CGA Lease Negotiation & Terms 3 — Questions and Answers
Question 1: A lease with a 'recapture clause' allows the landlord to:
- Recover unpaid rent through court proceedings
- Terminate the lease and reclaim the space if the tenant requests consent to sublease or assign (Correct answer)
- Increase rent above the CPI cap in strong market conditions
- Convert a gross lease to a net lease mid-term
Correct answer: Terminate the lease and reclaim the space if the tenant requests consent to sublease or assign
A recapture clause gives the landlord the right to terminate the lease and retake the space when a tenant seeks to sublease or assign, capturing any increased market value.
Question 2: Which of the following best describes a 'step-up' lease?
- A lease where rent decreases over time as the tenant gains occupancy stability
- A lease where rent increases are predetermined at specified intervals throughout the lease term (Correct answer)
- A lease where the tenant assumes operating expenses in phases
- A lease tied to the tenant's gross sales volume
Correct answer: A lease where rent increases are predetermined at specified intervals throughout the lease term
A step-up (or graduated) lease specifies fixed rent increases at predetermined dates, providing both parties with rent certainty.
Question 3: An appraiser is valuing an office building where a major tenant has a 'right of first offer' (ROFO). How does ROFO affect property value?
- It increases value by ensuring long-term occupancy
- It may reduce value by restricting the owner's ability to sell at full market price (Correct answer)
- It has no effect on value since it only applies to lease renewals
- It increases value by guaranteeing above-market rent
Correct answer: It may reduce value by restricting the owner's ability to sell at full market price
A ROFO can reduce marketability and value by requiring the owner to offer the property to the tenant first, potentially limiting competitive bidding from outside buyers.
Question 4: In a percentage lease, the 'natural breakpoint' is calculated as:
- Base rent divided by the percentage rent rate (Correct answer)
- Total sales divided by the lease term in months
- Gross sales minus operating expenses
- Market rent divided by gross leasable area
Correct answer: Base rent divided by the percentage rent rate
The natural breakpoint is base rent divided by the percentage rate; sales above this amount trigger percentage rent payments to the landlord.
Question 5: A lease provision requiring the tenant to maintain the property in good condition and surrender it in the same state is known as:
- A subordination clause
- A yield-up or surrender clause (Correct answer)
- An estoppel certificate requirement
- A SNDA agreement
Correct answer: A yield-up or surrender clause
A yield-up or surrender clause specifies the condition in which the tenant must return the premises to the landlord at lease expiration.
Question 6: When analyzing leases for appraisal purposes, 'effective gross income' from a leased property is BEST calculated as:
- Potential gross income minus vacancy and credit loss
- Contract rent plus expense reimbursements minus vacancy and collection loss (Correct answer)
- Net operating income plus depreciation
- Market rent minus tenant improvement costs
Correct answer: Contract rent plus expense reimbursements minus vacancy and collection loss
Effective gross income equals contract rent plus reimbursements and other income, less an allowance for vacancy and collection loss.
Question 7: A 'gross-up' provision in an office lease allows the landlord to:
- Increase base rent annually by a fixed percentage
- Calculate operating expenses as if the building were fully occupied, even if it is not (Correct answer)
- Pass through capital improvement costs to all tenants
- Charge tenants for above-standard utility usage
Correct answer: Calculate operating expenses as if the building were fully occupied, even if it is not
A gross-up provision normalizes variable operating expenses to a full-occupancy basis so tenants share costs equitably regardless of actual building occupancy.
CGA Lease Negotiation & Terms 3
A lease with a 'recapture clause' allows the landlord to: