CLP Lease Origination and Structure 2 — Questions and Answers
Question 1: A prospective tenant requests a lease with a fixed rent for the entire 10-year term. What type of lease structure does this describe?
- Graduated lease
- Flat lease (Correct answer)
- Percentage lease
- Index lease
Correct answer: Flat lease
A flat lease (also called a straight lease) maintains the same rent amount throughout the entire lease term.
Question 2: Which document typically precedes a formal commercial lease and outlines the basic terms both parties intend to negotiate?
- Estoppel certificate
- Letter of intent (LOI) (Correct answer)
- Subordination agreement
- Recognition agreement
Correct answer: Letter of intent (LOI)
A letter of intent (LOI) is a non-binding preliminary document that outlines the key deal points before a formal lease is drafted.
Question 3: In a net lease, which expense does the tenant typically pay directly in addition to base rent?
- Landlord's mortgage principal
- Property taxes (Correct answer)
- Leasing commissions
- Capital improvements
Correct answer: Property taxes
In a net lease, tenants pay base rent plus some or all operating expenses such as property taxes, insurance, and maintenance.
Question 4: A lease clause that allows the landlord to recapture the space if the tenant's sales fall below a minimum threshold is called a:
- Co-tenancy clause
- Kick-out clause (Correct answer)
- Radius restriction
- Go-dark provision
Correct answer: Kick-out clause
A kick-out clause (also called a co-tenancy or termination clause) allows one party to terminate the lease if certain performance benchmarks are not met.
Question 5: When originating a retail lease, which factor is MOST important for determining base rent in a percentage lease?
- Tenant's credit history
- Breakpoint sales volume (Correct answer)
- Square footage of common areas
- Number of parking spaces
Correct answer: Breakpoint sales volume
In a percentage lease, the breakpoint is the sales level at which the tenant begins paying percentage rent above the base rent.
Question 6: A landlord wants to ensure the building's operating expenses are covered regardless of vacancies. Which lease type BEST accomplishes this?
- Gross lease
- Modified gross lease
- Triple net lease (Correct answer)
- Percentage lease
Correct answer: Triple net lease
In a triple net (NNN) lease, tenants pay base rent plus taxes, insurance, and maintenance, so the landlord receives rent largely unaffected by operating costs.
Question 7: During lease origination, what does 'free rent' as a concession typically represent from an accounting perspective?
- Rent that is permanently waived
- Deferred rent recognized straight-line over the lease term (Correct answer)
- A reduction in the security deposit
- An automatic rent abatement clause
Correct answer: Deferred rent recognized straight-line over the lease term
Free rent concessions are generally recognized on a straight-line basis over the full lease term under accounting standards, not as a permanent rent reduction.
CLP Lease Origination and Structure 2
A prospective tenant requests a lease with a fixed rent for the entire 10-year term.
What type of lease structure does this describe?