Landlord - Legal Exposure
The landlord and owner have other factors that can enter into a lease arrangement with a tenant.
Liability Exposure - The landlord has legal liability for bodily injury or property damage to any person lawfully on the premises.
Bodily Injury - This would be damages to a person's body caused by the premises of the landlord.
Lease - Option to Buy
Besides providing living quarters under a lease arrangement, the owner and landlord can provide other factors under a lease agreement. This can include the sale of the property to the tenant.
Option to Purchase - The owner/landlord can include in the lease agreement that the tenant has the right to purchase the property within an agreed upon time period.
State Exam Factor - The exam will often times zeros in on the fact where this is the only contract where a person goes from a freehold to a non-freehold estate under one legal document. The owner goes from landlord to tenant under the sales agreement.
Advantages to the Buyer - The buyer has the advantages of ownership and has an immediate tenant under the agreement. Besides this obvious advantage, the buyer will also enjoy the following:
Tax Sheltered Income - In that the building is a commercial venture, the buyer will be able to deduct from income the depreciation of the building and normal expenses that can be deducted from current income. The income is therefore a tax shelter.
Appreciation - Usually owned property will experience appreciation of value. The buyer would enjoy this from owning real property.
Sale and Leaseback - Owner Becomes A Tenant
Sale Lease Back - With commercial real estate, the seller might want to obtain the value of the property, but retain the possession of the property. The owner would sell the property to a buyer and agree to lease the property from the buyer. When an owner agrees to sell and lease the property back, there are other considerations:
Tax Deductible - When making payments on an owned building, the payments are not deductible. When making lease payments on a building, the cost is a tax deductible expense.
Depreciation Expenses Taken Over Time – When a business takes a yearly depreciation expense on a building, this lowers the Cost Basis for the building tax wise.
Above Example: If the depreciated building of $200,000 was sold 20 years later for $2,000,000, the profit would be $1,800,000. With a tax rate of 25%, the capital gains tax would be $450,000.
Types of Commercial Leases
Leasehold Estate - An estate right is the right of possession. When a tenant signs a lease they are entitled to possession (a leasehold estate) of the property specified on the lease agreement.
Consideration - A lease is a contract. Under contract law each party has to give consideration/value to the other. The tenant pays rent. The landlord gives possession of the specified (address) location on the lease.
There are quite a number of different types of leases. Most people are only familiar with the leasing of space, but there are leases for the air, ground, etc. What we are going to do now is look at the all the different types of real estate leases.
Named for Use - Most leases are named for the type of use that the tenant will enjoy during the lease period. The interesting aspect of these types of leases is that the lease is named for type of use the tenant will enjoy.
Residential Lease - This is a lease that allows the tenant to live within the specified premise for residential purposes.
Commercial Lease - This is a lease that allows the tenant to pursue retail, wholesale, and/or industrial pursuits within the specified premise on the lease agreement. The lease would specify the specific form of commercial venture that the tenant would be able to pursue.
Roof Top Lease - This is a lease that allows exactly what the name implies, the leasing of a roof top only. This is mainly used for the placing of signs on the roof by another business.
Some leases are named for the method that the rent will be paid by the tenant. This is mainly the case with commercial leases.
Gross Lease - The landlord is responsible for paying all of the expenses of the building. The tenant pays a rent only, with no additional costs such as electricity, garbage, taxes, etc. The owner/landlord simply receives a gross income. Gross means rental payment BEFORE expenses of the property are paid. There are several types of gross leases.
Straight, Flat, or Fixed Lease - This is the most common form of gross lease. They are usually for a short term of time such as 1 or 2 years. The lease amount paid by the tenant does not change in amount during the lease period. This is dangerous to the owner/ landlord in that if costs and expenses increase, the rent cannot be increased.
Graduated, Graded, or Step-Up Lease - This type of lease is utilized in commercial space when the tenant desires a long term lease. This type of lease will allow the lease payments to change in the future based on a specified event. This is what is used for long term gross leases.
Escalator or Index Clause - This allows the lease to be increased based on the rate of growth in the economy.
Escalator Clause - These types of gross leases allows the owner/landlord to adjust the lease payment amount through the escalator clause. This clause is used when a tenant wants a long term gross lease.
Gross Lease / Net LeaseGross leases can be set up with several variations. Some of these variables are as follows:
1. Percentage Lease - This type of gross lease (before expenses) is mainly used for short term needs of the tenant. It usually associated with the needs of small retail businesses that you see in shopping malls and little business complexes.
2. Percentage of Sales - The percentage lease is based on a straight percentage of gross sales that is experienced by the commercial tenant.
Net Leases - Under a net lease the tenant pays some or all of the building expenses and the owner/landlord receives net income (after expenses). In some instances, the tenant pays all the expenses of the building and the owner/landlord receives income after all the expenses are paid by the tenant; net basis.
1. Net Lease - There are several different types of net leases, but all of them are usually long term in duration. Any expenses of the building that increase will be paid by the tenant. A Net Lease requires the tenant to pay for operational expenses
2. Smaller Rent - Since the tenant pays taxes, insurance, and sometimes operating expenses, the tenant pays a smaller rental payment to the landlord. This is a net payment to the owner/landlord.
3. Net-Net Lease - Under this lease the tenant would pay insurance and operating expenses. In addition the tenant would also pay the landlord a small rental payment.
4. Net-Net-Net Lease (Triple Net or Triple Lease)- Under this lease the tenant would pay property tax, insurance, and operating expenses. In addition the tenant would pay the landlord an even smaller rental payment.
When a broker signs a contract to manage an owner's property, he/she becomes a:
Which of the following is not a necessary part of a lease?
A) name parties to the lease
B) terms of the lease
C) an option to purchase
D) terms of the rental payment
Which of the following is not considered in establishing rental fees for a tenant in a large office complex?
A) the ratio of rented space to the total area
B) the actual square footage in the rented space
C) the special services that are being furnished
D) the actual cubic footage in the rented space
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