PROP 1020 / CHAPTER 3 Flashcards
COMPLETE THE SENTENCE
The owner of real property typically holds the _ _ _ __ _ _ _ However, once a property is leased, two new interests are created: the lessee or tenant holds a _ _ _ _ _ _ _ and the owner or lessor’s remaining interest is known as the _ _ _ _ _ _.
The owner of real property typically holds the FEE SIMPLE INTEREST. However, once a property is leased, two new interests are created: the lessee or tenant holds a leasehold interest and the owner or lessor’s remaining interest is known as the leased fee interest.
LIST 4 CLAUSES COMMONLY FOUND IN A LEASE
Date of the lease;
Legal description or other identification of the leased premises;
Name of lessor – owner or landlord;
Name of lessee – tenant;
Lease term;
Occupancy date;
Rental amount, including any percentage rent, graduation or escalation provisions, rent concessions and terms of payment;
Landlord’s covenants – i.e., lessor’s responsibilities for items such as taxes, insurance, maintenance, utilities, etc.;
Lessee’s responsibilities – i.e., lessee’s responsibilities for items such as taxes, insurance, maintenance, utilities, etc.;
Right to assign or sublet – can the lessee assign or sublet and on what terms and conditions;
Use of Premise (Purpose & Use) clause: states what type of business the premises may be used for;
List 6 advantages of leasing for the lessor?
Inflation Hedge
Minimum Management
Tax Benefits
Security
Marketability
Mortgageability
Simpler Default Procedures
A landlord wants all money paid by the tenant to be designated as _____ since this allows the landlord to recover all monies owing should it be necessary to seize goods, chattels, and inventory of the tenant for non-payment.
A landlord wants all money paid by the tenant to be designated as RENT since this allows the landlord to recover all monies owing should it be necessary to seize goods, chattels, and inventory of the tenant for non-payment.
Explain how leasing is an advantage to the lessor as an inflation hedge?
TWO POINTS TO BE MADE IN RESPONSE:
[1] An inflation hedge is an investment that is considered to provide protection against the decreased purchasing power of a currency that results from the loss of its value due to rising prices (inflation).
[2] Reversion of the property at the end of the lease allows the lessor to benefit from appreciation in value due to inflation and supply & demand factors
EXPLAIN WHAT A “USE CLAUSE” IS?
USE CLAUSE
Found in commercial lease agreements.
This clause accounts for what the leased property can be used for. As an example, a lease agreement may specify the property can only be used for restaurant space, retail or warehousing. Limiting the use of the property can help a landlord lease similar space to similar businesses without major overhauls to the property.
This is the most common form of commercial lease for office and light industrial space.
ANSWER
Flat Rental Lease
An example of this type of lease is:
Rent for an office space over a 5-year term of $16 per square foot (psf) in years 1 & 2, rising to $16.50 psf in years 3 and 4, and $17.00 psf in year 5.
ANSWER
Step-up or Step-down Rental Lease. Also referred to as graduated or escalating lease
These leases can be quite complex, and are usually long term.
They provide for periodic adjustments based on a change in a specific economic index, such as the Consumer Price Index.
ANSWER: Variable Rental Lease. Sometimes called Index Leases
This form of lease provides for rent reviews at specific points in the lease term. A common example is a long-term land or ground lease with a term of 40 years where the rent is reviewed and adjusted every 5 years based on the prevailing market rent.
ANSWER:
Revaluation Leases
Landlords may offer lease incentives, also known as __________, to attract new tenants to rent space. Incentives may include a rent-free period, tenant improvement allowances, or even a cash payment.
ANSWER:
tenant inducements
The tenant’s use or occupation of real property means exclusive use for the purposes specified in the lease agreement. This form of exclusivity is generally referred to in a lease agreement as a tenant’s right to _______________
ANSWER: “quiet possession”
Rent is usually payable in money, but may be payable as _ _ _ _ _ _ _
ANSWER:
Rent is usually payable in money, but may be payable as a share of the profits from land, or even by services.
- - - NOTE ONLY - - -
The time for payment of the rent is usually set out in the lease. A common lease provision is the payment of annual rent on a monthly basis, in advance, on the 1st day of the month.
Payment in advance protects the landlord against a defaulting tenant.
Rent can be paid at any time on the day it is due; it is not in arrears until after midnight. If the lease does not specify a place for payment, the duty is on the tenant to seek out the landlord to make payment.
NOTE ONLY
The time for payment of the rent is usually set out in the lease. A common lease provision is the payment of annual rent on a monthly basis, in advance, on the 1st day of the month.
Payment in advance protects the landlord against a defaulting tenant.
Rent can be paid at any time on the day it is due; it is not in arrears until after midnight. If the lease does not specify a place for payment, the duty is on the tenant to seek out the landlord to make payment.
Additional rent items are often referred to as _ _ _ _ _ _ _
ANSWER:
Additional rent items are often referred to as “expense recoveries”
Additional rent is _ _ _ _
ANSWER:
Additional rent is usually a share of the costs and charges incurred to operate the property.
This is the actual space you occupy from wall to wall.
ANSWER:
Useable Square Feet
Usable square footage does not include _ _ _ _ _ _ _ _ _ _
Usable square footage does not include common areas of a building such as lobbies, restrooms, stairwells, storage rooms, and shared hallways.
Explain how leasing can be a tax benefit to the LESSOR?
Sometimes when real estate has appreciated a substantial amount, an owner will lease the property rather than sell to avoid capital gains tax.
_ _ _ _ _ _ _ _ is your usable square footage PLUS a portion of the building’s shared space.
ANSWER:
Rentable square footage is your usable square footage PLUS a portion of the building’s shared space.
IDENTIFY THE TYPE OF LEASE . . .
Some or all of the rent charged is based on a specified percentage of the volume of business, productivity, or use achieved by the tenant.
This form of lease is commonly found in retail tenancies where the landlord wishes to participate in the success of his tenants.
ANSWER:
Percentage Lease
As a tenant in a commercial space, you pay for a portion of the shared space and thus your monthly rent is always calculated on _ _ _ _ _
As a tenant in a commercial space, you pay for a portion of the shared space and thus your monthly rent is always calculated on RENTABLE SQUARE FOOTAGE.
Explain how leasing may provide tax benefits to the lessor?
When real estate has substantially appreciated an owner may lease the property rather than sell to avoid capital gains tax
The increase in the rentable square footage above your usable square footage is referred to as _ _ _ _ _
The increase in the rentable square footage above your usable square footage is referred to variously as the “load factor,” “common area factor,” or “add-on factor.”
