant need not sign the lease, although it is prudent to do so in order to enforce the terms of the lease. Multiple tenants who sign a single lease are jointly and severally responsible for fulfilling lease obligations. Thus, if one renter abandons an apartment, the other renters remain liable for rent.

Question 19

Lease Contract Requirements: Oral versus Written Form

Answer 19

Generally, a lease for a period exceeding one year cannot be oral but must be in writing to be enforceable because of the Statute of Frauds. An oral lease or rental agreement is legally construed to be a tenancy at will, having no specified term. Further, an oral lease terminates on the death of either principal party.

Question 20

Rent & Security Deposit Lease Clause

Answer 20

A rent clause stipulates the time, place, manner and amount of rent payment. It defines any grace period that is allowed, and states the penalties for delinquency.
The lease may also call for a security deposit to protect the landlord against losses from property damage or the tenant’s default. State law regulates the handling of the security deposit: where it is deposited, and whether the tenant receives interest on the deposit. A landlord may require additional financial security from a tenant of dubious creditworthiness in the form of personal guarantees, third party guarantees, or pledges of other property as collateral.

Question 21

Lease Term Clause

Answer 21

In the absence of an explicit term with beginning and ending date, a court will generally construe the lease to be a tenancy at will, cancelable upon proper notice.

Question 22

Repairs & Maintenance Lease Clause

Answer 22

Repairs and maintenance provisions define the landlord’s and tenant’s respective responsibilities for property repairs and maintenance. Generally, the tenant is responsible for routine maintenance of the premises while the landlord is responsible for general repairs. In residential leases, the landlord is responsible for major repairs and capital improvements. Payment of repairs and maintenance costs, however, is entirely negotiable between landlord and tenant.

Question 23

Subletting & Assignment Lease Clause

Answer 23

Subletting (subleasing) is the transfer by a tenant, the sublessor, of a portion of the leasehold interest to another party, the sublessee, through the execution of a sublease. The sublease spells out all of the rights and obligations of the sublessor and sublessee, including the payment of rent to the sublessor. The sublessor remains primarily liable for the original lease with the landlord. The subtenant is liable only to the sublessor.

An assignment of the lease is a transfer of the entire leasehold interest by a tenant, the assignor, to a third party, the assignee. There is no second lease, and the assignor retains no residual rights of occupancy or other leasehold rights unless expressly stated in the assignment agreement. The assignee becomes primarily liable for the lease and rent, and the assignor, the original tenant, remains secondarily liable. The assignee pays rent directly to the landlord.

Generally, the landlord cannot prohibit either act, but the tenant must obtain the landlord’s written approval.

Question 24

Rules & Regulations Lease Clause

Answer 24

A tenant must abide by all usage restrictions imposed by the lease’s rules and regulations for the property. These rules aim to protect the property’s condition as well as the rights of other tenants.

Question 25

Improvements & Alterations Lease Clause

Answer 25

A landlord typically wants to prevent a tenant from making alterations that later tenants may not desire. By the same token, a tenant who pays for an improvement wants to know who will own it at the end of the lease term. An improvements and alterations clause therefore identifies necessary permissions and procedures, and who owns improvements. Customarily, tenant improvements become the property of the landlord in the absence of an express agreement to the contrary.

Question 26

Options Lease Clause

Answer 26

An option clause offers a tenant the opportunity to choose a course of action at some time in the future under certain terms. Typical options are the right to renew the lease, buy the property, and lease additional adjacent space. A tenant does not have to exercise an option, but the landlord must comply if the tenant does exercise it.

Question 27

Damage & Destruction Lease Clause

Answer 27

A damage and destruction provision defines the rights and obligations of the parties in the event the leased premises are damaged or destroyed. State laws regulate such provisions

Question 28

Gross Lease
Full Service Lease

Answer 28

requires the landlord to pay the property’s operating expenses, including utilities, repairs, and maintenance, while the tenant pays only rent. Rent levels under a gross lease are higher than under a net lease, since the landlord recoups expense outlays in the form of added rent.

This type of lease is common for office and industrial properties. Residential leases are usually this type of lease with the exception that the tenants often pay utilities expenses.

