Leasing PDF

7 Leasing Learning Objectives After completing this lesson, students should be able to… Explain the advantages of using a standardized application form for all tenants Describe some of the additional information a manager must collect for...

7 Leasing Learning Objectives After completing this lesson, students should be able to… Explain the advantages of using a standardized application form for all tenants Describe some of the additional information a manager must collect for commercial tenant applications Discuss the legal requirements with which a manager must comply when screening potential tenants Distinguish between usable area, gross area, and rentable area in describing square footage Describe a situation that would justify an open-ended date of possession in a lease agree- ment Compare gross leases to net leases and percentage leases Describe the basic way percentage rent is calculated and explain the importance of defining gross sales in the lease agreement Explain the purpose of a use clause for an industrial property lease Discuss who must sign the lease in residential and commercial lease transactions Suggested Lesson Plan 1. Give students Exercise 7.1 to review the previous chapter, “Marketing.” 2. Provide a brief overview of Chapter 7, “Leasing,” and review the learning objectives for the chapter. © 2021 Rockwell Publishing  Property Management Instructor Materials 3. Present lesson content: Selecting Tenants – Application process – Investigating the applicant – Reaching a decision about the applicant – Notifying the applicant – Retention of records EXERCISE 7.2 Qualities of desirable tenants EXERCISE 7.3 Contents of a qualification package Lease Provisions – Description of premises – Lease term – Date of possession – Rent amount – Security deposit – Maintenance – Use of premises – Possession and quiet enjoyment – Alterations and initial improvements – Rules – Insurance – Assignment and subleasing – Right of first refusal – Option to renew EXERCISE 7.4 Lease provisions Signing the Lease 4. End lesson with Chapter 7 Quiz. Chapter 7 Outline: Leasing I. Selecting Tenants A. The owner and manager want tenants who will maintain the property, pay rent on time, get along with other tenants, and stay for a while 2  Chapter 7: Leasing B. The application process involves the application, screening, and acceptance (or denial) C. The manager begins the application process by gathering information about the prospective tenant(s) by using an application form 1. A standardized application form ensures that full data is collected effi- ciently from each applicant; it also means that each applicant is asked the same questions, which is the best way to avoid claims of discrimination 2. Residential tenant applications collect personal information, rental and employment history, asset information, and references a. The Fair Credit Reporting Act (FCRA) requires written authorization from an individual before running a background check 3. Commercial applications are more complicated because they include in- formation on the business as well as its owners, such as the names and roles of employees, the owner/lease signer’s role in the business, any financing, and any planned improvements to the leased space a. Qualification package: the application form along with its accompa- nying documentation b. Documents included in the qualification package usually include profit and loss statements, tax returns, personal financial statements, operating budget and five-year plan, business plan, business entity organizational documents, franchise agreement (if any), and the re- sumes of key personnel c. A landlord may require the owners of small- and medium-size busi- nesses to personally guarantee the lease 4. A property manager must require identification from an applicant before signing a lease in order to comply with the Patriot Act, which requires landlords to check the names of prospective tenants against the Specially Designated Nationals and Blocked Persons watch list 5. Depending on the market, a residential landlord may request a reserva- tion fee to hold a unit while the background check is completed D. The next step in the application process is to investigate the applicant’s back- ground 1. The investigation focuses on information contained on the application: legal history (both criminal and civil), rental history, employment, and general financial creditworthiness 2. Screening services: for a fee, various companies will provide background information about a tenant applicant, including employment history, past addresses and landlords, credit history, and some legal history 3  Property Management Instructor Materials 3. A personal investigation by the manager follows if the initial screening reveals no problems; the manager will contact past landlords and employers, and check ref- erences a. When speaking to previous landlords, the manager should ask whether the applicant paid rent on time, violated the lease or building rules, had any bounced checks, and gave