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Chapter 22 Leases and Property Types

Chapter 22 Leases and Property Types. REAL ESTATE FIN 331. What is a Lease ?. Legal contract between tenant (lessee) & owner (lessor) for use & possession of RE (land and/or improvements) Leases: the “engines” that “drive” values & returns

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Chapter 22 Leases and Property Types

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  1. Chapter 22Leases and Property Types REAL ESTATE FIN 331

  2. What is a Lease? • Legal contract between tenant (lessee) & owner (lessor) for use & possession of RE (land and/or improvements) • Leases: the “engines” that “drive” values & returns • When you purchase a property you are really acquiring a portfolio of leases • Understanding leases is prerequisite to understanding commercial RE markets &values

  3. Essential Elements of the Lease • Long-term lease must contain elements of a valid contract to be enforceable. The lease must be written and contain the following: • The names of the landlord and tenant • The description of the leased premises • An agreement to transfer possession of the property (conveyance) • The start and end dates of the agreement • A description of the rental payments • The agreement must be in writing • The agreement must be signed by all parties

  4. Negotiated Lease Provisions • Allowed use of the premises • The lease term to include an allowance for tenant improvements • Magnitude of the rental payments • Responsibility for operating expenses • None (Gross Lease) • Property Taxes (Net Lease) • Property Taxes and Insurance (Net-Net Lease) • All operating expenses (3x Net Lease • Any concessions to be made by the lessor

  5. Negotiated Lease Provisions • Ability to assign or sublet the lease • Assignment: All of tenant’s rights & obligations are transferred to another party • Sublease: Only a subset of tenant’s rights are transferred to another party • Property owners may prohibit both • Renewability of the lease • Cancellation option • Advertising and signage • Parking • Subordination and non disturbance

  6. Other Negotiated Lease Provisions • Rent concessions/abatements • Including tenant improvement allowances • Acceptance of premises • Tenants have specific time period (one week?) to notify landlord (in writing) of any “defects” • Conditions for surrender of premises • “broom clean & in good order & condition”… “reasonable wear & tear”

  7. Other Negotiated Lease Provisions C. Restrictions on alteration or improvements • Usually requires prior consent of landlord • Landlords want to maintain integrity of building’s mechanical, electrical, and structural systems • Landlord may require tenant to restore to original configuration & remove trade fixtures &equipment D. Estoppel certificate • A prospective lender or purchaser of a commercial property will usually require certificates from tenants stating that the leases • are “in full force & effect” or, if not, • specifying defaults by landlord

  8. residential rental properties and leases • Common lease provisions • Lease term (1 year usual for residential rentals, 3 to 20 years for industrial rentals) • Condition of premises • Responsibility for utilities • Rules and regulations • Rental Payments • Flat • Graduated • Indexed (to inflation or Cost of Living)

  9. Office Properties and Leases • Class A properties: command higher rents because of location, desirability • Class B properties: command lower rents Class A properties • Defining rentable space • Usable area: Square footage of the bounded space • Rentable area: usable area plus a prorated share of the common areas • Common lease provisions • Lease terms • Expense Stops

  10. retail property characteristics • Shopping Centers • Strip malls • Shopping centers • Regional malls • Outlet centers • Defining leasable area • Gross Leasable Area • Gross Floor Area

  11. retail property characteristics • Anchor Tenants: large department stores usually found at the corners of regional malls • Percentage Rent Clause: when rents are related to the tenant’s gross sales • Use Clauses • Hours of Operation • Common Area Maintenance

  12. industriAL PROPERTIES • Types of Properties • Single user buildings • Warehouses and Self Storage facilities • Multitenant industrial parks • Tax-free zones • Industrial parks special tax breaks

  13. homework assignment • Key terms: Anchor tenant, Cancellation option, Concessions, Percentage rent, Rentable area, Sublease, Tenant improvement allowance, Usable area • Study Questions: 4, 5, 6

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