Question 29

Net Lease

Answer 29

requires a tenant to pay for utilities, internal repairs, and a proportionate share of taxes, insurance, and operating expenses in addition to rent. In effect, the landlord “passes through” actual property expenses to the tenant rather than charging a higher rent level. These leases vary as to exactly what expenses the tenant is responsible for. The extreme form of this lease requires tenants to cover all expenses, including major repairs and property taxes.

This lease is common for office and industrial properties. They are sometimes also used for single family dwellings.

Question 30

Percentage Lease

Answer 30

allows the landlord to share in the income generated from the use of the property. A tenant pays percentage rent, or an amount of rent equal to a percentage of the tenant’s periodic gross sales. The percentage rent may be:
- a fixed percent of gross revenue without a minimum rent
- a fixed minimum rent plus an additional percent of gross sales
- a percentage rent or minimum rent, whichever is greater

This lease is used only for retail properties.

Question 31

Residential Lease

Answer 31

may be a net lease or a gross lease. Usually, it is a form of gross lease in which the landlord pays all property expenses except the tenant’s utilities and water. Since these leases tend to be short in term, tenants cannot be expected to pay for major repairs and improvements. The landlord, rather, absorbs these expenses and recoups the outlays through higher rent.

Question 32

How Residential Leases Differ from Commercial & other types of Leases

Answer 32

• lease terms are shorter, typically one or two years
• lease clauses are fairly standard from one property to the next, in order to reflect compliance with local landlord-tenant relations laws
• lease clauses are generally not negotiable, particularly in larger apartment complexes where owners want uniform leases for all residents

Question 33

Commercial Lease

Answer 33

may be a net, gross, or percentage lease, if the tenant is a retail business. As a rule, this lease is a significant and complex business proposition. It may involve hundreds of thousands of dollars for improving the property to the tenant’s specifications. Since the lease terms are often long, total rent liabilities for the tenant can easily be millions of dollars.

Question 34

Features of a Commercial Lease

Answer 34

• long term, ranging up to 25 years
• require tenant improvements to meet particular usage needs
• virtually all lease clauses are negotiable due to the financial magnitude of the transaction
• default can have serious financial consequences; therefore,
  lease clauses must express all points of agreement and be very precise

Question 35

Ground Lease
Land Lease

Answer 35

concerns the land portion of a real property. The owner grants the tenant a leasehold interest in the land only, in exchange for rent.

Question 36

The three circumstances in how ground leases are primarily used

Answer 36

• an owner wishes to lease raw land to an agricultural or mining interest
• unimproved property is to be developed and either the owner wants to retain ownership of the land, or the developer or future users of the property do not want to own the land
• the owner of an improved property wishes to sell an interest in the improvements while retaining ownership of the underlying land

In the latter two instances, a ground lease offers owners, developers, and users various financing, appreciation, and tax advantages. For example, a ground lease lessor can take advantage of the increase in value of the land due to the new improvements developed on it, without incurring the risks of developing and owning the improvements. Land leases executed for the purpose of development or to segregate ownership of land from ownership of improvements are inherently long term leases, often ranging from thirty to fifty years.

Question 37

Proprietary Lease

Answer 37

conveys a leasehold interest to an owner of a cooperative. This lease does not stipulate rent, as the rent is equal to the owner’s share of the periodic expenses of the entire cooperative. The term of the lease is likewise unspecified, as it coincides with the ownership period of the cooperative tenant: when an interest is sold, the lease for the seller’s unit is assigned to the new buyer.

Question 38

Leasing of Rights

Answer 38

The practice of leasing property rights other than the rights to exclusive occupancy and possession occurs most commonly in the leasing of water rights, air rights, and mineral rights.

For example, an owner of land that has deposits of coal might lease the mineral rights to a mining company, giving the mining company the limited right to extract the coal. The rights lease may be very specific, stating how much of a mineral or other resource may be extracted, how the rights may be exercised, for what period of time, and on what portions of the property. The lessee’s rights do not include common leasehold interests such as occupancy, exclusion, quiet enjoyment, or possession of the leased premises.

