How may the use of leases shift the risk of rising operating expenses from the lessor to the lessee?
Leases determine risk allocation between lessor and lessee. Inflationary adjustments, like CPI adjustments, shift risk to the lessee. The lessor can also include net lease or expense stop provisions to transfer additional risk.
The lessor typically accepts a lower base rent as the risk burden shifts to the lessee.
What is the difference between base or face rents and effective rents?
Base/face rents reflect rent paid per rentable square foot. Effective rents include additional costs like tenant improvements and expense pass-throughs.
Effective rents provide a more comprehensive view of total rental costs.
Define Tenant Improvements.
Money the landlord pays to prepare a tenant’s space, covering all or part of the build-out.
Costs are included below the NOI line in the proforma.
Define Free Rent.
A negotiated period where the tenant occupies space without paying rent, shown as a negative revenue line in cash flow statements.
Typically appears below Gross Potential Income and above Effective Gross Income.
Define Moving Allowance.
Money paid by the landlord to cover a new tenant’s moving expenses, usually within the first 30 days of occupancy.
Accounted for as negative revenue similar to Free Rent.
What is a Letter of Credit in the context of a lease?
A guarantee from a bank that rents in arrears will be paid to the property owner over a specified period.
Required by landlords under certain circumstances for new tenants.
What is an Allowable Use provision in a lease?
Defines what a tenant can and cannot do in the leased space, such as restrictions on operating hours or types of business.
Example: A restaurant tenant may not operate as a nightclub without serving food.
What is a non-operating expense pass through?
Expenses that the owner has little control over, typically set by third parties, like insurance or property taxes.
These expenses are due regardless of the building’s operational status.
Define Tenant’s Right of First Refusal.
Gives tenants the right to rent contiguous space before it is offered to the general public.
Ensures tenants have priority for additional space.
Why might it be important to have a Lease Termination clause?
Provides flexibility for landlords and tenants if a business slows down or does not meet growth expectations.
Protects landlords before tenants declare bankruptcy.
What is an estoppel?
A legal document used to ascertain factual information about tenants and landlords in real estate transactions.
Includes details about rent owed and promised improvements.
Load Factor
Load Factor =
Rentable area per floor ÷ Usable area per floor
x 1 +
Other common area in building ÷ Total rentable area in building
Gross Building Area
Total Building Area
Net Rentable Area
Includes common area
NRA = gross building area - “vertical penetrations”
Usable Area
rentable area - common areas
