The Real Estate School

LEASING AND PROPERTY

MANAGEMENT
UNIT 22

Page 445
 OVERVIEW
• Property Management – Involves the leasing, managing,
marketing, and overall maintenance of real estate owned by others,
usually rental property

Page 446
 LEASE AGREEMENTS
• Lease – Contract between an owner of real estate (Lessor) and a
tenant (Lessee)
LESSOR
OWNER

LESSEE
TENANT

Page 446
 LEASE AGREEMENTS
• Lease – Contract to transfer
the lessor’s rights to
exclusive possession and use
of the property to the tenant
for a specified period of time

Page 446
 LEASING REAL ESTATE
• Lease agreement combines two contracts:
1. Conveyance of a possession of the real estate
2. Pay rent and assume other obligations
• Landlord retains a Reversionary
Right to possession after the
lease term expires

Page 446
 LEASING REAL ESTATE
• Pennsylvania Statute of Frauds requires that leases for more than
three years be in writing to enforce performance on the contract
• The Real Estate Commission’s
Rules and Regulations require
licensees to use written contracts

Page 446
 LEASE AGREEMENTS
• Requirements of a valid lease:
• Capacity to Contract – Legal
capacity to contract
• Legal Objectives
• Offer and Acceptance – Reach
mutual agreement on all terms
• Consideration – Exchange of
promises
Figure 22.1 (page 448)

Page 447
 LEASE AGREEMENTS
• Drafting of leases:
• Residential Leases – Usually preprinted agreements
• Commercial Leases – Generally more complex with different
legal requirements and may include complicated calculations of
rent and maintenance costs

CAUTION - Legal counsel should be

sought when drafting legal documents

Page 455
 LEASE AGREEMENTS
• Possession of Premises
• The Lessor is bound by the
implied Covenant of Quiet
Enjoyment
• Lessee may occupy the leased
premises without interference
from landlord

Page 455
 LEASE AGREEMENTS
• Use of Premises – Lessor may restrict a Lessee’s use of the
premises through provisions included in the lease

Residential Restriction Office Restriction Retail Restriction

Page 106
 LEASE AGREEMENTS
• Term of Lease – Should
be stated precisely and
include a beginning and
ending date together with
a statement of the total
period of the lease

Page 455
LEASE AGREEMENTS
• Security Deposits – Used as security in case
tenant defaults on payment of rent or damages
the premises

Page 455
LEASE AGREEMENTS
• Security Deposits (cont’d)

• Maximum security deposit in first year of

lease = two month’s rent

• Maximum security deposit after the first

year = one month’s rent

Page 456
 LEASE AGREEMENTS
• Security Deposits (cont’d)

• During years 2-5, the landlord may increase the amount of

security deposit to keep pace with increasing rents
• After year 5, the landlord may not increase the amount of
security deposit

Page 456
 LEASE AGREEMENTS
• Security Deposits (cont’d)

• Residential security deposits >$100 must be deposited in an

approved banking or savings institution
• Must be deposited in an interest bearing account starting on the
2nd anniversary
• Must be returned to tenant, including interest, within 30 days
of the termination of tenancy

Page 456
 LEASE AGREEMENTS
• Improvements – Tenant may make improvements with Landlord’s
permission
• Any alteration becomes Landlord’s property

• In commercial leases, trade

fixtures may be installed by
Tenant and removed prior to
end of lease, provided space
is restored to prior condition

Page 457
 LEASE AGREEMENTS
• Accessibility – Tenant’s with disabilities must be permitted to
make reasonable modifications to a property at their expense
• Landlord may require
premises be restored to
its original condition at
end of lease

Page 457
 LEASE AGREEMENTS
• Maintenance of Premises – Residential Lessor is required to
maintain dwelling units in a habitable condition
• Commercial and industrial
leases usually maintain the Lessee
is responsible for making own
repairs

Page 457
 LEASE AGREEMENTS
• Recording a Lease – Anyone who inspects the property receives
actual notice so recording is considered unnecessary
• State laws vary as to the
acceptability of recorded leases and
under what circumstances