Question 39

Remedies For Default

Answer 39

A landlord or tenant who violates any of the terms and covenants of the lease has breached the contract and is in default. In the event of a default, the damaged party may pursue court action, including suing for
- damages
- cancellation of the lease
- specific performance: A successful suit for specific performance compels the defaulting party to perform the contract obligation that was breached.

Question 40

Default by Tenant

Answer 40

occurs most commonly from failure to pay rent or maintain the premises. If a tenant is in default, the landlord may file a suit for possession, also called a suit for eviction. If successful in this suit, the landlord can repossess the property and evict the tenant. The landlord also has the right to sue for damages.
Before filing a suit for possession, the landlord must give the tenant proper notice to pay monies due or otherwise cure the default before a deadline, or else vacate the premises. If the deadline passes without satisfaction, the landlord may file the suit and obtain a judgment for possession. The landlord may then obtain an order directing the sheriff to complete the eviction, forcibly if necessary.

Question 41

Default by Landlord

Answer 41

The most common form of landlord default is failure to provide services and maintain the property condition. When a landlord defaults on the terms of the lease, tenants may sue for damages.

Question 42

Constructive Eviction

Answer 42

In an instance where the landlord’s negligence or disruptive action has rendered the property unoccupiable, a tenant may vacate the premises and declare that the lease is cancelled by default. This action can nullify the tenant’s lease obligations if the claim succeeds in court. In order to obtain this kind of eviction judgment, the tenant must vacate the premises.

Question 43

Uniform Residential Landlord & Tenant Act (URLTA)

Answer 43

a model law enacted as a blueprint for state laws to regulate leasing and management practices of landlords with residential properties.

The act aims to:
- equalize and standardize rights of landlord and tenant
- protect tenants from unethical practices
- prevent unfair, complex leases and their enforceability

Question 44

URLTA Lease Agreement Standards

Answer 44

• unclear lease term: becomes a periodic tenancy
• rent amount: fair market value or court’s opinion
• waiving of rights: certain rights cannot be waived

Question 45

URLTA Deposit & Advance Standards

Answer 45

URLTA requires leases to be clear about:
- maximum deposit amount
- the tenant’s right to earn interest on the deposit
- commingling deposit or advance with other monies
- deadline for returning deposits
- procedures and criteria for return of the deposit to the tenant

Question 46

URLTA Landlord’s Obligations Standards

Answer 46

Under URLTA, a landlord must:
- bargain in good faith with the tenant
- provide required maintenance
- make repairs
- comply with local building codes
- provide access and safety services: elevator; fire escapes, etc.
- provide a procedure for delivery of official notices

Question 47

URLTA Tenant’s Obligations Standards

Answer 47

A tenant must:
- bargain in good faith
- maintain the condition of the leased premises
- abide by (legitimate) rules and regulations of the building
- refrain from abusing or causing destruction to the property
- limit uses to those approved
- avoid unduly disturbing other tenants

Question 48

URLTA Access Standards

Answer 48

URLTA attempts to balance the landlord’s right to access the premises with the tenant’s right of quiet enjoyment. The landlord has the right to enter the premises at any time when acting to prevent damage or destruction; to make repairs or show the property, on giving proper notice; if the purpose is not arbitrary and the time is reasonable The tenant may not refuse the landlord entry for acceptable reasons such as emergencies, repairs, inspections, and showings.

Question 49

URLTA Default & Eviction Standards

Answer 49

URLTA attempts to establish equitable procedures for dealing with lease defaults. If the landlord defaults, a tenant may sue for damages, terminate the agreement, or negotiate a rent abatement. Tenants generally are not released of liability for rent during a dispute. Rents, however, may be paid to a court impound pending judgment. If a tenant defaults, the landlord may terminate and evict, provided proper notice is made and the landlord can justify the cause for the action.

Question 50

URLTA Exemptions

Answer 50

State laws based on URLTA generally do not apply to transient occupancies, such as hotel and motel rentals, proprietary leases in cooperatives, or to occupancy in a residence that is under a contract for deed.