proper move-out notice b. For commercial applicants, the manager runs a credit check on the business owners as well as the business E. Once a manager has investigated the applicant thoroughly, she must decide whether to accept or reject the application 1. Written evaluation standards help the manager make unbiased decisions, and can also guard against subsequent discrimination claims 2. Typical standards for a residential applicant address income, evictions, criminal convictions, positive landlord references, and bankruptcy; the manager should set minimums that he can follow consistently 3. Standards for commercial applicants are more complex, but at a minimum in- clude acceptable credit and legal histories for both the owners and the business entity, and a financial analysis F. The manager should notify the applicant in writing, whether the application is ac- cepted or denied 1. The Fair Credit Reporting Act requires written notification if the denial is based on credit issues G. Management should save all completed applications and background check docu- mentation for both accepted and rejected applicants for 5-10 years 1. This protects against discrimination claims 2. The law requires safeguarding of personal information EXERCISE 7.2 Qualities of desirable tenants EXERCISE 7.3 Contents of a qualification package II. Lease Provisions A. The description of the premises is usually straightforward in residential leases; com- mercial property leases should contain a legal description of the property 1. A space diagram should be included in commercial leases if the leased area is just one part of the building 2. Square footage isn’t essential for residential leases but is critical in commercial leases, because many commercial spaces are advertised and rented based on a certain dollar figure per square foot a. In addition, commercial tenants usually pay a proportionate share of the building’s operating expenses based on the amount of square footage leased 4  Chapter 7: Leasing b. Usable area: the number of square feet the tenant can exclusively occupy; it excludes the building’s common areas c. Rentable area: the usable area plus the building’s common areas d. R/U ratio: the ratio of rentable area to the usable area; often used to deter- mine tenant’s share of operating expenses (paid as part of rent) e. Add-on factor: an alternative to the precise R/U ratio, the add-on factor is an amount charged to account for tenant’s share of operating expenses f. Gross area: the building’s entire floor area, measured to the outside of its exterior walls, and including enclosed floors, basements, and mechanical equipment floors; sometimes called the construction area B. Lease term: the amount of time the property will be leased 1. Residential leases generally run 6 months to 1 year 2. Commercial leases can run from 3 to 30 years, depending on the type of property and how much the tenant has invested in fixtures 3. A leasehold can be either a term tenancy or a periodic tenancy a. Term tenancy: a leasehold having a fixed term; a term tenancy may run for whole years, or just a few days or months; the tenancy automatically expires once the end of the term is reached b. Periodic tenancy: a tenancy that automatically renews for a certain period of time, such as a month-to-month tenancy; the tenancy terminates when one party gives the other party notice c. If “just cause” eviction law applies, landlord cannot end tenancy except to take unit off market or because tenant has breached lease C. A residential lease term usually begins as soon as the tenant is entitled to possession, and the date of possession should be stated in the lease agreement 1. Commercial leases also start from the date of possession a. For retail space, the start date may be a month or two after the tenant takes possession, which gives the business time to set up and begin generating in- come 2. If the premises are not ready on the date specified, the tenant is usually entitled to compensation a. A commercial tenant may have more significant damages, including lost income; many commercial leases contain a liquidated damages provision to address this problem 3. The start date of a lease may be uncertain if the commercial tenant has requested remodeling or a build-out a. Remodeling: renovations to already existing rental space b. Build-out: creating a desired space from an unfinished space c. When the premises are being remodeled or built out, the lease should contain an addendum with a work schedule, construction standards, and an antici- pated occupancy date 5  Property Management Instructor Materials D. Both residential and commercial leases are often classified by the method used to determine the amount of the tenant’s rent 1. Gross lease: a lease where the landlord absorbs operational costs, such as mainte- nance, taxes, and insurance, rather than directly charging the tenant her share of those amounts (although some tenants are billed separately for utilities) a. Most residential leases are gross leases 2. Net lease: a