Property Management Flashcards
Property management functions fall into four general categories:
- Marketing and Financial
- Tenant and Occupancy
- Facility Management
- Administration & Risk Management
The property manager’s job is to maximize the owner’s return on investment by:
- Creating an effective marketing campaign
- Analyzing market data to help establish rent rates
- Manage tenants and tenant relations
- Manage the structures and outdoor areas
- Budget capital expenditures
- Keep records
- Manage risks
The property manager has four primary functions:
- Accomplish the owner’s objectives
- Maintain the physical integrity of the property
- Develop a plan for building adequate reserves for replacement
- Establish a budget and maintain fiscal control
Property zoning laws control:
the use of land, dictating what property owners can build on a property and how they can use those structures.
The type of control that property zoning laws can have on a piece of property include:
- The size of lots for proposed subdivisions
- The type of structures that go on those lots, such as a commercial structure or a residential structure
- The use of the land, whether industrial or agricultural
- The external appearance and style of the structures erected
- The density of the property
True or False: Property codes can be created by government agencies as well as community organizations.
True
Texas property codes are organized as:
16 titles, and each title contains a varying number of chapters. Within the chapters are specific sections that explain different aspects of the laws.
What does BOMA stand for?
The Building Owners and Managers Association International
IREM Designation: Certified Property Manager (CPM) criteria:
Must be a candidate for at least a year;
Currently be in the real estate management business;
Hold a real estate license or certify that you are not required to hold one;
Be a member or affiliated with a local board of Realtors
Be approved by your local IREM chapter;
Subscribe to the Code of Ethics of the Certified Property Managers;
Be current with all national and chapter service fees;
Have at least a high school diploma.
IREM Designation: Accredited Residential Manager (ARM) designation needs:
Submit letters of recommendation
Pass an examination;
Meet certain experience criteria
IREM Designation: Accredited Management Organization (AMO) criteria:
Given to firms not individuals
Firm must have at least one person with CPM designation in management
That person must complete an IREM course called “Managing the Management Company.”
BOMA Designation: Real Property Administrator (RPA) criteria:
Complete courses:
Design, Operation and Maintenance of Building Systems, Part I
Design, Operation and Maintenance of Building Systems, Part II
Property Manager’s Guide to Commercial Real Estate Law
Real Estate Investment and Finance
Environmental Health and Safety Issues
Ethics is Good Business-Short Course
- and 2 electives -
Risk Management and Insurance
Fundamentals of Real Property Administration
Leasing and Marketing for Property Managers
Asset Management
BOMA Designation: Facilities Management Administrator (FMA)
requires completion of seven required courses and one ethics course
ICSC Designations: Certified Leasing Specialist criteria:
meet certain experience and educational requirements pass a written CLS exam
full time experience in shopping center leasing for at least four out of the last six years
completion of ICSC Leasing I and II certificate courses as well as ICSC Leasing II Advanced Certificate Program
ICSC Designations: Certified Shopping Center Manager (CSM) criteria
Must have had four years experience as a shopping center manager in the areas of maintenance, leasing, marketing and promotions
Must pass a six-hour examination
ICSC Designations: Accredited Shopping Center Manager (ASM)
This designation is for international members outside of the United States
ICSC Designations: Accredited Marketing Director (AMD) criteria:
Must have worked as a shopping center marketing director for four years or, as a shopping center manager, have handled the marketing director function for four years.
Must pass a four-hour exam
ICSC Designations: Senior Level Accreditation
This accreditation is only available to those who have already achieved the SCSM or SCMD designations and have held them for three years.
A planned unit development, or (PUD), is a
type of building development with a designed grouping of varied and compatible land uses, such as housing, recreation, commercial centers, and industrial parks, all within one contained development or subdivision.
A condominium is a
building in which each owner has a percentage ownership of the entire property.
A housing cooperative forms when
people join with each other on a democratic basis to own or control the housing and/or related community facilities in which they live. Usually they do this by forming a not-for-profit cooperative corporation.
Subsidized housing involves
renting units for a reduced rent rate while a rent subsidy is paid by the government on behalf of a tenant to help the tenant pay the rent.
