BOMA Lease Administration & Finance 3

Question 1

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

Accepted Answer

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

Answer

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.

Question 2

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

Accepted Answer

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

Answer

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.

Question 3

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

Accepted Answer

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

Answer

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.

Question 4

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

Accepted Answer

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

Answer

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.

Question 5

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

Accepted Answer

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

Answer

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.

BOMA - Building Owners & Managers Association Practice Test

BOMA - Building Owners & Managers Association Practice Test

BOMA Lease Administration & Finance 3