Rent, Leasing, And Property Management
( Originally Published 1924 )
Name the parts of a lease. Why are the terms of a lease nearly all in favor of the landlord? What advantage does the landlord have as a landlord in case of dispossess proceedings? What are dispossess proceedings? Why should the lease establish all charges as rent? What are the interests of the landlord in leasing residence property? How does the agent serve these interests of the landlord? What are the interests of the tenant in leasing residence property? How does the real estate agent serve these interests? On what bases is business property rented? What advantages and disadvantages may there be to the landlord and tenant in long-term leases? What percentage of sales can different types of business enterprises afford to pay in rent? What are the tasks of the real estate agent in renting business property? Why is the management of office buildings an important and complicated task? What organizations serve the agent who rents office property? What are the reasons for the development of the ninety-nine-year lease? Describe the provisions of a "Sky" lease. Explain why rent regulation is sometimes popular. Is it likely to effect the results desired?
REAL ESTATE is rented by means of a legal document known as a lease. A lease grants to some one other than the owner certain rights in connection with the use of real estate. For granting these rights the owner receives a stipulated sum at stated intervals known as rent, or sometimes as "contractual rent.
The laws regulating leases and leased property are well defined and they are important to the owner and the renter: A standard lease contains the following parts the parties the recital which indicates the location of the land and the lessor's title to the same ; the demise or actual granting of the leasing rights; the habendum, which defines the commencements and the term of the lease; the reddendum or reservation of land; the covenants or various conditions as to occupancy ; the restrictions on the uses of the premises, and the signatures, witnesses, and acknowledgments."
Several features are worthy of special notice since their omission is likely to work hardship upon the owner. It will be noted in the first place that the terms seem to be almost completely in the landlord's favor. This feature, however, is for the sole purpose of protecting the owner of the property against depredations committed by irresponsible tenants ; the desirable tenant secures all the protection he needs, but the trouble maker will find his way made hard for him.
Secondly, the lease definitely establishes the relationship of landlord and tenant. This is important because of the legal difficulties involved in securing possession in case the relationship has not been definitely established. Dispossess proceedings are very simple if the relationship can be proved. They consist in the filing by the landlord of a petition in a court of a justice of the peace, or other minor court, asking for a warrant of dispossess. This petition states the facts of the case, showing why the landlord asks that he be given possession again. The ten-ant must be notified that such a petition has been made, and a time is set at which he must appear and show what-ever reasons there are for the landlord's petition to be denied. Unless reasons are shown, the court will issue a warrant or an order giving the landlord possession. If the tenant does not vacate within a reasonable length of time, a sheriff or officer will be instructed to carry out the order of the court by forcible means. The advantage of this proceeding from the landlord's point of view is that it enables him to secure possession almost immediately.
Lastly, the clause establishing all charges as rent after they become payable enables the landlord to collect such charges or secure possession in the same easy way as he uses to secure rent due. The remaining features of the lease are evident from a study of the form for a lease shown in the appendix.
The subject of renting and leasing falls naturally into four parts, according to the type of real estate which is being considered. Thus there are the renting and leasing of (I) residence property; (2) properties used for mercantile purposes; (3) office buildings, and (4) leases involving only the land. Each of these types of property involves different considerations and interests.
The Renting of Residence Property. There are two sets of interests usually not identical to be served in the renting of residence property, those of the landlord and those of the tenant. The most obvious interest of the landlord is to receive as large an income as possible from his property. Residences are not rented ordinarily for any other purpose than to realize a return upon the investment they represent. In order to maintain this income as long as possible, the landlord is interested, secondly, in the preservation of his property from deterioration. Careful repair and maintenance will accomplish this end; a property left alone will very rapidly decay and the in-come from it decreases at a proportional rate. In realizing both of these ends it is to the landlord's interest to keep as high a class of tenant as possible. The higher the class of tenant the greater the care taken of the property, and the greater the power of the tenant to pay a high rent. The presence of an objectionable tenant destroys the rental and the selling value of residential property exactly in proportion to his undesirability; the presence of a desirable tenant is an attraction to others of like kind.
The tenants of rented residences are chiefly interested in the service or services rendered them; they are best served by prompt, efficient rendering of the services to which they are entitled. It is not always that the tenant's conception of the services to which he is entitled can be realized, but nothing can cause greater dissatisfaction on the part of tenants than the feeling that their interests are being neglected, and their requests receiving no consideration.
