CGA Lease Negotiation & Terms 2 — Questions and Answers
Question 1: A tenant negotiates a 'free rent' period at lease commencement. How should an appraiser treat this concession when estimating market rent?
- Ignore it as a one-time promotional item
- Convert it to an effective rent by amortizing the concession over the lease term (Correct answer)
- Add it to contract rent to estimate market rent
- Treat it as a tenant improvement allowance
Correct answer: Convert it to an effective rent by amortizing the concession over the lease term
Free rent concessions are amortized over the full lease term to derive effective (economic) rent, which is then compared to market rent.
Question 2: Which lease clause grants the tenant the right to remain in possession at the end of the lease term if no new agreement is reached?
- Right of first refusal
- Holdover provision (Correct answer)
- Estoppel certificate clause
- Subordination clause
Correct answer: Holdover provision
A holdover provision defines the tenant's rights and rent obligations when continuing occupancy after lease expiration without a new lease.
Question 3: Under a triple-net lease, which of the following expenses is the LANDLORD most likely responsible for?
- Property taxes
- Insurance premiums
- Structural repairs to the building shell (Correct answer)
- Common area maintenance
Correct answer: Structural repairs to the building shell
In a triple-net lease, tenants pay taxes, insurance, and maintenance, but structural repairs to the building shell typically remain the landlord's responsibility.
Question 4: A CPI escalation clause in a lease ties rent increases to the Consumer Price Index. This clause primarily protects which party?
- The tenant against overcharges
- The landlord against inflation eroding real rent value (Correct answer)
- The lender against default risk
- Local government against tax shortfalls
Correct answer: The landlord against inflation eroding real rent value
CPI escalation clauses protect the landlord by adjusting rent upward with inflation, preserving the real economic value of the lease income.
Question 5: When appraising a property with an above-market lease, the appraiser must account for a 'contract rent premium.' This premium is BEST described as:
- Additional rent paid by the tenant above the base rate
- The present value of the excess of contract rent over market rent for the remaining lease term (Correct answer)
- The landlord's profit margin above operating expenses
- A penalty clause for early lease termination
Correct answer: The present value of the excess of contract rent over market rent for the remaining lease term
The contract rent premium is the present-value difference between the above-market contract rent and current market rent over the remaining lease term.
Question 6: A co-tenancy clause in a retail lease typically allows a tenant to:
- Sublease space to a third party without landlord approval
- Reduce rent or terminate the lease if an anchor tenant vacates (Correct answer)
- Expand into adjacent space at a predetermined rent
- Negotiate lease terms jointly with other tenants
Correct answer: Reduce rent or terminate the lease if an anchor tenant vacates
Co-tenancy clauses protect retail tenants by allowing rent reduction or early termination if a named anchor tenant or minimum occupancy threshold is lost.
Question 7: In lease negotiations, a 'work letter' or 'tenant improvement agreement' primarily addresses:
- Rent escalation schedules and base year adjustments
- The scope, cost, and responsibility for buildout improvements to the leased space (Correct answer)
- The tenant's right to assign the lease to a successor entity
- Landlord's obligation to maintain structural systems
Correct answer: The scope, cost, and responsibility for buildout improvements to the leased space
A work letter details what improvements will be made, who pays for them, and the allowance provided by the landlord for tenant buildout.
CGA Lease Negotiation & Terms 2
A tenant negotiates a 'free rent' period at lease commencement.
How should an appraiser treat this concession when estimating market rent?