Subsidized housing is housing that is constructed under a
special low interest loan program
“investment tax credit” program
the developer obtains investment tax credits from the state. The developer then sells the credits to a lending institution, which provides the equity for the project.
With subsidized housing, the developer must provide
a certain percentage of the units at below-market rents. Not all units must be below-market, but a percentage of them must be.
A time share is
an interest in a unit where the owner of the interest has the right to use a unit during a designated period of time during the year.
A time share interest is
either a fee simple (ownership) interest or a leasehold interest over the course of a certain number of years.
Economics refers to
the study of the production, consumption, and transfer of wealth.
Business economics is
a field of study that examines economic theory to analyze business enterprises.
Gross domestic product (GDP) is a
reliable indicator of the economic trends. It measures the value of goods and services produced in the U.S. during a given time period.
Two distinct metrics make up the employment forecast
the number of jobs created and the number of jobs lost compared to the population growth.
Inflation is
the generally rising price of goods and services detailed in the Consumer Price Index (CPI).
Supply is
the quantity of goods or services that can be sold at a given price.
In the real estate market, supply is made up of
vacant land, residential properties, and commercial properties.
Demand refers to
the amount of a product or service desired by buyers.
There are two factors that impact how supply and demand work in regards to real estate:
Uniqueness – this means that no two properties are exactly alike
Immobility – property cannot be relocated to accommodate changes in supply and demand
Supply is affected by:
Labor force, construction, and material costs
Government controls and financial policies
Local government factors
The Federal Reserve Board (the Fed) is
responsible for determining interest rates.
Demand is affected by:
Population
Demographics
Employment and wage levels
The principle of substitution is:
When supply outstrips demand, values drop, creating a buyer’s market. A home is only worth what a buyer is willing to pay. Often a homeowner will not want to sell a home for less than the price he paid. If the current market does not support that price, buyers will not be willing to pay more for that home then they would pay for one with similar features and amenities in a similar location.
Seller’s markets are sometimes called “renter’s markets” because
potential buyers need to keep renting until they can save up a higher down payment and compete with other buyers in the market.
The property management plan should be designed to address the owner’s goals such as:
Property analysis Tenant analysis Physical structure Staffing requirements Cost savings Market analysis Cash flow Budgeting
In estimating potential gross rent, you will need to consider a number of contributing factors, including:
Market rent in comparable properties in the trade area
Current and anticipated market conditions
Future rental rates - i.e., have rents been falling or rising in the area?
Occupancy levels of comparable properties
One of the reasons that investing in rental properties is so attractive is that
landlords can shelter their income from taxation by depreciating the building and improvements.
Increasing the attractiveness of rental properties is the fact that
capital gains tax rates have been reduced to 15 percent.
Rent is driven by the market and the market is driven by a number of factors:
supply and demand, interest rates, location of the property, condition of the property, and general economic stability.
Expenses used to calculate the property management expenses of the property are:
mortgage payment, insurance, utilities, maintenance, repairs, office assistance, supplies, property taxes and any other expense that can be anticipated
Components of successful marketing plan are:
The Mission Statement Analysis of the Company's Place in the Marketplace Marketing Strategy Budget Performance Evaluation
Where Do Property Managers Find Clients?
Condominium associations Townhouse communities Investment institutions Developers REO properties Resort properties Single-family residential rentals
The Real Estate Journal or the Business Journal’s real estate section
will have the most current developments in the local real estate industry.
Marketing to Tenants
Referrals
Hang out with prospective tenants
Rental agencies
Welcome packets
There are 2 real estate advertising strategies:
Institutional advertising is used to create a favorable image of the real estate company in the public’s eye.
Specific advertising, also called operational advertising, is used to describe a particular piece of property or a tract of homes.
Three ways to attract buyers:
Attention Getters - ads that grab the readers attention
Desirability - The ad creates desire by appealing to the senses and emotions.
Action - the ads should move readers to take action
There are six basic elements of advertising:
Choosing the right market Knowing when to advertise Knowing the profile of the buyers in that market Advertising the right property Using the right media Using effective advertising techniques
In determining the media choice, the agent or broker must consider the following:
What is the target audience you are trying to reach?
What message do you wish to convey?
What is your budget?