The function of the agent who rents residential property lies in serving these two groups of interests in such a way as to give them both justice, and, as far as possible, satisfaction. The interests of the landlord he can serve in three ways; by his wide contact with the rental market and with prospective tenants he can cut down the owner's loss of rents on account of vacancies. In some cases this loss is large, and cutting it down is an appreciable service. Secondly, he can save expense on repairs and upkeep by the exercise of good judgment as to when and how repairs should be made. Many concerns specializing in property management conduct a whole department for the purpose of effecting savings to their clients in this respect. Again, because of his specialized experience he can effect savings in maintenance, such as janitor's bills, coal bills, etc.
Another service which the agent can render the land-lord is relieving him from the details of managing his own property. This consists of an almost infinite number of petty trifles such as listening to the numerous complaints of sensitive tenants, collecting rents, and so on. Many landlords who own apartment houses as investments very eagerly embrace the opportunity to rid themselves of these annoyances and to take cognizance of their property only when they receive their monthly check.'
Great tact and patience are required for handling ten-ants and giving them satisfaction. When more than one family live in the same house, particularly, as in apartments, there are constant differences of opinion, as there are differences in temperament, and what satisfies one will not satisfy others. The agent in dealing with this situation must be patient in hearing complaints, and tactful in refusing unjust requests and in settling disputes.
The agent's service to the tenant begins with finding him a place to rent, as it begins with the landlord in finding a tenant. He should act as an advisor in this operation. The careful dealer will avoid renting a customer too expensive a residence. It has been estimated that a man should never spend more than a third of his income for rent. When a tenant undertakes to pay too much, he frequently defaults in his payments to the grief of agent, landlord, and himself.
It has been frequently remarked that the landlord is somewhat inclined to favor the "sitting tenant," that is, the tenant who is actually living in his house, as against the new or prospective tenant. This is true to a larger extent in small places where the relationship of tenant and landlord is more or less personal, than it is in larger places where the relationship is purely a business one. As a result of this tendency, there will sometimes be a great discrepancy in the rent which is paid by the tenants of the same building. The older tenants enjoy the same terms as prevailed when they originally occupied the building, while the new ones have to pay the prevailing rents in the community.
The rental departments of most real estate offices are not well organized from the point of view of the tenant and the prospective tenant. In times of housing short-age this is of little concern, but if there should develop a surplus of housing accommodations, real estate offices would have to reorganize their rental departments so as to offer more service to the prospective tenant. An efficiently organized rental department that would be able to furnish transportation to prospective tenants would be welcomed by those who rent. It must be kept in mind, however, that the renting agent is serving the landlord ; his compensation comes from the landlord, and it is the agent's duty to obtain as large a return upon the land-lord's investment as possible, within the bounds of fairness.
Renting and Leasing of Store Spaces. The leasing of store space is a more complicated matter than renting residences; there is usually a larger sum involved, and more hidden principles. The value of a store site for rental purposes depends upon two factors : the people who pass by that spot, and the opportunity there is for the display of goods to them. The value of the first of these factors is determined by a study of the number of passers-by and their nature. Experience has developed the system of "clocking" or counting the number of passers-by at different hours on different days. These counts of traffic give a scientific check upon the possibilities of sales at the point of observation; they disclose to the merchant an accurate picture of his possible market. Successful merchants, especially chain store managers, have by experience developed the ability to predetermine what portion of the passers-by they can secure as customers, and what the average sale to each customer will be. In this determination the type of passers-by is as important as the number. People who are hurrying by are not such good prospects as those who are shopping; those whose incomes are small are not so much sought for as customers as those possessing a competency. In order to get a more accurate check upon these factors careful notice is taken of the appearance of the traffic, and sometimes the people are followed to their destinations. It has been re-ported that one cigar company, in choosing a location and making an offer to lease, counted not only passers-by but also the number of those who had tobacco stains on their fingers.
The advantage possessed by a location where the traffic is heavy lies in the opportunity for display of merchandise to possible buyers when they are in a buying mood. Buildings, therefore, which are designed in such a way as to give no opportunity for display are severely handicapped in the amount of rental which they will command. This consideration also partly determines the advantage which the first floor has over other floors in the building for merchandising operations. An additional advantage is possessed on account of the ease with which a customer can enter and make his purchase. It is obviously more difficult to get customers to come in and enter an elevator than merely to enter and purchase.
Long and Short Term Leases. Using the traffic observation as an index of possible sales, the merchant can judge more accurately what rental he will be able to pay for a certain location. This rental is ordinarily based upon the number of square feet of floor space. The question immediately confronting both the owner and the merchant is that of the length of the lease. There is no definite rule which can be applied to all cases. If the property values of a city are increasing, the owner will be wise to give only a short-time lease ; while if they are falling, he may secure some advantage by making a long-time lease, but the merchant stands to lose. In a dynamic city the conditions which obtain at the time the lease is written cannot long obtain. The city will increase in size, the value of the site go up, and the merchant reap an advantage. At the same time a growing city may mean a shifting of shopping center so that in spite of the increase in population, the merchant would soon be paying too high a rent for his obsolete location. On the other hand, the owner may lose heavily if he ties up a piece of property that is rapidly increasing in value in a long-time lease, with possible renewal clauses. He is sure of a definite income, however, and some seek this surety rather than an indefinite hope of securing larger returns.
