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The Real Estate School
U N I T 2 2
LEASING AND PROPERTY
MANAGEMENT
1
Page 445
OVERVIEW
• Property Management – Involves the leasing, managing,
marketing, and overall maintenance of real estate owned by
others, usually rental property
2
Page 446
LEASE AGREEMENTS
• Lease – Contract between an owner of real estate (Lessor) and a
tenant (Lessee)
LESSOR
OWNER
LESSEE
TENANT
3
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
4
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
5
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
6
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
7
Page 447
Figure 22.1 (page 448)
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
8
Page 455
CAUTION - Legal counsel should
be sought when drafting legal
documents
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
9
Page 455
LEASE AGREEMENTS
• Use of Premises – Lessor may restrict a Lessee’s use of the
premises through provisions included in the lease
10
Page 455
Residential Restriction Office Restriction Retail Restriction
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
11
Page 455
LEASE AGREEMENTS
• Security Deposits – Used as security in case
tenant defaults on payment of rent or
damages the premises
12
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
13
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
14
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
15
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
16
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
17
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
18
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
19
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
20
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
21
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
22
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)
23
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
24
Page 458
DISCHARGE OF LEASES
• Federal and State laws allow military personnel to terminate leases
without penalty in certain situations
25
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
26
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
27
Page 459
DISCHARGE OF LEASES
28
Page 459
Assignment Sublease
Figure 22.2
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
29
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
30
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
31
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
32
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
33
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
34
Page 461
DISCHARGE OF LEASES
• Fair Housing and Civil Rights Laws – Affect landlords and tenants
just as they do sellers and purchasers
35
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.
36
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
37
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
38
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
39
Page 462
TYPES OF LEASES
• Percentage Lease Calculation – EXAMPLE
40
Page 462
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
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
41
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)
42
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
43
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
44
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
45
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
46
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
47
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
48
Page 464
THE MANAGEMENT PLAN & AGREEMENT
• The Management Agreement (cont’d)
• Management agreement should be in writing and include the
following points:
• Property description
• Time period
• Manager’s responsibilities
• Owner’s purpose
• Manager’s authority
• Reporting
49
Page 464-465
• Compensation
• Allocation of costs
• Antitrust provisions
• Equal opportunity statement
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
50
Page 465
THE MANAGEMENT PLAN & AGREEMENT
• Residential Property Management
Agreement
(Landlord Agency Contract)
51
Page 465
Figure 22.4
(page 466-471)
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
52
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)
53
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
54
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
55
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
56
Page 473
PROPERTY MANAGER’S RESPONSIBILITIES
• Financial Reports (cont’d)
• Cash Flow Report – Formula for
arriving at cash flow
57
Page 473
Gross Rental Income
+ Other Income
- Losses Incurred
Total Adjusted Income
- Operating Expenses
NOI Before Debt Service
- Debt Service
- Reserves
Cash Flow
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
58
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
59
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
60
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
61
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
62
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
63
Page 474
PROPERTY MANAGER’S RESPONSIBILITIES
• Advertising – Property managers must attract the best tenants by
considering various methods of advertising
• Newspaper
• Brochures
• Direct-mail
• Web sites
64
Page 475
• Radio
• Television
• Billboards
PROPERTY MANAGER’S RESPONSIBILITIES
• Selecting Tenants – Proper selection is the 1st step in establishing
and maintaining sound, long-term relationships
65
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
66
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
67
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
68
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
69
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
70
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
71
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
72
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
73
Page 478
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
74
Page 478
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
75
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
76
Page 479
• 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
77
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
78
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
79
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
80
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
81
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
82
Page 481
PROPERTY MAINTENANCE & RISK MANAGEMENT

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LCAR Unit 22 - Leasing and Property Management - 14th Edition Revised.pptx

  • 1. The Real Estate School U N I T 2 2 LEASING AND PROPERTY MANAGEMENT 1 Page 445
  • 2. OVERVIEW • Property Management – Involves the leasing, managing, marketing, and overall maintenance of real estate owned by others, usually rental property 2 Page 446
  • 3. LEASE AGREEMENTS • Lease – Contract between an owner of real estate (Lessor) and a tenant (Lessee) LESSOR OWNER LESSEE TENANT 3 Page 446
  • 4. 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 4 Page 446
  • 5. 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 5 Page 446
  • 6. 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 6 Page 446