lease where the landlord passes through to the tenant a pro rata share of operational costs so that the rent itself is pure net income a. Most commercial leases are net leases b. Common area maintenance (CAM) charges: operating costs associated with common areas, such as utilities, cleaning, and repairs c. Triple net lease: when the landlord passes through maintenance, tax, and insurance costs to the tenant; also known as a fully net lease 3. Percentage lease: a lease where the retail landlord charges a fixed minimum rent or base rent plus some percentage of the tenant’s gross sales a. The lease should specify exactly how gross sales are defined and reported, and how percentages are applied 4. Escalation clause: a clause in the rent provision of a lease providing that rent will rise at certain intervals (often once a year) by a certain amount a. Operating expense escalation clause: the tenant pays a proportionate share of any increase in operating expenses over and above the amounts incurred in the first full year of the lease b. Expense stop escalation clause: a clause that sets a limit on how much the property owner is expected to pay toward operating expenses in a given year; for example, the “stop” might be $10 of operating expenses per rented square foot per year c. Reappraisal clause: a clause that states the property will be appraised at a set interval, and the parties will change the current rent to the market rent as determined by the appraisal 5. Rent is typically due on the first of the month, although that may vary for retail tenants who pay percentage rent E. Most tenants must give the manager a security deposit to cover any expenses associ- ated with a breach of the lease contract 1. State landlord-tenant laws place restrictions on the amount of deposit that may be required of residential tenants 2. Commercial landlords are not bound by those laws, and security deposits are negotiable 3. Managers holding security deposits are fiduciaries, and the duties of accounting and fairness apply in both residential and commercial settings 4. When a tenancy ends, the manager should refund the security deposit as promptly as possible; state law may impose a deadline 6  Chapter 7: Leasing F. In residential and commercial properties, the manager usually handles maintenance and cleaning of the common areas 1. Residential tenants handle routine cleaning inside their own units, while repairs are normally handled by management 2. Maintenance inside commercial units is subject to negotiation G. Every lease should contain a use clause: a provision that limits the tenant’s use of the property to one purpose, and also prohibits illegal or hazardous uses 1. Residential tenants are usually limited to residential use 2. All commercial leases prohibit illegal uses and the use of hazardous materials (or limit them for certain industries) a. Landlords want the narrowest use possible, while tenants want the ability to expand and adapt to changing markets 3. Noncompete clause: a provision prohibiting the landlord from leasing space to competing businesses; sometimes found in shopping center leases 4. Hazardous substances provisions may include landlord inspection rights, insur- ance requirements, and indemnification language to protect the landlord H. Covenant of quiet enjoyment: a promise (actual or implied) by the landlord that the tenant’s possession of the property will not be disturbed, either by the landlord or by a third party with a lawful claim to the property 1. The provision applies even if it’s not stated in the lease, and cannot be waived I. Commercial and residential leases differ in regard to alterations and initial improve- ments provisions 1. Residential tenants are usually prohibited from making alterations without con- sent from the landlord 2. Commercial tenants customize their space, so significant alterations are part of lease negotiations a. Tenant improvement allowance: a certain amount of money given to a tenant by the landlord that will be used to build out or remodel the premises at the start of a tenancy b. A work letter may be attached as an addendum to the lease, containing build- out or remodeling plans and specifications, and completion dates may be attached as an addendum to the lease J. Residential landlords impose a set of tenant rules in the form of a lease addendum covering tenant conduct 1. Rules for commercial tenants may be included in lease provisions or as a part of the tenant handbook, and typically address employee parking, freight elevator us- age, and signage K. Renter’s insurance: protects the tenant’s personal property within the rental unit in the event of damage or loss; also provides liability protection for any accidents or inju- ries to the tenant or the tenant’s guests 7  Property Management Instructor Materials 1. Commercial landlords always require tenants to maintain liability insurance 2. Certificate of insurance: a certificate issued by an insurer to a tenant to give proof of insurance coverage L. Most leases require the