Texas Real Estate Licensing Act (TRELA) specifically states that:
the Texas Real Estate Commission will not regulate real estate advertising, except to prohibit a false, misleading, or deceptive practice by the person.
Truth In Lending Act, or Regulation Z, requires
- disclosure of all costs associated with closing a sale and/or mortgage.
- it makes bait-and-switch advertising a federal offense
The Civil Rights Act of 1968
prohibits discriminatory advertising of any real property.
Discriminatory advertising includes
advertising any preference, limitation, or discrimination, overt or implied, because of race, color, national origin, religion, gender, handicap or familial status.
NOI
net operating income = income minus expenses
Property management functions fall into four general categories:
Marketing and Financial
Tenant and Occupancy
Facility Management
Administration & Risk Management
Uniform Electronic Transaction Act (1999)
made digital signing possible and which states had the option to adopt.
Uniform Electronic Transaction Act (1999) states that
any physical action by someone on the Internet is a legal binding contract
The Business Plan Components
Executive Summary Market Research Business Structure Marketing & Sales Objectives & Plans The Financial Plans
triple net” lease
means the landlord will pass through to the tenants of the building the landlord’s insurance, taxes and operating expenses for the common area.
common area maintenance (CAM) provisions
operating costs of common areas that may be passed on to tenant unknowingly
Budget Variance Report contains these categories:
Rental Income
Expense Recoveries
Other Revenue
Variance
Balance Sheet common entry items:
Assets
Liabilities
Tenant Rent Roll consists of
Tenant name Suite or apartment number Square footage Lease expiration date Rental amount (per square foot or monthly) Graduated rental increases
The cash flow statement
breaks down income and expenses by category, but not by tenant, as with the General Ledger.
The General Ledger
is an active, live document in that it is always in motion. It records every transaction from deposit to withdrawal to interest and fee additions.
This inspection report is meant to be done
on a quarterly basis on most properties, with monthly updates that are much less detailed.
A demographic analysis of the market area should include:
Population Age Income levels Education levels Family make-up (number of houses with children) Ethnicity Home ownership (vs. rental) Average home price Employment data (white collar, blue collar)
Operating Expenses includes:
all utilities, janitorial services, repairs and maintenance.
Return on Investment: (ROI)
Owners of property will likely perform an analysis of the improvement to decide whether the improvement will be a good return on their investment.
Variance:
shown as a dollar amount, positive or negative, and as a percentage over or under budget.
What is an escalation clause?
A lease clause that allows for set increases in rent
There are two different reasons to perform an income analysis:
One is to report the actual income for a property. The other is to do budget projections. One is based on history; the other on estimates.
Projected Income and Expense Analysis basic elements include:
Potential gross rent (contract rent)
Minus vacancy and credit loss
Plus additional secondary income, if any
Equals effective gross rent
How is effective gross rent calculated?
Potential gross rent – vacancy and credit loss + additional secondary income = effective gross rent.
Depreciation is basically
a loss of value for any cause.
Physical deterioration (Inherent)
Something within the property itself causes a loss in value (such as normal wear and tear, deferred maintenance, aging of the buildings, or even negligence by the tenant)
Functional Obsolescence (Inherent)
can result from certain features being outdated or obsolete, poor architectural design or construction style, or other changes that cause the property to be less useful than it once was, or than other properties in the market area.
Economic Obsolescence (Extraneous)
Something outside the property causes a loss in value.
An Employer Identification Number (EIN)
is a nine-digit number assigned by the IRS to businesses or entities that report taxes, whether or not they employ others. It is used to identify the tax accounts of those businesses or employers. It is comparable to a Social Security Number for individual taxpayers.
A sole proprietorship is
an unincorporated business that is owned by one individual. It is the simplest form of business ownership. The business has no existence apart from the individual owner. Its assets and liabilities are not separate from those of the owner. The income and expenses of the business are included on the owner’s individual tax return.
A corporation is defined as
a legal entity or structure created under the authority of the laws of an individual state, where a person or group of persons become shareholders.
A partnership is
the relationship existing between two or more persons who join together to carry on a trade or business. Each partner contributes money, property, labor or skill, and expects to share in the profits and losses of the business.
An estate is
a legal entity created as the result of a person’s death and consists of real and/or personal property of the deceased person. The estate exists until the final distribution of the assets is made to the heirs and other beneficiaries.