Page 457
 LEASE AGREEMENTS
• In Pennsylvania, a Memorandum of Lease may be filed to
provide notice of the interest but does not disclose the terms of
lease to the public
• Only the names of the
parties and a description
of the property are
included

Page 457
 LEASE AGREEMENTS
• Options – Clause in a lease that grants the Lessee a privilege of
renewing or extending the lease

• Lessee must give notice before a specific date of the intention to

exercise option
Page 457
 LEASE AGREEMENTS
• Purchase Option – Gives Lessee the right to purchase the leased
premises
• Right of First Refusal – Allows
Tenant the opportunity to buy
the property before owner
accepts another
offer

Page 457
 DISCHARGE OF LEASES
• Leases are discharged when any of the following occur:
• Parties have fully performed their obligations
• Operation of law
• Mutual agreement

• Leases are NOT discharged if:

• Either party dies
• Property is sold
(Certain exceptions apply)

Page 458
 DISCHARGE OF LEASES
• If leased real estate is SOLD, the new owner takes the property
subject to existing leases
• Exception: Sale Clause
Language in a lease that
permits the new owner
(landlord) to terminate existing
leases

Page 458
 DISCHARGE OF LEASES
• Federal and State laws allow military personnel to terminate
leases without penalty in certain situations

Page 458
 DISCHARGE OF LEASES
• Destruction of Premises – Residential tenants are permitted to
reduce their rent payments in proportion to the amount of space
they are unable to use
• Tenants who have
constructed buildings
on leased land are still
obligated for the
payment of rent

Page 459
 DISCHARGE OF LEASES
• Assignment and Subleasing – Only allowed when a lease
specifically permits them
• Assignment – Tenant transfers all leasehold
interests to another person or entity
• Subleasing – Tenant transfers less than all the leasehold interest
by leasing them to a new tenant

Page 459
 DISCHARGE OF LEASES
Figure 22.2

Assignment Sublease

Page 459
 DISCHARGE OF LEASES
• Breach of Lease
• Landlord Remedy – Suit for Possession (Actual Eviction)
Legal process whereby Landlord may regain possession when
Tenant breaches a lease or improperly retains possession

Page 460
 DISCHARGE OF LEASES
• Breach of Lease (cont’d)
• Landlord Remedy – Suit for Possession (Actual Eviction)
• If Tenant fails to leave, the
Landlord can have the
judgment enforced by a
court officer who forcibly
removes the Tenant

Page 460
 DISCHARGE OF LEASES
• Breach of Lease (cont’d)
• Landlord Remedy in Pennsylvania
• Landlord must give proper notice before filing suit
• Landlord files a complaint
• District Justice (DJ) issues summons for Tenant to appear and answer
complaint
• DJ enters judgment against the Tenant ordering the Tenant to deliver
property (may also include costs)
• If Tenant fails to leave, a constable is utilized
Page 460
 DISCHARGE OF LEASES
• Breach of Lease (cont’d)
• Tenant Remedy – Constructive Eviction – If the leased
premises become unusable, Tenant may have the right to
abandon them and sue for damages
• Tenant has to prove that there was conscious neglect by the
Landlord
• Tenant must leave the premises while the condition that made
the premises uninhabitable exist

Page 460
 DISCHARGE OF LEASES
• Breach of Lease Remedies (cont’d)
• Warranty of Habitability
The Lessor who leases residential
premises
warrants that the
premises are fit for
habitation

Page 460
 DISCHARGE OF LEASES
• Breach of Lease (cont’d)
• Pro-Tenant Legislation – The Uniform Residential Landlord
and Tenant Act addresses the need for both parties to fulfill
certain basic obligations
• Landlord’s right to enter property
• Use and maintenance of premises
• Tenant’s protection against retaliation for complaints
• Contact information for Tenant

Page 461
 DISCHARGE OF LEASES
• Fair Housing and Civil Rights Laws – Affect landlords and
tenants just as they do sellers and purchasers

Page 461
 DISCHARGE OF LEASES
• Pennsylvania Human Relations Act – All persons must have
access to the housing of their choice without regard to their race,
color, religion, national origin, sex, age (40 years old or older),
disability, use of guide or support animals due to a disability, or
familial status.