Question 51

Individual Property Manager

Answer 51

Usually a real estate broker who manages properties for one or more owners; may belong to a small property management firm devoted to full-time property management, be self-employed, or be one of several managers in a large real estate firm

Question 52

Individual Building Manager

Answer 52

Usually manages a single large property; may be employed by a property manager or directly by an owner; may or may not have a real estate license

Question 53

Resident Manager

Answer 53

(Residential properties only) lives on the property and may be employed by a real estate broker, a managing agent or an owner to manage a property on a part-time or full-time basis; may be required by state law for properties of certain types & sizes

Question 54

Responsibilities of a Manager

Answer 54

A manager has a fiduciary relationship with the principal and, in general, is charged with producing the greatest possible net return on the owner’s investment while safeguarding the value of the investment for the owner/investor. At the same time, the manager has some responsibilities to tenants, who want the best value and the best space for their money. Professional managers are therefore much more than rent collectors. They need technical expertise in marketing, accounting, finance, and construction.

Question 55

Reporting

Answer 55

Financial reporting to the principal is a fundamental responsibility of the property manager. Reports may be required monthly, quarterly, and annually. Required reports typically include an annual operating budget (see below); monthly cash flow reports indicating income, expenses, net operating income, and net cash flow; profit and loss statements based on the cash flow reports and showing net profit; and budget comparison statements showing how actual results match the original budget.

Question 56

Budgeting

Answer 56

An operating budget based on expected expenses and revenues is a necessity for management. The budget will determine rental rates, amounts available for capital expenditures, required reserve funds, salaries and wages of employees, amounts to be paid for property taxes and insurance premiums and mortgage or debt service. It will indicate the expected return, based on the previous year’s performance. A typical budget will contain a projection, also based on past performance and on current market information, of income from all sources, such as rents and other services, and of expenses for all purposes, such as operating expenses, maintenance services, utilities, taxes, and capital expenditures. Operating statements itemizing income and expenses are then presented to the owner on a regular basis so that the owner can evaluate the manager’s performance against the budget.

Question 57

Potential Gross Income

Answer 57

The total of scheduled rents plus revenues from such sources as vending services, storage charges, late fees, utilities, and contracts

Question 58

Effective Gross Income

Answer 58

Subtracted losses caused by uncontrolled rents, vacancies & evictions

Question 59

Net Operating Income

Answer 59

Operating expenses are subtracted from the total of effective gross income

Question 60

Cash Flow

Answer 60

When debt service and reserves (which are not counted as operating expenses) are subtracted

Question 61

Expenses

Answer 61

May be fixed or variable.

Question 62

Fixed Expenses

Answer 62

Costs that remain constant and may include operating expenses, regular maintenance costs and administration.

Question 63

Variable Expenses

Answer 63

Costs that may change from month to month or occur sporadically, such as specific repairs or capital expenditures

Question 64

Capital Expenditures

Answer 64

Expected expenditures for major items such as renovation or expansion should be included as a budgeting item. Large-scale projects are typically budgeted over a period of years.

Question 65

Cash Reserve

Answer 65

A fund set aside from operating revenues for variable expenses, such as supplies, redecorating, and repairs. The amount of the reserve is based on experience with variable expenses in previous years.

Question 66

Renting

Answer 66

The property manager, whose full responsibilities include maintaining and managing the property in accordance with the owner’s financial goals, include seeing that the property is properly rented and tenanted. The manager may use the services of a leasing agent, whose concern is solely to rent the space. In such a situation, some of the manager’s tasks may be performed by the leasing agent.

Question 67

Controlling Vacancies

Answer 67

There are many possible reasons for vacancies in a building:
- rent too high or too low
- ineffective marketing
- management quality
- poor tenant-retention program
- image and appearance problems
- high market vacancy rate

Successful managers look for these factors and take steps to limit or counteract their effects.

Question 68

Marketing

Answer 68

Finding and attracting the right kind of tenants for a property is the aim of a marketing program. A marketing plan based on the property’s features and the relationship between supply and demand in the market area, and consonant with the money available, will determine the best mix of advertising and promotional activities.

