Humber Real Estate - Course 4, Module 12: Preparing to Lease Office, Retail and Industrial Properties|109 questions and answers

What is a Percentage Lease? - The tenant is typically required to pay a fixed minimum monthly rent (i.e. to cover taxes, maintenance and insurance as the bare minimum), plus a percentage of gross monthly income in excess of base sales calculated using the minimum rent - Mainly found in the retail property market - This arrangement creates a type of partnership between the landlord and tenant How can Percentage Lease rates be negotiated between a buyer and seller? It can be dependant on the type of business and certain factors (e.g. volume of business generated per square foot and markup levels of goods sold or services offered). Percentage Leases are generally used to establish a minimum rent as a percentage of income that will _______________________, as sales grow. Revert back to a fixed rent For grocery-type stores that pay a low base rent in a triple net lease, percentage leases provided what opportunity? For the landlord to boost the rent when sales are good, while allowing the tenant to pay only the minimum rent when sales are poor. Most percentage leases include articles or sections to cover what details? - Reporting of monthly sales figures to help the landlord receive monthly interim cheques for any percentage rent due without having to wait until the end of the year - A continuous reporting of sales levels of tenants that enable the landlord to calculate percentage rents, and to monitor tenant success levels and risk of failures What is a Retail Ground Lease? The rental of the land only, and is also known as a land lease or a pad lease. Despite the name, ground leases are also found in office, industrial and recreational sectors, and are common for stand-alone retail or restaurant sites. A Retail Ground Lease is often of a _________________________ involving a tenant who covenants to build a structure on the leased land. The building serves as _____________________________, and upon default by the tenant, the landlord may terminate the lease. Long duration, security for rental payments Why are retail ground leases attractive to both tenants and landlords? - Owners of land in highly desirable areas get an improved site at the end of the lease (typically 10-20 years) for which someone else provided money - Allow tenants to construct a building while avoiding additional capital outlays for the property - Allow tenants to leverage existing financial resources and potentially use land at a lower cost than purchasing the property When can retail ground leases present problems? - If expansion of the building is required - If the tenant needs additional financing and the landlord opposes these changes, given their equitable position as owner of the land and landlord under the lease Base rent is also known as what? Minimum rent What are the 4 different types of rent in commercial leasing? - Base rent - Additional rent - Percentage rent - Fixed rent What is Base Rent? The minimum rent payable by a tenant under a net lease. It is the landlord's determination of the apportioned physical building and the land costs over the lease term. Base rent does NOT include what? The variable expenses of real property. What is Additional Rent? The tenant's proportionate share of the operating costs of the complex, in addition to the base rent, as established in the lease document. When is Additional Rent generally estimated? At the beginning of any fiscal or calendar year for the building. How is Additional Rent paid? As equal monthly instalments, in advance, throughout the period for which the estimate is made and reconciled shortly after the fiscal or calendar year, as defined in the lease. The sum of base rent and ______________ rent makes up the rent for a commercial lease. Additional It's important to advise the tenant to concentrate on _____________________________, rather than the exhaustive list of inclusions often found in net leases. Exclusions to additional rent Items typically included in additional rent can vary depending on the type of lease. In a typical office lease, what does additional rent often cover that is not covered in an industrial property's lease? Utilities Additional rent is usually composed of recoverable items, meaning what? Expenses related to maintaining a property that can be billed to tenants as opposed to expenses incurred by the owner that cannot be recovered from the tenants. What items make up Additional Rent? - Operating costs - Property taxes - Utilities - Landlord's insurance - Snow removal - Grass cutting - Landscaping - Paving and repaving - Line painting - Garbage removal Typically used in retail shopping centres, ____________________ is computed as a percentage of a retail tenant's sales effected from a lease premises. Percentage rent Landlords usually prefer to have a percentage rent calculation that requires the rent to be the ___________________________________ and the percentage rent. This allows the tenant to have the benefit of lower base rent and allows the landlord to share in the success of the tenant. Greater of the minimum or base rent The rates of percentage rent tend to vary depending on what factors? - Markup levels of goods sold or services offered - Typical turnover of goods or sales volume - Profitability of the operation Generally, the ________________________ of business generated per square foot, the lower the percentage charged. Greater the volume Higher markups on products are usually associated with ________________________. Higher percentages Higher amounts of business brought by the tenant to the shopping centre (vs. generated BY the shopping centre) will _____________________________. Decrease percentages Historically, percentage rent varies significantly with the type of business, for example: Hardware store - low % Video arcade - high % What is Fixed Rent? The type of rent found in gross leases. This rent arrangement allows the tenant to pay an agreed fixed amount of rent while the landlord is responsible for all operating costs associated with the property. Fixed rent often presents the possibility of unexpected increases in costs and potential misuse of resources (e.g. water and hydro) by a tenant. Thus, what measures can be put in place to mitigate any