A trust is
an arrangement through which trustees take title to property for the purpose of protecting or conserving it for the beneficiaries.
Limited Liability Company (LLC)
is an entity formed under state or foreign law by filing articles of organization as an LLC
The W-4 form
allows the taxpayer (the employee) to designate how many dependents he or she wishes to claim, as well as the filing status.
Form I-9
is to be completed jointly by the employee and the employer to certify that all new employees are authorized to work in the United States hired after November 6, 1986.
The Preparer/Translator Certification must be completed if
a person other than the employee prepared the preceding section. A preparer/translator may only be used when the employee is unable to complete Form I-9 Section 1 on his or her own; however the employee must still sign the section personally.
Form I-9 Section 2 must be completed
by the employer by examining evidence of identity and employment authorization within three business days of the date employment begins.
Form W-7 is
the Application for IRS Individual Taxpayer Identification Number (ITIN) (if they are ineligible for a SSN)
Unlike an SSN, the ITIN cannot be used for
identification purposes, authorization to work in the U.S. or to apply and receive benefits from the SSA. It is for tax reporting purposes only, and is not valid for identification outside the tax system.
Form W-9
used to request the taxpayer identification number (TIN) of a U.S. person (including a resident alien) and to request certain certifications and claims for exemption.
Form 941: Employer’s Quarterly Federal Tax Return must be filed if:
you have participated in any of the following during the previous quarter:
Wages to employees
Federal income tax withheld from employees
Tips your employees have received
Employer’s and employee’s share of Social Security and Medicare taxes
Current quarter’s adjustments to Social Security and Medicare taxes for fractions of cents, sick pay, tips, and group-term life insurance.
Advance earned income tax credit (EIC) payments.
Credit for COBRA premium assistance payments
After you file your first Form 941,
you must file a return for each quarter, even if you have no taxes to report, unless you filed a final return.
Businesses needing an EIN must
apply for a number and use it throughout the life of the business on all tax returns, payments and reports.
Employer’s Quarterly Federal Tax Returns are due by
the last day of the month that follows the end of each calendar quarter.
The IRS uses two separate sets of deposit rules to determine when businesses must deposit their social security, Medicare, and withheld income taxes. These schedules tell you when a deposit is due after you have a payday.
Your deposit schedule is not determined by how often you pay your employees. Your deposit schedule depends on the total tax liability you reported for your previous four-quarter “lookback period” (July 1 through June 30 of last year). If you reported $50,000 or less in the previous lookback period, you must deposit monthly. If you reported more than $50,000, you must deposit semi-weekly.
The information you need to have reliably at hand in order to file your Employer’s Quarterly Federal Tax Return includes:
Number of employees who received compensation during the quarter
Total amount of compensation paid
Income tax withheld
Taxable social security and Medicare wages
Advance earned income credit (EIC) payments made to employees
COBRA premium assistance payments
Number of individuals provided COBRA premium assistance
Form 1099 - Miscellaneous Income is required when
you have paid for services in excess of $600 to any person or business
The Federal Unemployment Tax Act (FUTA) provides for
payments of unemployment compensation for workers who have lost their jobs.
For deposit purposes, Federal Unemployment Tax Act (FUTA) is deposited
quarterly and is due on the last day of the month following the quarter in which it is due.
In October 1936 the Texas legislature passed the Texas Unemployment Compensation Act, which
accepted the unemployment insurance provisions of the Social Security Act and established the Texas Unemployment Compensation Commission.
Unemployment Compensation taxes on covered employers payrolls began
on January 1, 1936, and payments to covered eligible workers were effective January 1, 1938.
Texas Workforce Commission (TWC) is composed of
three members appointed by the governor for six-year terms. One represents labor, one employers, and one the public– with the public’s representative serving as chairman. This is a paid board.
The Texas Workforce Commission (TWC) is
the state government agency charged with overseeing and providing workforce development services to employers and job seekers of Texas. For employers, TWC offers recruiting, retention, training and re-training, and outplacement services, as well as valuable information on labor law and labor market statistics. For job seekers, TWC offers career development information, job search resources, training programs, and, as appropriate, unemployment benefits.
