Commercial and Residential Leases

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• Lease analysis explained

Learning Outcomes

• Understand commercial and residential leases

Residential vs. Commercial Brokerage

• Residential and commercial brokerage requires a different skill set
• Residential brokers rely on people and selling skills.
• Commercial brokers need more technical and business knowledge
• Commercial agents are well-versed in economic and market analysis, legal aspects of leasing, etc.

Residential Leases

• Gives the right to use residential space
• Tenant selection criteria includes:
  • Housekeeping ability: Good housekeeping tenants are preferred
  • Compatibility: Tenant must be suitable to co-exist with other tenants
  • Credit rating: Relates to the rent-paying ability of tenants.

Commercial Lease

• Provides the agreement to use commercial space
• The tenant selection includes criteria like:
  • Credit and financial rating
  • Tenant reputation
  • Unique space requirements and Expansion requirements
  • Compatibility

Rights and Responsibilities

• Delivery of Possession requires the landlord to deliver actual possession and the right of possession
• Regarding the use of property, the tenant can use the property for any legal purpose unless there's a restriction.
• A tenant has the right to exclude others from the property, but exceptions apply for the landlord to collect rent or prevent waste
• Repairs and Maintenance: Landlord has the obligation to maintain and repair the leased property
• Liability to third parties: The landlord or tenant can be responsible for injury to a third party
  • Categories of third parties: Invitees and trespassers.
• Right to assign and sublet: A tenant can assign or sublet unless a clause limits the rights

Lease Clauses

• Lease clauses relate to the following:
  • Fixtures: How fixtures provided by the tenant will be dealt with
  • Landlord's right to enter to show property
  • Hazard insurance: Establishes who is responsible for carrying insurance
• Security Deposit:
  • Landlords have liens on tenant's personal property but it's hardly enforced, and a deposit is typical
• Utility Payments: Settles responsibility of who pays for utilities
• Notification of Renewal: Requires tenants to notify the landlord of their intention to renew the lease.

Typical Clauses

• Improvements Clause: Specifies who owns improvements made by the tenant
• Hours-of-business: Typically found in retail leases and identifies hours of business during which stores are to stay open
• Signage: The nature and placement of the tenant's identifying name and advertising that must be clearly described

Termination of Leases

• Leases can terminate through:
  • Expiration of the lease term
  • Mutual agreement to terminate
  • Breach of contract, such as non-payment of rent, deprivation of use by landlord, or constructive eviction

Lease Characteristics

• Lease characteristics may affect the rent charged or the value of the lease:
  • Space: The size, shape, and configuration affect rent.
  • Tenant: Who the tenant is affects the rent
  • Date and term of lease: Landlords prefer long-term leases and leases that do not expire when a large number of leases expire.
• Concessions are meant to attract the tenant. Examples:
  • Rent abatements
  • Tenant improvement allowance
  • Rent-free period

Lease options

- Renewal options: Entitles tenants to renew at the end of the lease
- Cancellation option: Entitles the option holder to cancel the lease before the end of the lease term.
- Expansion option: Entitles tenants to take specified space during a specified window of time.

Lease Analysis

• Brokers may conduct a lease analysis to advise clients on which lease to select from several options, including:
  • The net present value of the lease for the entire lease period
  • The effective rent or lease costs per period
  • The total cedi outflow
  • The net present value of the lease per square foot
  • The effective level rent payment per square foot

Computation of Effective Rent

• Used in making quantitative comparisons among leases
• It's the net present value of the rental payments in an equivalent annual level payment form
  • Calculate the lease present value (LPV)
  • Calculate the annualized value of the LPV

Example

• Comparing two mutually exclusive lease proposals where:
  • Lease A is a 5-year lease at GHC 200 per square meter with one year of free rent up front
  • Lease B is a 6-year lease at GHC 250 per square meter but with two years of free rent up front
• Landlord's preference will depend if the appropriate discount rate is 10% and rents are paid in arrears

Solution

• LPV (A) = (0/1.1) + (200/1.1²) + (200/1.1³) + (200/1.14) + (200/1.15) = 576.34
• Effective rent (A) = 576.34 * (0.1/(1-(1/1.1^5)) = 152.04
• LPV(B) = (0/1.1)+(0/1.1²)+(250/1.1³)+(250/1.14)+(250/1.15)+(250/1.16)=654.93
• Effective rent (B) = 654.93 * (0.1/(1-1.1^6)) = 150.38

Understand the differences between commercial and residential leases. Explore tenant selection criteria, including housekeeping, compatibility, and credit rating for residential leases, and creditworthiness for commercial leases. Learn about the diverse skill sets required for residential and commercial brokerage.