Page 461
 TYPES OF LEASES
• Gross Lease – The Tenant pays a fixed rental and the landlord
pays all operating expense (property charges or operating
expenses)
• Residential and commercial office
leases are most common

Page 462
 TYPES OF LEASES
• Net Lease – The Tenant pays all or most of the operating
expenses in addition to the rent
• Typical in large commercial and industrial leases

Page 462
 TYPES OF LEASES
• Percentage Lease – Rent is based on a minimum fixed rental
fee plus a percentage of the gross or net income received by the
tenant
• Typical in retail business leases

Page 462
 TYPES OF LEASES
• Percentage Lease Calculation – EXAMPLE
A retail lease requires minimum rent of $1,300 per month plus 5% of the
business’s sales over $160,000. On an annual sales volume of $250,000,
calculate the annual rent.

• Base Rent: $1,300/month x 12 months = $15,600

• Percentage Rent: $250,000 - $160,000 = $90,000

$90,000 x 0.05 = $4,500

• Total Rent: $15,600 + $4,500 = $20,100

Page 462
 TYPES OF LEASES
• Variable Leases – Allow for increases in the
fixed rental charge during the lease period
• Graduated Lease – Provides for specific
rent increases at set future dates
• Index Lease – Allows rent to be increased or
decreased periodically based on changes in
an index

Page 463
 TYPES OF LEASES
• Ground Leases – Landowner leases unimproved land to a tenant
who agrees to erect a building on it
• Used in commercial and
industrial property
development
• Separate ownership of land
and building
• Long-term (50-99 years)

Page 463
 TYPES OF LEASES
• Oil and Gas Leases – Landowner receives a cash payment for
executing the lease and a royalty for oil or gas extracted from the
ground

Page 463
 TYPES OF LEASES
• Lease Purchase – Used when a Tenant wants to purchase a
property but is unable to do so
• Part of the periodic rent is applied toward the purchase price until the
Tenant can obtain financing

Page 463
 TYPES OF LEASES
• Sale and Leaseback – Owners of property sell the property and
then lease it back for an agreed period and rental
• Used to obtain extra working capital

Page 463
 THE MANAGEMENT PLAN & AGREEMENT

• The Management Plan – Outlines the

details of the owner’s objectives with the
property and what the property manager
expects to accomplish and how, including
all financial objectives

Page 463
 THE MANAGEMENT PLAN & AGREEMENT

• Property Manager analyzes three factors

• Owner’s objectives
• Regional and
neighborhood market
• Specific property
• Critical indicators:
• Occupancy
• Absorption rates
• New starts

Page 463
 THE MANAGEMENT PLAN & AGREEMENT

• The Management Agreement – A contract that creates a general

agency relationship between the owner and the property manager
and defines responsibilities

Page 464
 THE MANAGEMENT PLAN & AGREEMENT

• The Management Agreement (cont’d)

• Management agreement should be in writing and include the
following points:
• Property description • Compensation
• Time period • Allocation of costs
• Manager’s responsibilities • Antitrust provisions
• Owner’s purpose • Equal opportunity statement
• Manager’s authority
• Reporting

Page 464-465
 THE MANAGEMENT PLAN & AGREEMENT

• Calculating Rental Commissions

• If an apartment unit rents for $1,200 per month and the commission payable is
8%, the commission will be calculated as follows:
$1,200/month x 12 months = $14,400/year
$14,400 x 0.08 = $1,152
• Rental commissions are usually payable when the first month’s rent is
received and the tenant moves in

Page 465
 THE MANAGEMENT PLAN & AGREEMENT

• Residential Property Management

Agreement
(Landlord Agency Contract)

Figure 22.4
(page 466-471)
Page 465
 PROPERTY MANAGER’S RESPONSIBILITIES

• The three principal responsibilities of the property manger:

1. Achieve the objectives
of the owner
2. Generate income
3. Preserve and/or increase
the value of the property

Page 472
 PROPERTY MANAGER’S RESPONSIBILITIES

• In Pennsylvania, a property manager who serves the public for a

fee must be one of the following:
• Licensed real estate broker
• Real estate licensee affiliated with a property management
company
• Brokerage firm that has a property management department
(NOTE: Property manager may also be an employee of the owner of real estate)