  • 7. 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 7 Page 447 Figure 22.1 (page 448)
  • 8. 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 8 Page 455 CAUTION - Legal counsel should be sought when drafting legal documents
  • 9. 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 9 Page 455
  • 10. LEASE AGREEMENTS • Use of Premises – Lessor may restrict a Lessee’s use of the premises through provisions included in the lease 10 Page 455 Residential Restriction Office Restriction Retail Restriction
  • 11. 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 11 Page 455
  • 12. LEASE AGREEMENTS • Security Deposits – Used as security in case tenant defaults on payment of rent or damages the premises 12 Page 455
  • 13. 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 13 Page 456
  • 14. 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 14 Page 456
  • 15. 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 15 Page 456
  • 16. 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 16 Page 457
  • 17. 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 17 Page 457
  • 18. 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 18 Page 457
  • 19. 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 19 Page 457
  • 20. 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 20 Page 457
  • 21. 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 21 Page 457
  • 22. 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 22 Page 457
  • 23. 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) 23 Page 458
  • 24. 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 24 Page 458
  • 25. DISCHARGE OF LEASES • Federal and State laws allow military personnel to terminate leases without penalty in certain situations 25 Page 458
  • 26. 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 26 Page 459
  • 27. 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 27 Page 459
  • 28. DISCHARGE OF LEASES 28 Page 459 Assignment Sublease Figure 22.2
  • 29. 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 29 Page 460
  • 30. 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 30 Page 460
  • 31. 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 31 Page 460
  • 32. 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 32 Page 460
  • 33. 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 33 Page 460
  • 34. 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 34 Page 461
  • 35. DISCHARGE OF LEASES • Fair Housing and Civil Rights Laws – Affect landlords and tenants just as they do sellers and purchasers 35 Page 461
  • 36. 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. 36 Page 461
  • 37. 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 37 Page 462
  • 38. 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 38 Page 462
  • 39. 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 39 Page 462
  • 40. TYPES OF LEASES • Percentage Lease Calculation – EXAMPLE 40 Page 462 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
  • 41. 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 41 Page 463
  • 42. 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) 42 Page 463
  • 43. 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 43 Page 463
  • 44. 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 44 Page 463
  • 45. 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 45 Page 463
  • 46. 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 46 Page 463
  • 47. 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 47 Page 463
  • 48. 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 48 Page 464
  • 49. THE MANAGEMENT PLAN & AGREEMENT • The Management Agreement (cont’d) • Management agreement should be in writing and include the following points: • Property description • Time period • Manager’s responsibilities • Owner’s purpose • Manager’s authority • Reporting 49 Page 464-465 • Compensation • Allocation of costs • Antitrust provisions • Equal opportunity statement
  • 50. 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 50 Page 465
  • 51. THE MANAGEMENT PLAN & AGREEMENT • Residential Property Management Agreement (Landlord Agency Contract) 51 Page 465 Figure 22.4 (page 466-471)
  • 52. 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 52 Page 472
  • 53. 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) 53 Page 472
  • 54. 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 54 Page 472
  • 55. 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 55 Page 473
  • 56. 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 56 Page 473
  • 57. PROPERTY MANAGER’S RESPONSIBILITIES • Financial Reports (cont’d) • Cash Flow Report – Formula for arriving at cash flow 57 Page 473 Gross Rental Income + Other Income - Losses Incurred Total Adjusted Income - Operating Expenses NOI Before Debt Service - Debt Service - Reserves Cash Flow
  • 58. 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 58 Page 473 (+)
  • 59. 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 59 Page 474
  • 60. 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 60 Page 474
  • 61. 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 61 Page 474
  • 62. 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 62 Page 474
  • 63. 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 63 Page 474
  • 64. PROPERTY MANAGER’S RESPONSIBILITIES • Advertising – Property managers must attract the best tenants by considering various methods of advertising • Newspaper • Brochures • Direct-mail • Web sites 64 Page 475 • Radio • Television • Billboards
  • 65. PROPERTY MANAGER’S RESPONSIBILITIES • Selecting Tenants – Proper selection is the 1st step in establishing and maintaining sound, long-term relationships 65 Page 475
  • 66. 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 66 Page 475
  • 67. 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 67 Page 475
  • 68. 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 68 Page 475-476
  • 69. 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 69 Page 476
  • 70. 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 70 Page 476
  • 71. 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 71 Page 476
  • 72. 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 72 Page 477
  • 73. 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 73 Page 478
  • 74. 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 74 Page 478
  • 75. 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 75 Page 478
  • 76. 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 76 Page 479
  • 77. • 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 77 Page 479 PROPERTY MAINTENANCE & RISK MANAGEMENT
  • 78. • 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 78 Page 480 PROPERTY MAINTENANCE & RISK MANAGEMENT
  • 79. • 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 79 Page 480 PROPERTY MAINTENANCE & RISK MANAGEMENT
  • 80. • 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 80 Page 480 PROPERTY MAINTENANCE & RISK MANAGEMENT
  • 81. • 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 81 Page 481 PROPERTY MAINTENANCE & RISK MANAGEMENT
  • 82. • 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 82 Page 481 PROPERTY MAINTENANCE & RISK MANAGEMENT