Chapter 22
Leases and Property Types
REAL ESTATE
FIN 331
What is a Lease?
A. Legal contract between tenant (lessee) &
owner (lessor) for use & possession of RE
(land and/or improvements)
B.Leases: the “engines” that “drive” values &
returns
1. When you purchase a property you are really
acquiring a portfolio of leases
C.Understanding leases is prerequisite to
understanding commercial RE markets &
values
Essential Elements of the Lease
A. Long-term lease must contain elements of a
valid contract to be enforceable. The lease
must be written and contain the following:
1. The names of the landlord and tenant
2. The description of the leased premises
3. An agreement to transfer possession of the
property (conveyance)
4. The start and end dates of the agreement
5. A description of the rental payments
6. The agreement must be in writing
7. The agreement must be signed by all parties
Negotiated Lease Provisions
A. Allowed use of the premises
B. The lease term to include an allowance for
tenant improvements
C. Magnitude of the rental payments
D. Responsibility for operating expenses
1.
2.
3.
4.
None (Gross Lease)
Property Taxes (Net Lease)
Property Taxes and Insurance (Net-Net Lease)
All operating expenses (3x Net Lease
E. Any concessions to be made by the lessor
Negotiated Lease Provisions
F. Ability to assign or sublet the lease
1. Assignment: All of tenant’s rights & obligations are
transferred to another party
2. Sublease: Only a subset of tenant’s rights are
transferred to another party
3. Property owners may prohibit both
G. Renewability of the lease
H. Cancellation option
I. Advertising and signage
J. Parking
K. Subordination and non disturbance
Other Negotiated Lease Provisions
A. Rent concessions/abatements
1. Including tenant improvement allowances
B. Acceptance of premises
1. Tenants have specific time period (one week?)
to notify landlord (in writing) of any “defects”
C. Conditions for surrender of premises
1. “broom clean & in good order & condition”…
“reasonable wear & tear”
Other Negotiated Lease Provisions
C. Restrictions on alteration or improvements
1. Usually requires prior consent of landlord
a. Landlords want to maintain integrity of building’s
mechanical, electrical, and structural systems
2. Landlord may require tenant to restore to original
configuration & remove trade fixtures & equipment
D. Estoppel certificate
1. A prospective lender or purchaser of a commercial
property will usually require certificates from
tenants stating that the leases
a. are “in full force & effect” or, if not,
b. specifying defaults by landlord
RESIDENTIAL RENTAL
PROPERTIES AND LEASES
A. Common lease provisions
1. Lease term (1 year usual for residential
rentals, 3 to 20 years for industrial rentals)
2. Condition of premises
3. Responsibility for utilities
4. Rules and regulations
5. Rental Payments
a. Flat
b. Graduated
c. Indexed (to inflation or Cost of Living)
Office Properties and Leases
A.Class A properties: command higher rents
because of location, desirability
B.Class B properties: command lower rents
Class A properties
C.Defining rentable space
1. Usable area: Square footage of the bounded space
2. Rentable area: usable area plus a prorated share
of the common areas
D.Common lease provisions
1. Lease terms
2. Expense Stops
RETAIL PROPERTY
CHARACTERISTICS
A.Shopping Centers
1.
2.
3.
4.
Strip malls
Shopping centers
Regional malls
Outlet centers
B.Defining leasable area
1. Gross Leasable Area
2. Gross Floor Area
RETAIL PROPERTY
CHARACTERISTICS
C. Anchor Tenants: large department stores
usually found at the corners of regional
malls
D. Percentage Rent Clause: when rents are
related to the tenant’s gross sales
E. Use Clauses
F. Hours of Operation
G. Common Area Maintenance
INDUSTRIAL PROPERTIES
A. Types of Properties
1. Single user buildings
2. Warehouses and Self Storage facilities
3. Multitenant industrial parks
B. Tax-free zones
1. Industrial parks special tax breaks
HOMEWORK ASSIGNMENT
A.Key terms: Anchor tenant, Cancellation
option, Concessions, Percentage rent,
Rentable area, Sublease, Tenant
improvement allowance, Usable area
B.Study Questions: 4, 5, 6