Question 69

Marketing Methods

Answer 69

• billboard advertising
• brochures and fliers
• meetings and presentations
• networking
• newspaper ads
• radio and television advertising
• signs
• tenant referrals
• websites and online services

Question 70

Setting Rents

Answer 70

Rental income must be sufficient to cover fixed expenses, operating expenses, and desired return on investment. But rental rates must also be realistic, taking into account what is happening in the market. The manager must consider prevailing rents in comparable properties as well as vacancy rates in the market and in the property. The manager makes a detailed survey of competitive space and makes adjustments for differences between the subject property and competing properties before setting the rental rates for the property. Residential apartment rates are stated in monthly amounts per unit, while commercial rates are usually stated as an annual or monthly amount per square foot. If vacancy rates in the managed property are too high, the manager may have to lower rates or identify problems in the property or its management that are contributing to vacancy level. On the other hand, if the property’s vacancy rate is significantly lower than market rates, the manager may conclude that higher rental rates are called for.

Question 71

Selecting Tenants

Answer 71

To ensure that the property produces the desired level of income from rent, it is essential to find the most suitable tenants. For commercial space, the manager must determine that:
- the space meets the tenant’s needs for size, configuration, location, and quality.
- the tenant will be able to pay for the space.
- the tenant’s business is compatible with that of other tenants.
- there is room for expansion if the tenant’s need for space is likely
to grow.

a manager has the right to refuse to rent to a person who has a history paying rent late, damaging property, fighting with other tenants, or spotty employment.

Question 72

Collecting Rents

Answer 72

The lease agreement should clearly specify the terms of rental payment. The manager must establish a system of notices and records as well as a method of collecting rents on schedule. Compliance with all state laws and regulations concerning collecting and accounting for rents is a necessity to avoid unwanted legal complications. As for monies received, the manager must follow trust fund handling procedures established by law and laid out in the rental and management agreements. If authorized by the management agreement, the manager may also collect security deposits and handle them as required by law.

Question 73

Maintaining Tenant Relations

Answer 73

Happy tenants remain in a rented space longer than unhappy tenants. High tenant turnover adds to increased advertising and redecorating expenses. For these reasons, it is incumbent on the manager to
- communicate regularly with tenants
- respond promptly and satisfactorily to maintenance and service
requests
- enforce rules and lease terms consistently and fairly
- comply with all relevant laws, such as fair housing and ADA
(Americans with Disabilities Act) regulations

Question 74

Property Maintenance

Answer 74

Physical maintenance of the property is one of the property manager’s primary functions. The costs of services provided must always be balanced with financial objectives and the need to satisfy tenant needs. The manager will also be concerned with staffing and scheduling requirements, in accordance with maintenance objectives.

Question 75

Routine Maintenance

Answer 75

necessary for the day-to-day functioning of the property. Regular performance of these activities helps to keep tenants satisfied as well as forestall serious problems requiring repair or correction. Routine activities are such things as:
- regular inspections
- scheduled upkeep of mechanical systems-heating, air-conditioning, rest rooms, lighting, landscaping
- regular cleaning of common areas
- minor repairs
- supervision of purchasing

Question 76

Preventative Maintenance

Answer 76

goes beyond the routine in attempting to deal with situations that can become serious problems if ignored. Seasonal or scheduled replacement of appliances and equipment, regular painting of exterior and interior areas, and planned replacement of a roof are a few examples.

Question 77

Corrective Maintenance

Answer 77

When routine and preventive maintenance fail, repairs and replacements become mandatory to keep the property operational. A boiler may develop a leak, an air-conditioning unit may break down, an elevator may cease to function properly.

Question 78

Tenant Improvements

Answer 78

Alterations made specifically for certain tenants are called build-outs or tenant improvements. The work may involve merely painting and re-carpeting a rental space, or erecting new walls and installing special electrical or other systems. In new buildings, spaces are often left incomplete so that they can be finished to an individual tenant’s specifications. In such cases, it is important to clarify which improvements will be considered tenant property (trade fixtures) and which will belong to the building.

Question 79

Renovations

Answer 79

When buildings lose functionality (become functionally obsolescent), they generally also lose tenants, drop in class, and suffer declining rental rates. Maintenance becomes more expensive because of the difficulties of servicing out-of-date building components. Renovation may solve some of these problems, but the manager will have to help the owner determine whether the costs of renovation can be recovered by increased revenues resulting from the renovation.

