Lease Administration & Finance Flashcards

What is a 'letter of credit' (LOC) used for in commercial leasing?

Answer: A form of security deposit that gives the landlord a bank guarantee if the tenant defaults

A Letter of Credit is a bank instrument used as a security deposit alternative; the landlord can draw on it if the tenant defaults on lease obligations.

What is 'gross-up' in the context of operating expense calculations?

Answer: Adjusting variable operating expenses to reflect what they would be at full or near-full occupancy

Expense gross-up adjusts variable costs (like utilities) upward to reflect full occupancy, preventing landlords from recovering less than actual per-tenant costs during low-occupancy periods.

What does a 'right of first refusal' (ROFR) give a commercial tenant?

Answer: The right to lease adjacent or additional space before the landlord offers it to others

A Right of First Refusal gives the tenant the right to match a third party's offer on adjacent space before the landlord can lease it to that third party.

What is a 'holdover' situation in a commercial lease?

Answer: When a tenant continues occupying space after the lease term expires without a new lease

Holdover occurs when a tenant remains in possession after the lease expires; most leases specify holdover rent (often 150-200% of the last rent) to discourage this.

In commercial real estate finance, what is a 'debt service coverage ratio' (DSCR)?

Answer: Net Operating Income divided by annual debt service (mortgage payments)

DSCR measures how many times a property's NOI covers its annual debt service; lenders typically require a minimum DSCR of 1.20-1.25 to approve commercial loans.

What is the purpose of a 'subordination, non-disturbance, and attornment' (SNDA) agreement in commercial leasing?

Answer: To protect the tenant's lease rights in the event the landlord's lender forecloses on the property

An SNDA agreement ensures the tenant's lease is subordinate to the mortgage but protects the tenant from eviction if the lender forecloses, provided the tenant is not in default.