Primary services of the Texas Workforce Commission are funded by
federal tax revenue and are generally free to all Texans
An employer must pay FUTA to workers if their wages are more than
$1,500
What is the simplest form of business ownership?
Sole proprietorship
there might be an accountant that works in the office who takes direction from both the owner and the property manager. What defines whether these employees are employees of the owner or the property manager?
The management agreement
TREC rules provide that the TREC can take disciplinary action against a broker or salesperson who
pays or associates with an unlicensed person engaging in activities that require a license.
True or False: Someone who represents himself as a property manager for someone other than himself and expects compensation to do so must be licensed if the person rents or leases the property on behalf of the property owner. Activities that are ancillary to the primary function, like administrative tasks, making repairs, etc, do not require a license.
True
The property manager has four primary functions:
Accomplish the owner’s objectives.
Maintain the physical integrity of the property.
Develop a plan for building adequate reserves for replacement.
Establish a budget and maintain fiscal control.
First and foremost, the property manager’s duty is to
the owner.
As a property manager, the fiduciary duties to an owner include
loyalty, confidentiality and honesty.
What type of coverage includes fire, riot, vandalism, theft, glass breakage, lightning, hail, smoke and explosion?
Dwelling policy
Management fees are those fees
the Broker collects to manage the property. This fee is owed regardless of what else happens and is usually the greater of a flat fee per unit or a percentage of the gross monthly rents collected that month.
Leasing fees for new tenancies are
fees the Broker earns each time the Property is leased to a new tenant. These fees are earned and payable at the time the lease is EXECUTED.
Services fees are fees
the Broker earns each time the Broker arranges for the property to be repaired, maintained, redecorated or altered. The fee is usually a percentage of the cost of the service and is payable upon the Owner’s receipt of the Broker’s invoice.
Interest on Trust Accounts
The agreements provide that any trust account the Broker maintains may be interest bearing, and the Broker is entitled to the interest as additional compensation. The Broker must remove the interest within 30 days after the interest or income is paid.
Administrative Fees
If the Broker collects administrative fees from the tenants, such as application fees, late charges, returned check fees or similar fees, these belong to the Broker when the Broker collects them.
Fees related to Insurance and Legal Matters
If the Owner requests the Broker to appear in any legal proceedings or deposition related to the Property, the Owner will pay the Broker a fee for the Broker’s time. These fees are earned at the time the services are rendered and are payable upon the Owner’s receipt of the Broker’s invoice.
Fees in the Event of a Sale
1) Fee if a tenant purchases the property - This fee applies if a tenant purchases the property from the Owner. It is usually a percentage of the sales price.
2) Fee if a buyer is procured through the Broker - This fee is earned by the Broker if, during the agreement period, the Broker procures a buyer who purchases the property from the Owner.
Service Fees
1) Sales coordination fee - This fee is earned if the Broker does not receive a sales commission fee. It is payment for the Broker’s time and services to coordinate showings, inspections, appraisals, repairs or other related matters.
2) Fees upon Termination - Upon termination, the Owner must pay the Broker all amounts the Owner owes the Broker under the agreement and if the Broker leases a property to a tenant on the day the agreement terminates, the Owner owes the Broker a fee in an amount equal to the lesser of the management fees that would accrue over the remainder of the term of the lease or a predetermined flat fee
The Owner must reimburse the Broker for the Broker’s expenses. This includes, but is not limited to:
Copy charges Long distance and faxes Postage and couriers Notary fees Photos and videos Reasonable travel expenses Parking and tolls Other authorized expenses
Funds Received After Termination
Sometimes the Broker will receive funds after the management agreement has terminated. The Broker has an obligation to deposit those funds into the Broker’s trust account and pay them to the Owner except for an offset of a percentage that the Broker may keep as compensation.
Cooperation with other Brokers
Under paragraph 15 of the commercial agreement, the Broker must agree to allow other brokers to show the property to prospective tenants. If the other broker procures the tenant, the Broker must pay the other broker a fee out of the compensation the Broker earns under Paragraph 15. The agreement spells out the amount the Broker will pay to the other broker. The agreement separates the amounts owed according to whether the other broker is a participant in the MLS in which the listing is filed.
“Indemnification” means
the agreement to compensate another party for a loss or cost the other party incurred.