Question 80

Environmental Concerns

Answer 80

A variety of environmental concerns confronts a property manager, ranging from air quality to waste disposal, tenant concerns, and federal, state and local environmental regulations. The managed property may contain asbestos, radon, mold, lead, and other problematic substances. Tenants may produce hazardous waste. The manager must be aware of the issues and see that proper procedures are in place to deal with them, including providing means for proper disposal of hazardous materials, arranging for environmental audits and undertaking possible remediation. For instance, an audit may show that a building is causing tenants to become sick because of off-gassing from construction materials combined with a lack of ventilation. Remediation may consist of nothing more than replacing carpets and improving ventilation, and the manager, if empowered to do so, should take the necessary steps.

Question 81

Legal Concerns (ADA)

Answer 81

The Americans with Disabilities Act requires managers to ensure that disabled employees and members of the public have the same level of access to facilities as is provided for those who are not disabled. Employers with at least fifteen employees must follow nondiscriminatory employment and hiring practices. Reasonable accommodations must be made to enable disabled employees to perform essential functions of their jobs. Modifications to the physical components of the building may be necessary to provide the required access to tenants and their customers, such as widening doorways, changing door hardware, changing how doors open, installing ramps, lowering wall-mounted telephones and keypads, supplying Braille signage, and providing auditory signals. Existing barriers must be removed when the removal is “readily achievable,” that is, when cost is not prohibitive. New construction and remodeling must meet a higher standard, Managers must be aware of the laws and determine whether their buildings meet requirements. If not, the manager must determine whether restructuring or retrofitting or some other kind of accommodation is most practical.

Question 82

Risk Management

Answer 82

Many things can go wrong in a rented property, from natural disaster to personal injury to terrorism to malfeasance by employees. Huge monetary losses for the owner, in the form of civil and criminal penalties, legal costs, fines, damages, and costs of remediation can be the result. A manager must consider the possibility of such events and have a plan for dealing with them.

Question 83

Risk Management Strategies

Answer 83

• avoidance-removing the source of the risk, such as by closing off a dangerous area of the building
• reduction-taking action to forestall the event before it happens, such as by installing fire alarms, sprinklers, and security systems
• transference-shifting the risk to someone else by buying an insurance policy
• retention-taking the chance that the event is not likely enough to occur to justify the expense of one of the other strategies; self- insurance

Question 84

Security & Safety

Answer 84

A court may hold a manager and owner responsible for the physical safety of employees, tenants, and customers in leased premises. In addition to standard life safety and security systems such as sprinklers, fire doors, smoke alarms, fire escapes, and door locks, a manager may have to provide electronic and human monitoring systems (security cameras, security guards) and be prepared to take action against tenants who allow, conduct or contribute to dangerous criminal activities such as assault and drug use.

Question 85

Insurance

Answer 85

Many types of insurance are available to allow for the shifting of liability away from the owner. An insurance audit by a competent insurance agent will indicate what kind of and how much coverage is advisable.

Question 86

Common types of insurance coverage for income and commercial properties

Answer 86

• casualty-coverage for specific risks, such as theft, vandalism, burglary, illness and accident, machinery damage
• liability-coverage for risks incurred by the owner when the public enters the building; medical expenses resulting from owner negligence or other causes
• workers’ compensation-hospital and medical coverage for employees injured in the course of employment, mandated by state laws
• fire and hazard-coverage for damage to the property by fire, wind, hail, smoke, civil disturbance, and other causes
• flood-coverage for damages caused by heavy rains, snow, drainage failures, and failed public infrastructures such as dams and levies; flood insurance is not included in regular hazard policies
• contents and personal property-coverage for building contents and personal property when they are not actually on the building premises
• consequential loss, use, and occupancy-coverage for the business losses resulting from a disaster, such as loss of rent and other revenue, when the property cannot be used for business
• surety bond-coverage against losses resulting from criminal or negligent acts of an employee

Question 87

Handling of Trust Funds

Answer 87

Managers are responsible for proper handling of monies belonging to other parties that come into the manager’s hands in the course of doing business. For property managers, such funds include rents collected from tenants, security deposits, and capital contributions from the property owner. State laws, usually incorporated into real estate commission rules and the state’s real estate law, specify how a property manager is to manage trust funds. In general, the agent is to maintain a separate bank account for these funds, with special accounting, in a qualified depository institution. The rules for how long an agent may hold trust funds before depositing them, and how the funds are to be disbursed, are spelled out. The fundamental requirements are that the owners of all funds must be identified, and there must be no commingling or conversion of client funds and agent funds. Mishandling carries heavy penalties.