Page 472
 PROPERTY MANAGER’S RESPONSIBILITIES

• Financial Reports – While there is no standard formats, there is

similarity among reports and should be adapted to meet owner’s
needs

Page 472
 PROPERTY MANAGER’S RESPONSIBILITIES

• Financial Reports (cont’d)

• Operating Budget – Projection of income and expense for the
operation of a property over a one-year period

Page 473
 PROPERTY MANAGER’S RESPONSIBILITIES

• Financial Reports (cont’d)

• Cash Flow Report – Monthly statement
that details the financial status of the
property
• Most important report because it provides
a picture of the current financial status of
a property

Page 473
 PROPERTY MANAGER’S RESPONSIBILITIES

• Financial Reports (cont’d)

Gross Rental Income
• Cash Flow Report – Formula + Other Income
- Losses Incurred
for arriving at cash flow
Total Adjusted Income
- Operating Expenses
NOI Before Debt Service
- Debt Service
- Reserves
Cash Flow

Page 473
 PROPERTY MANAGER’S RESPONSIBILITIES

• Financial Reports (cont’d)

• Profit and Loss Statement – A financial picture of the revenues
and expenses used to determine whether the business made
money

(+) (- )

Page 473
 PROPERTY MANAGER’S RESPONSIBILITIES

• Financial Reports (cont’d)

• Budget Comparison Statement – Compares the actual results
with the original budget
• Usually given in
percentages or
numerical variances

Page 474
 PROPERTY MANAGER’S RESPONSIBILITIES

• Renting the Property – Effective rental of the property is essential

to ensure the long-term financial health of the property
• Licensees must use the
Consumer Notice for the
lease of residential or
commercial property

Page 474
 PROPERTY MANAGER’S RESPONSIBILITIES

• Renting the Property (cont’d)

• Setting Rental Rates – Influenced primarily by supply and
demand
• Property manager should
conduct a survey of
competitive spaces

Page 474
 PROPERTY MANAGER’S RESPONSIBILITIES

• Renting the Property (cont’d)

• Setting Rental Rates (cont’d)
• Residential Space – Stated as
a monthly rate
• Commercial Space – Stated as
an annual or monthly rate per
square foot

Page 474
 PROPERTY MANAGER’S RESPONSIBILITIES

• Marketing – Must take into consideration the property itself, the

supply and demand in the area, and the amount of money
available for advertising

Page 474
 PROPERTY MANAGER’S RESPONSIBILITIES

• Advertising – Property managers must attract the best tenants by

considering various methods of advertising
• Newspaper • Radio
• Brochures • Television
• Direct-mail • Billboards
• Web sites

Page 475
 PROPERTY MANAGER’S RESPONSIBILITIES

• Selecting Tenants – Proper selection is the 1st step in establishing

and maintaining sound, long-term relationships

Page 475
 PROPERTY MANAGER’S RESPONSIBILITIES

• Selecting Tenants (cont’d)

• Property managers should make sure premises are suitable for
tenant in terms of size, location, and amenities
• Commercial tenant’s business should be compatible with the
building and other tenants
• Property managers need to be aware of how fair housing laws
affect and impact their business

Page 475
 PROPERTY MANAGER’S RESPONSIBILITIES

• Selecting Tenants (cont’d)

• Collecting Rents – Terms of rental payments should be spelled
out in the lease agreement:
• Time and place of payments
• Provisions and penalties for late payments
• Provisions for cancellation and damages in case of
nonpayment

Page 475
 PROPERTY MANAGER’S RESPONSIBILITIES

• Selecting Tenants (cont’d)

• Collecting Rents (cont’d)
• Property manager should establish a firm and consistent
collection plan with a system of notices and records that
comply with state and local law
• Property manager must be prepared to initiate and follow
through with the necessary legal steps to evict tenants