A party is not in default unless
there is a violation or breach of the agreement
AND
the other party has given the breaching party notice of their claim of default
AND
the breaching party has not cured the default within ten days after receiving the notice.
Only when the claim has ripened into a default does the non-defaulting party have a remedy. The remedies provided under the agreements are:
Terminate the agreement by providing at least 10 days notice.
Recover all amounts due to the non-defaulting party under the agreement.
Recover reasonable collection costs and attorney’s fees.
Exercise any other remedy available at law.
Information about Brokerage Services Addendum
defines for whom the Broker is working in the various transactions. It also defines the rules the Broker must follow depending upon whom the Broker represents
Owner’s Notice Concerning Condition of Property under Property Management Agreement (TAR-2206)
Like a Sellers Disclosure Notice
Property Manager’s Inventory and Condition Report (TAR-2006)
This form is given to the tenant at the time of moving into the residential unit.
If a tenant purchases a property from the owner, the broker’s fee is usually ___________.
a percentage of the sales price
Under the management agreement, how many days prior to the end of the term must notice of termination be given?
30 days
Single-Room Occupancies (SROs) are
units with a single bedroom and bath.
The Uniform Condominium Act governs condominiums in Texas, which is Chapter 82 of the Texas Property Code.
Chapter 82 applies to all types of condominiums-commercial, industrial, residential and any other type of condominium.
A plat is
a type of survey that shows the schematic map of the property. It will show the location and dimensions of the property and the improvements within the property. It will also show the easements that serve the property, including underground utility lines.
Materials and fixtures outside the interior walls of the unit that serve only that unit are called
limited common elements
Unit Owners’ Association (UOA)
The association is comprised exclusively of all the unit owners and it may be organized as a profit or a nonprofit corporation. The property manager is really the manager of the association.
A quorum is established if
persons entitled to cast at least 20 percent of the votes that may be cast for election of the board are present in person or by proxy at the beginning of the meeting.
If there is not enough money in the condo insurance policy to repair or replace the damage,
the expense becomes a common expense.
UOA must maintain:
1) Property insurance on the insurable common elements insuring against all risks of direct physical loss commonly insured against, including fire and extended coverage, in a total amount of at least 80 percent of the replacement cost or actual cash value of the insured property as of the effective date and at each renewal date of the policy
2) Commercial general liability insurance, including medical payments insurance, in an amount determined by the board but not less than any amount specified by the declaration covering all occurrences commonly insured against for death, bodily injury, and property damage arising out of or in connection with the use, ownership, or maintenance of the common elements.
The UOA must repair or replace any portion of the condominium for which insurance is required that is damaged or destroyed unless:
The condominium is terminated.
Repair or replacement would be illegal.
80 percent of the unit owners vote not to rebuild.
The UOA lien has priority over other liens except for
tax liens, liens recorded prior to the declaration, a first mortgage, or a construction lien for construction of improvements to the unit.
T or F: Once a lien is established, it can be foreclosed by judicial or non-judicial foreclosure, except the association cannot foreclose a lien for assessments consisting only of fines.
True
Condo management fees are
usually a set monthly fee per unit plus actual costs incurred. Some associations will also provide an office within the complex. Typical fees range from $8.00 per month per unit to $15.00 per month per unit depending on the size of the unit.
A housing cooperative is a
corporation or other legal entity that owns real estate. Usually, there are multiple units in a housing cooperative. Each shareholder or member of the legal entity is entitled to occupy one housing unit. There is an occupancy agreement or lease to memorialize the rights of the shareholders with regard to their units.
In the student-housing cooperative,
the students pay a fee to use the common areas but are not shareholders of the entity that owns the property.
What interest does a time share owner have in the time share unit?
fee simple or leasehold
The definition of Freehold Estates is simply,
“I own the property.” It is what we think of as “ownership.” There is no definite ending date.
A landlord owns the property in freehold but rents it to the tenant in leasehold.
note to remember
Fee Simple (Fee Simple Absolute)
Owns the bundle of rights. Some of its characteristics include:
Highest degree of ownership;
Has unlimited duration;
Is inheritable;
All other estates may be created from Fee Simple;
Is subject to only the government powers (PETE).