Question 88

Management Agreement

Answer 88

establishes an agency agreement between manager and owner as well as specifying such essentials as the manager’s scope of authority, responsibilities, objectives, compensation, and the term of the agreement. Property managers are usually considered to be general agents empowered to perform some or all of the ongoing tasks and duties of operating the property, including the authority to enter into contracts. The agency relationship creates the fiduciary duties of obedience, care, loyalty, accounting, and disclosure. The contractual relationship ensures that the manager will strive to realize the highest return for the owner consistent with the owner’s objectives and instructions.

Question 89

Manager’s Authority

Answer 89

the scope of powers being conveyed to the manager: hiring and staffing, setting rents, contracting with vendors, ordering repairs, limits on expenditures without seeking owner permission

Question 90

Manager’s Responsibilities

Answer 90

specification of duties, such as marketing, leasing, maintenance, budgeting, reporting, collecting and handling rents; the manager should be included as an additional insured on the liability policy for the property

Question 91

Allocation of Costs

Answer 91

who is to pay certain expenses, that is, which will be treated as expenses of the manager vs. which will be paid directly by the owner

Question 92

Property Manager’s Compensation

Answer 92

the management fee or other means of compensation to the manager; there may be a flat fee based on square footage, a rental commission based on a percentage of annual rent, a combination of these, or some other arrangement; in compliance with anti-trust laws, management fees are not standardized but must be negotiated by agent and principal

Question 93

Property Manager Rights

Answer 93

Depending on the degree of authority granted by the agreement, the manager may have the right to hire and fire, enter into contracts, and perform routine management tasks without interference from the owner. The manager has the duties described earlier: to maintain financial records and make reports; to budget; to find, retain, and collect from tenants; to maintain and secure the property; to meet the owner’s objectives. The manager’s liabilities include the consequences of mishandling trust funds, violating fiduciary responsibilities, and violating fair housing laws, credit laws, and employment laws.

Question 94

Estate for Years

Answer 94

may be for any definite period—years, months, weeks, days. When the estate expires, the lessee must return the premises to the lessor and vacate the premises. Most commercial leases grant this type of estate.

Question 95

Estate from Period to Period

Answer 95

does not have any definite period. Such an estate begins as a lease for a definite period but continues after the expiration of the lease, as long as the lessee continues to pay rent at the regular interval, the lessor accepts it, and no one gives notice to terminate the lease. This type of leasehold is common with residential properties

Question 96

Tenancy at Will

Answer 96

similar to the periodic tenancy, except that it does not begin with a definite period. It continues, with the consent of the lessor, as long as the tenant pays rent at regular intervals. It is terminated by the death of either party. The tenancy at will is rarely, if ever, used in a written lease.

Question 97

Tenancy at Sufferance

Answer 97

comes into existence when a tenant stays beyond the expiration of another type of lease without the lessor’s permission. This type of tenancy is never intentionally used in a written lease.

Question 98

Graduated Lease

Answer 98

Either a gross or a net lease may also be a graduated lease, in which the rental rate increases at specified times over the lease term.

Question 99

Management Plan

Answer 99

Developing a management plan is a necessary step in beginning a management project, and it may also be part of obtaining a management contract. The manager must consider the owner’s objectives, including financial goals; the competitive market for the property, both local and regional, depending on the property type; and the features of the particular property. The plan will take into account market indicators such as vacancy rates, occupancy rates, absorption rates, and new supply coming onto the market. It will also include a budgetary component that considers sources of revenue and anticipated expenses. Finally, the plan will indicate what the manager intends to do with the property, given these considerations, to manage the property in a way that will meet the owner’s objectives.