landlord’s prior written consent to any assignment or sublease 1. Assignment: when the original tenant transfers the right to possess the property to someone else for the remainder of the lease term a. The new tenant (assignee) becomes liable to the landlord for rent, and the original tenant becomes secondarily liable for the rent 2. Sublease: when the original tenant transfers part of the property to someone else for the remainder of the lease term, or part or all of the property to someone else for part of the lease term a. The new tenant (the sublessee) pays rent to the original tenant, rather than to the landlord; the original tenant is still liable to the landlord b. A sublease is sometimes called a sandwich lease 3. In many states the landlord’s consent cannot be unreasonably withheld M. Commercial leases sometimes give a tenant a right of first refusal: a provision that gives the tenant the first opportunity to rent adjacent space if the space becomes available N. Option to renew: a provision in a lease contract that gives the tenant the option to renew his lease at the end of the lease term for another similar rental period EXERCISE 7.4 Lease provisions III. Signing the lease A. Most states require a lease contract to be in writing; whether required or not, it’s al- ways good business practice B. For residential leases, the manager should have every adult who will live in the unit sign the lease so that all are liable in the event of a breach 1. To enter a lease, a person must have contractual capacity; generally, they must be mentally competent and over the age of 18 C. For commercial leases where the tenant is a corporation, a corporate officer with ex- press authorization from the board of directors must sign D. If the tenant is a partnership, any general partner can legally bind the entire entity to the lease terms, but it is best to obtain a resolution authorizing a particular partner to sign (or have all partners sign the lease) E. Personal guaranty: when a small business owner signs the lease personally, along with the business entity; this makes the owner personally liable (along with the en- tity) for a breach of the lease 8  Chapter 7: Leasing Exercises EXERCISE 7.1 Review exercise To review Chapter 6, “Marketing,” read the following fill-in-the-blank questions aloud to students and have them jot their answers down on a piece of paper; discuss answers together. Public relations Reach Generational marketing Branding Demographics 1. Marketing that segments its target by age but also by social, economic, and psy- chological factors is called _______________. 2. The _______________ is the image for a company or a property developed in the marketplace. 3. Studying _______________, such as average family size and education level, helps the manager understand the market or the available workforce. 4. Maintaining the brand image of a company or property requires a solid program of _______________. 5. Direct mail flyers were sent to 10,000 households. This number represents the advertisement’s _______________. Answers: 1. GENERATIONAL MARKETING. This marketing technique segments a market by age but also by social, economic, and psychological factors. 2. BRANDING. Creating an attractive image of a product or service is branding. 3. DEMOGRAPHICS. Demographics are any data that characterizes a population. 4. PUBLIC RELATIONS. Brands are nurtured and maintained in various ways includ- ing by a program of public relations. 5. REACH. The goal of most advertising is to reach the largest possible portion of the target market for the least amount of money. 9  Property Management Instructor Materials EXERCISE 7.2 Qualities of desirable tenants Below are some factors that are desirable in rental tenants. For each question, state which qualities the prospective tenant probably lacks or likely possesses. Keep the property in good condition Pay rent on time Harmonize well with other tenants Stay a reasonably long time 1. Gordy plays in a rock band. He makes his income from sporadic table-waiting jobs and music gigs; he wants to practice music inside his unit. 2. Sully has worked for 15 years in the same job. He lived at his last apartment for eight years until it was converted to condos, forcing him to move. 3. Brittany’s credit score is low. The property manager of the last place she lived says that Brittany left her unit in excellent condition, even leaving the oven spotlessly clean. The manager says his company prohibits him from discussing the reasons for a tenant’s departure, however. 4. A small single-story office building houses an accountant, a lawyer, and an insur- ance office. A tattoo artist wants to move into the vacant end unit. Answers: 1. Gordy’s sporadic income sources mean he may not pay rent on time. Noise from his practicing music may mean he won’t harmonize well with other tenants. 