Voluntary Life Estates are sometimes referred to as
“Conventional Life Estates”
Ordinary Life Estates:
Estate in Reversion - the grantor separates his/her fee simple estate into two parts, which are:
1) A life estate, which is deeded to a life tenant, and
2) Reversion estate, which is retained by the grantor.
The life tenant possesses an incomplete bundle of rights for his/her lifetime. Once the life tenant dies, the life estate portion reverts back to the grantor, who once again has the complete bundle of rights.
Leasehold estates are sometimes called,
“Less than freehold estates” - leasehold estates are what we often think of as “renting” or “leasing.”
The four main types of Leasehold Estates are:
1) Estate for Years
2) Estate from Period to Period
3) Estate at Will
4) Estate at Sufferance
An Estate for Years
It has definite beginning and ending dates
It is not necessary to give notice to the landlord to terminate
Renewal is NOT automatic
Many commercial leases and some apartment leases are estates for years
This type of lease can be for any length of time
**A one-day lease to rent a hotel room has a definite beginning and ending, so it would be considered an estate for years.
Estate from Period to Period
Also known as periodic tenancy, or a month-to-month lease.
Proper notice is required to terminate (30 days, 60 days or whatever is agreed to in the lease).
No definite ending date (this type of lease renews itself for whatever period of time was called for in the original lease or whatever is agreed upon in the actual lease).
***Most apartment leases are estates from period to period if the tenant is required to give notice to terminate.
Estate at Will
Landlord lets you stay without a lease.
Notice can be given by either party without warning.
Death of either party immediately terminates an estate at will.
Estate at Sufferance
When a tenant stays past the term of the lease, he/she is known as a holdover tenant because he/she is unlawfully in possession of the property. The landlord must evict the tenant through the court; in other words, he cannot lock the tenant out, turn off utilities, or forcibly remove the tenant.
Common Types of Leases
Ground lease - Long-term lease, usually 99 years. The tenant may build on a property with a ground lease but the property is still the landlord’s. Depending upon how the ground lease is structured, any improvement the tenant builds upon the property becomes the landlord’s once the lease is over. Ground leases are very common in commercial lease situations.
Index lease - Lease is based on some type of index such as Cost of Living, etc., and it usually adjusts upward.
Appraisal lease - A lease that states a date in the future for a new appraisal. If the appraisal is higher than the previous appraisal, the rent will go up accordingly.
Graduated lease - Cost goes up at regular intervals.
Net lease
The tenant has agreed to pay ownership expenses, usually utilities, property taxes, and special assessments.
Net-Net lease
The tenant pays for the insurance as well as utilities, property taxes, and special assessments.
Net-Net-Net lease (triple net lease)
The tenant also pays for some agreed upon items of repair and maintenance in addition to insurance, utilities, property taxes, and special assessments.
Escalator clause
A clause in a lease in which the parties agree to an adjustment of rent based on set increases in taxes, insurance, maintenance, and other operating costs.
Non-disturbance clause
A mortgage clause that requires a tenant cannot be disturbed or evicted if the property faces foreclosure.
“Gross Leases” are those in which
the tenant pays a fixed rent and the landlord pays all the expenses associated with the property, including taxes, insurance and maintenance.
Escalation clauses in leases are
those provisions establishing how the rent will be increased over a period of time.
In a holdover situation
the tenant becomes a tenant at will
A financial statement is
a statement of assets and liabilities in order to come up with a tangible net worth of liquidity.
The essential elements of the Guaranty include:
(a) name or names of the individual or individuals guaranteeing the lease, including the spouse if a married person is the Guarantor
(b) statement that the Guaranty is irrevocable and will be called upon only in the case of a Tenant default
(c) time period of the Guaranty
(d) pertinent details about the lease and the leased premises.
***Sometimes a Landlord will allow the Guaranty to expire after a period of time if there has been no default.
An alternative to executing a Personal Guaranty could be
1) a Letter of Credit
2) increased Security Deposit
3) pre-paid rent.
TRELA
Texas Real Estate Licensing Act
The purpose of the Letter of Intent is
to define the basic business and economic terms under which both Landlord and Tenant agree to enter into a lease. It is not a legally binding document and will most likely be stated as such in the document.