negative financial impact on the landlord? - Rent is typically set for 1-2 years, and an escalation clause can be added to allow for changes in operating costs (taxes, utilities, maintenance and repairs, etc.), - A cap can be established on operating costs in the lease to protect the tenant from an excessive increase in such costs - The landlord often requires the tenant to pay utilities in a Gross Lease - If multiple tenants are leasing a commercial property, check meters can be installed to control electricity costs What is a Single Net Lease? When the tenant will be paying for some of the landlord's costs but the types of costs would be much more limited than in a double or triple net lease. For example, the tenant may be paying a portion of the property taxes. What is a Double Net Lease? A double net lease is a lease agreement in which the tenant is responsible for both property taxes and premiums for insuring the building. Unlike a single net lease, which only requires the tenant to pay property taxes, a double net lease passes more expenses along in the form of insurance payments. What is a Triple Net Lease? A lease in which the tenant pays for their portion of the landlord's operating costs which would include the maintenance costs, building repairs, building insurance and property taxes. What is the benefit of a Gross Lease for a tenant? With this lease, the tenant has peace of mind in knowing rent costs up front. The landlord is responsible for paying costs such as heat and hydro and will keep this in mind when negotiating the rent. What are the concerns of a Gross Lease for a landlord? Sudden increases in costs or misuse of resources can be a concern for landlords. What is a Gross Lease? An agreement in which the tenant pays a fixed rent and the owner pays all operating expenses associated with the property. Why are Gross Leases very common? Many tenants desire security in terms of rent costs. Also, many landlords need this type of lease because of the cost of separating utilities and installing individual heating and cooling of the premises. If it's impossible or difficult to set up separate billing for hydro and heat per tenant because of physical constraints of the building, what type of lease is easiest? A Gross Lease Why do landlords prefer net leases? Sudden increases in costs must be absorbed by the owner under a gross lease. What measures can be put in place in a Gross Lease to mitigate any negative financial impact on the landlord? Escalation clauses can be built into the lease to allow for changes in operating costs. In a commercial lease agreement, the specific location of the premises should appear. In the case of a single purpose property with a dedicated parking lot, the description of the leased premises will include what? - The building itself (municipal address & legal description) - The land under the building - The parking lot Note: In the case of more than one building on a common parking lot, the leased premises will usually be identified as the full municipal address and unit number, with rights to a from the complex in common with others. There will be a schedule to the lease that identifies the leased premises relative to the complex and a separate schedule identifying the legal description of the complex. True or false? The permitted use of the premises must be clearly and simply defined on a commercial lease agreement. True. In the case of a shopping mall, every tenant operates within a narrowly defined store type. What minimum elements of a lease must be included in a commercial lease agreement? - Names of all parties - Description of the leased premises - Permitted use of the premises - Commencement and expiration dates - Rights and obligations of the parties (i.e. any restrictions, special privileges, additional costs and exclusive covenants as governed by the particular circumstances; i.e. specific needs and wants of the parties) - Term of the lease, including renewal options - Rent calculation methods - Non-payment of rent What is the purpose of a "rent-free period" also known as a "tenant fit-up period"? When a tenant is given time to renovate the leased premises, to stock shelves and otherwise prepare the premises to begin operations. True or false? During the rent-free period, the tenant may be required to pay utilities and operating costs (TMI), but not the minimum rent. True. Note: The rent-free period can vary depending on the fit-up required, the size of the leased premises and the term of the lease. In a commercial lease agreement, the 'Non-Payment of Rent' clause should establish the landlord's rights to do what? - Charge interest on unpaid rent - Specify a time limit within which the tenant must pay the rent - Terminate the lease after due notice of a default - Enter the leased premises to perform the work the tenant has failed to do, with all expenses payable by the tenant - Make payments due by the tenant to a third party Define 'Common Area Maintenance'. The landlord's costs attributable to the common areas of the complex (land and buildings) related to the repair, maintenance, operation, supervision and administration of such areas, property taxes and property insurance. How are 'Common Area Maintenance' charges usually billed? As part of additional rent and pro-rated among the building tenants. What is 'Privity of Contract'? The legal proposition that a contract, including rights and obligations, is only enforceable on the parties to that contract. True or false? A commercial tenant is typically permitted to assign, sublet or transfer their interest in the lease without the written consent of the landlord. False. Written consent is required from the landlord and the lease will often define if and on what terms assignment is permitted. If a tenant sublets the leased premises, is privity of contract established between the incoming subtenant and the landlord? No. It remains with the original tenant and landlord only. If a landlord (or tenant) fails to carry out their obligations stated in a lease, what 2 options do they have? - Small Claims Court - Superior Court of Justice Note: The limit for small claims court is $35,000 and small claims is used for compensation for losses. The Superior Court of Justice is used when a court order is required or if compensation above $35,000 is being sought.