2. Sully’s past indicates potential to stay a long time. Also, his income is stable; pro- vided he earns enough, he’s likely to pay rent on time. 3. Brittany seems a good bet for keeping the property in good condition. However, given her low credit score and the lack of rental history, she may not pay rent on time. 4. It’s likely the tattoo artist won’t harmonize well with the white collar tenants already in the building. While the artist may get along with these tenants on a personal level, his tattooing business may make people seeking legal and accounting ser- vices leery of the quality they’re getting. 10  Chapter 7: Leasing EXERCISE 7.3 Contents of a qualification package Which of the following would a prospective accounting firm tenant include in its quali- fication package? Which would not be included? 1. Profit and loss statements 2. Breakdown of minorities employed as workers 3. One-year budget 4. Five-year budget 5. History of charitable contributions 6. Tax returns 7. Business plan 8. Consideration the tenant will show the manager in the form of tickets to sporting events and so forth 9. Resumes of key personnel 10. Entity formation documents, such as articles of incorporation or partnership agree- ment Answers: 1. INCLUDED. Established businesses must show a history of making sufficient money to pay rent. 2. NOT INCLUDED. A landlord asking for this information might be violating anti- discrimination law. 3. INCLUDED. Qualification packages include budgets to help the landlord under- stand whether the prospective tenant will have enough money to pay rent. 4. INCLUDED. Commercial landlords want to look at both short- and long-term budgets. 5. NOT INCLUDED. This information doesn’t really indicate what kind of tenant the business would make. 6. INCLUDED. Tax returns provide confirmation of the information found in profit and loss statements. 7. INCLUDED. This is especially important for new businesses, as they can’t provide profit and loss statements or business tax returns. 11  Property Management Instructor Materials 8. NOT INCLUDED. Generally speaking, accepting these kinds of gifts violates the manager’s fiduciary duties to the owner. 9. INCLUDED. Resumes help the landlord determine whether the prospective tenant’s business is handled by people who know what they’re doing. 10. INCLUDED. The landlord needs to understand how the entity is organized, if only to determine who has authority to sign the lease on behalf of the tenant. EXERCISE 7.4 Lease Provisions Match the name of the lease provision with the clauses given below. Escalation Percentage rent CAM charges Use Noncompete Right of first refusal Option to renew 1. Tenant will pay 3% of gross sales each month as additional rent. 2. Rent will increase 3% each year. 3. Landlord will not rent space in the shopping center to any other coffee shop. 4. Tenant will pay a proportionate share of landlord’s expenses associated with maintaining the lobby and building exterior. 5. After expiration of this lease, tenant may sign for an additional two three-year terms. 6. Tenant will not conduct any business on the premises unrelated to the buying, selling, and appraising of jewelry. 7. If the space adjoining the tenant’s current space becomes available, tenant may rent it for $8.60 per square foot. Answers: 1. PERCENTAGE RENT. Rent calculated as a percentage of sales is called percentage rent. Percentage rent is only used with retail tenants. 2. ESCALATION. In an escalation clause, rent is increased each year at specified intervals. 3. NONCOMPETE. A provision limiting a landlord’s right to lease to competing busi- ness is often called a noncompete clause. 12  Chapter 7: Leasing 4. CAM CHARGES. CAM stands for common area maintenance. Commercial ten- ants usually pay a pro rata share of the costs of maintaining the common areas. 5. OPTION TO RENEW. An option to renew gives the tenant the right (but not the obligation) to renew the lease for a certain period or periods (usually at an in- creased rent). 6. USE. In a use clause, the landlord limits what use the tenant may make of the property. In a residential lease, for example, commercial uses are prohibited. 7. RIGHT OF FIRST REFUSAL. A right of first refusal gives the tenant the option of renting a neighboring space, but only if it becomes available. 13  Property Management Instructor Materials Chapter 7 Quiz 1. An ideal tenant must do all of the following, 6. Shirley and Tara own and operate a small busi- except: ness together. Their business, Design Solutions, a) get along well with other tenants is organized as a limited liability company. b) keep the property in good condition They are seeking new commercial space. A c) refer other prospective tenants manager would perform a credit check and d) stay for a reasonably long time verify other financial information for: a) Design Solutions, LLC b) Shirley 2. A residential lease application form will include c) Tara all of the following, except: d) All of the above a) asset information b) references c) rental history 7. All other things being equal, a residential man- d) sources of financing ager who must choose only one tenant would most likely pick a tenant who has: a) had the same job for