Page 475-476
 PROPERTY MANAGER’S RESPONSIBILITIES

• Maintaining Good Tenant Relations

• Regular newsletters or posted memos help keep tenants
informed
• Maintenance and service requests should be attended to
promptly
• Treat all tenants the same in terms of rent collection and
enforcement

Page 476
 FEDERAL LAWS AFFECTING
PROPERTY MANAGEMENT
• Americans with Disabilities Act (ADA)
• Title I – Provides for the employment of qualified job
applicants regardless of their disability
• Any employer with 15 or more employees must adopt
nondiscriminatory employment procedures
• Employers must make reasonable accommodations to enable
individuals with disabilities to perform essential job functions

Page 476
 FEDERAL LAWS AFFECTING
PROPERTY MANAGEMENT
• Americans with Disabilities Act (ADA) (cont’d)
• Title III – Prohibits discrimination in commercial properties
and public accommodations
• Ensures that people with disabilities have full and equal
access to facilities and services

Page 476
 FEDERAL LAWS AFFECTING
PROPERTY MANAGEMENT
• Americans with Disabilities Act (ADA) (cont’d)
• Property manager is responsible for determining whether a
building meets ADA’s accessibility requirements
• Existing Buildings – ADA recommends reasonably achievable
accommodations
• New Buildings – Must meet higher standards

Page 477
 FEDERAL LAWS AFFECTING
PROPERTY MANAGEMENT
• Equal Credit Opportunity Act (ECOA) – Prohibits lender from
denying a loan based on a person’s race, color, religion, national
origin, sex, marital status, age, and receipt of public assistance

Page 499
 FEDERAL LAWS AFFECTING
PROPERTY MANAGEMENT
• Equal Credit Opportunity Act (ECOA) (cont’d)
• Should use the same lease application for every applicant
• If checking credit for one; check
credit for all
• Be consistent in evaluating income
and debt of applicants

Page 499
 FEDERAL LAWS AFFECTING
PROPERTY MANAGEMENT
• Fair Housing Act – Prohibit discrimination in the sale, rental, or
financing of housing
based on race, color, religion,
national origin, sex,
familial status,
or disability

Page 478
 PROPERTY MAINTENANCE & RISK
MANAGEMENT
• Property Maintenance – Keeping the property in good condition
involves four types of maintenance:

1. Preventive Maintenance – Preserves the long-range value and

physical integrity of the building
2. Corrective Maintenance – Actual repairs that keep the
building functioning
Page 479
 PROPERTY MAINTENANCE & RISK
MANAGEMENT
• Property Maintenance (cont’d)

3. Routine Maintenance – Day-to-day duties such as cleaning

and performing minor adjustments
4. Tenant Improvements – Construction alterations made to the
interior of the building to meet the tenant’s needs

Page 479
 PROPERTY MAINTENANCE & RISK
MANAGEMENT
• Risk Management
• Security of Tenants – Property managers
and owners should evaluate measures
to protect tenants from
unauthorized entry to
buildings and to
secure apartments
from intruders

Page 480
 PROPERTY MAINTENANCE & RISK
MANAGEMENT
• Risk Management Techniques – The perils of any risk must be
evaluated in terms of options
• Control it through preventative measures
• Avoid it by removing the risk
• Retain it by insuring it with large deductible
• Transfer it by taking out an insurance policy

Page 480
 PROPERTY MAINTENANCE & RISK
MANAGEMENT
• Types of Insurance – First line of defense in risk management for
property owners and managers
• Tenant’s Insurance – Property
manager should notify
tenants that they should
obtain renter’s insurance
to protect their personal
belongings

Page 480
 PROPERTY MAINTENANCE & RISK
MANAGEMENT
• Types of Insurance (cont’d)
• Commercial Insurance – An insurance audit should be
performed which will indicate areas in which greater or lesser
coverage is recommended

Page 481
 PROPERTY MAINTENANCE & RISK
MANAGEMENT
• Types of Insurance (cont’d)
• Commercial Insurance (cont’d)
• Multiperil Policies – Insurance package that includes standard
types of coverage for fire, hazard, public liability, and casualty
• Condominium associations carry insurance on common
elements and buildings

Page 481