Real Estate Final Exam

Commercial property held as an investment by the owner is leased to a tenant. a. What are
some important clauses found in commercial leases? Explain the ones you list. B. What
methods are used to calculate the rental amount on commercial leases? C. What is a ground
lease and why is it used?

Commercial Lease Clauses

1. Release Upon Assignment- Determines if the tenant and guarantor are both released
from lease obligations if the business is sold. It also states if the lease can be reassigned
to the new business owner.
2. Exclusive Use- Can tenant gain the right to be the only business in a shopping center or
mall of that specific industry. This is the determining clause.
3. Term- This explains when the term will commence/begin.

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4. Permits- This determines the tenants right to remove himself/herself from the lease

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agreement if unable to acquire necessary permits.

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5. Remedies- This determines the landlords right to access his leased property at any given
time and defines what personal property he/she can remove from the leased ground.

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6. Signs- The defines what will happen to the lease agreement if the tenant is unable to get
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approval for signs necessary to advertise their business.
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7. Severability-Typically states that if one aspect of the lease agreement is deemed illegal
then the remainder of the contract is still legally binded.
8. Subleasing- Defines lessee’s right to sublease the property. (do’s and Don’t’s)
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Commercial Lease Rental Calculation Methods

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1. Rates- Typically, an amount of dollars multiplied times the square feet amount. Ex $10 x
2,000 square feet
2. Base Rent and Operating Expenses- This allows landlords to pass through variable
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expenses throughout the term to the tenants. Ex. A common rate + whatever amount
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decided to cover variable expenses. (Tax, CAM, Insurance)

3. Gross Lease- Base rent + all initial year operating expenses.
4. Net Lease- Base rent + one or more of operating expenses included. Ex. $10 per sq ft +
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$100 (electricity)
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Ground Lease and why it’s used

A ground lease is an agreement which a tenant is permitted to develop a piece of property during
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the lease period, after which the land and all improvements are turned over to the property
owner. It is used because it allows the landlord to assume all improvements upon expiration of
the lease agreement, and then the landlord may sell the property at a higher rate.

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 2. What environmental issues should a land owner be aware of? What environmental issues
should a potential purchaser of a tract of land be aware of?

Environmental issues that land owners should pay attention to

Landowners should take caution when using and storing chemicals that are at risk of
contaminating the underlying soil. Leaking underground storage tanks and pipes as well as
pesticide, gasoline, and manure products are common contaminants. Prevention is the best way
to tackle these issues. Methods such as proper storage, handling, disposal, and mixing should
take place. Tanks older than 15 years should be removed. These issues must be taken care of
before selling the property and could become the main reason you can’t sell the property.

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Environmental issues that potential purchasers should pay attention to

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Buyers should always ask the property owner or real estate agent about any potential
contaminates located on the property or if used on the property prior to purchase. Buyer should

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ask about age, presence, and condition of tanks. They should also pay attention to asbestos by
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double checking to assure the property doesn’t have exposure. Basically, all issues that land
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owners should be aware of the buyer should most definitely be aware of.
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3.a. What are Zoning Ordinances? 3.b. What is a nonconforming use? 3.c. What is a Variance?
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A. Zoning Ordinances- Zoning ordinances are plots set aside for specific construction. (i.e)
Residential or commercial properties. They also can regulate lot sizes, placement, bulk, and the
height of specific structures.
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B. Non-conforming use- Is a use of property that was permitted under the time of the zoning
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ordinance but with subsequent use is no longer permitted. It can continue to stay but if is ever
converted then it cannot be converted back. Ex. The residential home located at the corner of
Hwy 61 & 8. (It may still be there or may have been converted, I haven’t checked in a while.)
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C.- Variance- Request for exception to zoning ordinances. (ex. Building townhomes in an area
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zoned for 1-2 family homes.) (Huerta’s multicolored home off of Court Street in Cleveland.)
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4. What is escrow? Why do lenders make use of escrow?

Escrow- Consists of two parties, lender and borrower, in which one withholds x amount of funds
until execution of the agreement.

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 Why do they use Escrow? – If the borrower fails to execute his/her part of the agreement, upon
expiration of the contract’s term, then the lender is protected by the funds held in escrow.

5. How does a property owner (residential or commercial) insurance against flood damage?

Residential and Commercial property owners should take all precautionary methods possible
to prevent flooding. However, if done so, upon qualification you may enroll in a flood
insurance program. This program is government backed and can be semi-difficult to
obtain. You must meet all qualifications and pay the premium. It is similar to a regular
insurance policy but does differ slightly. Ex. Cabins behind the levee in 2011 who had flood
insurance were able to rebuild at the expense of the government, those who didn’t have it
either let their cabin rot or rebuilt at their own expense. The government made everyone

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enrolled in the program raise their cabins above the new flood zone stage.

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