one year, had the 3. What do some residential managers require a same previous address for two years, and prospective tenant to submit to hold the space no misdemeanor convictions during the period when the manager performs b) had the same job for two years, had the a background check? same address for three years, and one mis- a) Credit report demeanor conviction b) References c) had the same job for three years, had the c) Reservation fee same address for two years, and no misde- d) Security deposit meanor convictions d) had the same job for three years, had the 4. To get a summary of a prospective tenant’s same address for three years, and no mis- legal history and creditworthiness, a manager demeanor convictions will often use a: a) government watch list 8. Which law requires a manager to notify a tenant b) private investigator in writing if the application was rejected based c) screening service on the prospective tenant’s credit score? d) universal criminal database a) Equal Credit Opportunity Act b) Fair Credit Reporting Act 5. The manager should investigate all of the c) Fair Housing Act following aspects of a tenant’s rental history, d) Real Estate Settlement Procedures Act except for whether the tenant: a) bounced any checks b) gave proper move-out notice c) has had any bankruptcies d) paid the rent on time 14  Chapter 7: Leasing 9. A manager is choosing between two prospec- 13. In a gross lease, the tenant is responsible for tive tenants for one vacancy. Fred has a solid paying: credit score and a salaried job. Ted has only a) fixed monthly rent freelance income and a much weaker credit b) fixed monthly rent, common area mainte- score, but has offered to pay a higher rent. nance Which tenant would be preferable? c) fixed monthly rent, insurance, taxes, and a) Fred, because a manager should not accept maintenance an unqualified tenant to gain a larger com- d) fixed monthly rent, percentage share of mission sales b) Ted, because choosing him will result in a larger commission for the manager 14. Which of the following is not a potential benefit c) Ted, because it is illegal to discriminate of a percentage lease? based on previous credit scores d) Ted, because the higher rent will maximize a) It allows the owner to pass variable charges the owner’s profit through to the tenant b) It fosters cooperation between owner and tenant, because the owner profits from the 10. A manager defines the square footage of a com- tenant’s success mercial tenant’s space in terms of the space that c) The landlord is encouraged to make the the tenant occupies exclusively, plus a share of entire property more attractive for custom- the building’s common areas, measured from ers, benefiting tenants’ businesses the inside of the building’s outer walls. This d) The tenant starts with relatively low rents would be known as: while getting her business off the ground a) gross area b) net area 15. An escalation clause is based on: c) rentable area d) usable area a) a fixed annual increase of a specified num- ber of dollars b) a proportionate share of increases in operat- 11. A tenant arranges for a lease of 30 years. This ing expenses above expenses incurred the is most likely to be a/an: first year a) industrial tenant c) changes in a designated index, like the b) office tenant Consumer Price Index c) residential tenant d) Any of the above d) retail tenant 16. A security deposit may be used by an owner to 12. Angie rents an apartment for a full one-year pay for any of the following, except: period. After that term is over, she continues a) a broken window living in the apartment, but on a month-to- b) default on rent month basis. When she is ready to move out, c) fire damage she gives her manager 30 days’ notice. Angie d) replacing old worn carpeting first had a _____, and then she had a _____. a) joint tenancy; periodic tenancy b) periodic tenancy; term tenancy c) term tenancy; periodic tenancy d) term tenancy; tenancy at will 15  Property Management Instructor Materials 17. B. Sharpe’s Music Store is opening in the Glenside Mall. The owner of the store doesn’t want to see other music stores open up in the mall. Which of the following clauses would he try to negotiate with the landlord as part of the lease? a) Use clause b) Covenant of quiet enjoyment c) Noncompete clause d) Right of first refusal 18. A tenant is renting an unfinished space; the owner will pay to have the space built out to the tenant’s specifications. There is a set limit to how much the owner will spend, though. This amount is known as the: a) construction clause b) right of first refusal c) tenant improvement allowance d) work letter 19. What type of arrangement is sometimes also known as a “sandwich lease?” a) Assignment b) Percentage lease c) Periodic tenancy d) Sublease 20. A lease contains a provision that requires the landlord to offer space in the building when it comes open to a current tenant, before making it available to a new tenant. This is known as a/an: a) merger clause b) option to lease c) option to renew d) right of first refusal 16  Chapter 7: Leasing Answer Key 1. c) While it would certainly be a plus if 7. d) Residential managers usually rank or a tenant were to refer other prospects, give points to prospective tenants ac- that’s not as crucial as having a tenant cording to a number of rental criteria. who maintains the property, pays rent Tenant D is equal to or exceeds the on time, harmonizes with the other other tenants on all of the given crite- tenants, and stays for a long term. ria. 2. d) Financing isn’t an issue with resi- 8. b) The Fair Credit Reporting Act requires dential leases. This will be a more written notice of a denial based on significant question in commercial credit issues. leases, to make sure the tenant busi- ness has a means of staying afloat. 9. a) It is not a sound management practice (and may be a violation of the man- 3. c) A reservation fee is an amount of ager’s fiduciary duties to the owner) money, often applicable to the first to choose an unqualified tenant, like- month’s rent, given to the manager by lier to cause problems down the line, a prospective tenant to hold the prop- because it will lead to a bigger com- erty during the application process. mission. 4. c) A screening service will collect and 10. c) Rentable area is the space that a tenant summarize legal information about a occupies exclusively, plus most or all potential tenant, for a fee. There is no of the building’s common areas. Un- universal criminal database, which is like the gross area method, it measures part of why it’s more convenient to from the inside of the building’s outer pay for a screening service. walls. 5. c) While bankruptcies can be important 11. a) Industrial tenants, because of the ex- to know about, they’re part of a ten- tensive modifications and specialized ant’s credit history, not rental history; equipment that they require, are likely prior landlords are unlikely to know to receive the longest leases. Office whether a tenant has had any bankrupt- and retail leases are usually longer cies or not. than residential leases, but are still likely to be less than 10 years. 6. d) For a commercial lease application, the manager will usually run a credit 12. c) Angie’s year-long lease was a term check on both the business owners and tenancy (with a term of one year); her the entity itself, at a higher level of de- subsequent interest, renewing each tail than with residential tenants. month, was a periodic tenancy. 17  Property Management Instructor Materials 13. a) A gross lease only involves payment of 20. d) A tenant with a right of first refusal a fixed monthly rental payment (and, if must be offered space before it can be the unit is individually metered, certain offered to a new tenant, on the same utilities). By contrast, a net lease pass- terms as would be offered to new ten- es other costs through from the owner ants. to the tenant. 14. a) Passing variable charges through to a tenant does not describe a percentage lease; it describes a net lease. 15. d) Escalation clauses can be structured in a variety of ways, including annual in- creases of either a fixed or percentage amount, increases based on changes in a consumer index, increases in operat- ing expenses, or periodic appraisals. 16. d) A security deposit may be retained by an owner to pay for expenses associ- ated with a breach of the lease, such as a default, or damage to the unit beyond normal wear and tear. 17. c) A noncompete clause would require a landlord to include use provisions in subsequent leases with other tenants that would prohibit competing uses. 18. c) An owner who is building out a unit for a tenant will usually contribute up to (but not more than) a fixed amount toward the project, known as a tenant improvement allowance. 19. d) A sublease may be referred to as a sandwich lease, because the sublessee pays rent to the original tenant, who in turn pays rent to the landlord. This places the original tenant in the mid- dle, between landlord and sublessee. 18  Chapter 7: Leasing PowerPoint Thumbnails Use the following thumbnails of our PowerPoint presentation to make your lecture notes. 19 Property Management Instructor Materials 20 Chapter 7: Leasing 21 Property Management Instructor Materials 22 Chapter 7: Leasing 23 Property Management Instructor Materials 24 Chapter 7: Leasing 25 Property Management Instructor Materials 26 Chapter 7: Leasing 27 Property Management Instructor Materials 28 Chapter 7: Leasing 29 Property Management Instructor Materials 30 Chapter 7: Leasing 31 Property Management Instructor Materials 32 Chapter 7: Leasing 33 Property Management Instructor Materials 34 Chapter 7: Leasing 35 Property Management Instructor Materials 36 Chapter 7: Leasing 37 Property Management Instructor Materials 38 Chapter 7: Leasing 39 Property Management Instructor Materials 40 Chapter 7: Leasing 41 Property Management Instructor Materials 42 Chapter 7: Leasing 43 Property Management Instructor Materials 44 Chapter 7: Leasing 45 Property Management Instructor Materials 46