In order to overcome the disadvantages contained in either the short-time or the long-time lease, and to insure fairness to both parties, a different basis of payment has recently been developed. It is customary now for some chain stores to rent premises at a minimum figure and agree to pay a certain percentage of the sales, whatever they may be, for the use of the site.' Such stores have estimated very carefully what proportion of their sales they can afford to pay for rent. The following list of percentages has been compiled as fairly representative of present possibilities in this connection:
Automobile Agency 2%
Under such a lease both parties are benefitted by increasing property value, and both lose when the value of the site falls. It may be said that this form of lease ties the landlord's fortunes too closely to those of his tenant. But there is no clearly defined reason why it should not be so, unless the landlord is interested primarily in the surety of his income; the method for him to pursue, then, is to rent for a long term at a minimum return.
The functions of the dealer in connection with the leasing of business properties are broader and more complicated than in connection with residence property. Their proper performance requires a higher degree of specialization. For there are a larger number of considerations affecting the value and leasing of business property. For example, while the dealer who leases business property does establish a market in the same way as a dealer in residential property, he emphasizes a great deal more the principle of fitting his commodity to the needs of his customers. The dealer in business properties is constantly studying the needs of various prospective customers and the suitability of the properties available to those needs. He knows what leases are written and their terms; he studies the traffic at different points in his city and analyzes the rental value of the various locations; he is acquainted with the date of expiration of present leases so as to be able to solicit customers at the proper time. He studies the specific needs of particular business firms and goes out to find a location which will fit those needs. Space is the commodity, service the utility which he has to sell and no man can sell successfully without a thorough understanding of his commodity and conscientious application to his work.
The Management of Office Buildings. Another type of space which the real estate man frequently handles is office space. This type has sprung into prominence since the building of skyscrapers became common in the larger cities. It is peculiarly American, and arises from the invariable tendency here to segregate business from homes. In Continental Europe, the space above shops is commonly used as apartments, and offices occupy chiefly the ground floor.
Office space is usually rented on the basis of the square foot of floor space. It is obvious, however, that size is not the only factor that determines its value. A greater consideration is that of air and sunlight. In the large cities this makes space on the upper floors, above the fifth or sixth, more valuable than that nearer the ground. A light, well-ventilated office, especially if it commands a good view, will rent for considerably more than one that is dark and crowded close to a neigh-boring building. Location, service, including janitor, heating, elevator, and prestige attaching to the building are other factors entering into rental value in office space.
The management of office buildings is a task of large proportions. When the investment in a single building will run into hundreds of thousands and sometimes mil-lions, the responsibility of the manager becomes very heavy, and he ought to have specialized training. This fact has led to the organization of the National Association of Building Owners and Managers, an organization for the purpose of forwarding the interests of office building owners and of, working out the problems connected with the management of this increasingly important block of investments.
Real estate dealers as a whole are as much interested in the operation of apartment houses and dwellings as in office buildings. There has been formed, consequently, a division of the National Association of Real Estate Boards known as the Property Management Division. At the national convention and other meetings, the members of the division meet to discuss the problems pertining to their own work. The dealer who is handling residential property should be in touch with this division.
Building managers are charged with responsibility for filling buildings with desirable tenants, collecting rents promptly, keeping the building in a good state of repair, giving the service to which tenants are entitled, and re-fusing other service in such a way as to keep their good will, and acting in every other way as the agent of the owner so as to enable him to realize as much as possible from his investment in the building. It is only by enabling the owner to realize a larger return and by relieving him of details that the building manager justifies his position.
Ground Leases. Within recent years a form of lease has become general which grants the use of the land for a large number of years, most frequently for ninety-nine. The exact origin of the custom of granting the lease for ninety-nine years rather than for ninety or some other number is not known. This form of lease is desirable from two points of view. In the first place it may be given by the owner of an unimproved lot who has not the capital or the inclination to improve the lot, but wants to retain title to it as a source of sure and steady income. Secondly, this sort of lease is sought for by the business man who wants to establish a permanent location for his business at the lowest possible capital cost. By securing a ninety-nine-year lease he gets what amounts to permanent possession of the site, so far as the life of the building he wants to erect is concerned, but he has to pay only interest on the value of the site instead of the entire capital down. Thus the ninety-nine-year lease meets the requirements of both these parties. It frequently contains provisions for the disposition of the buildings erected on the site under the terms of the lease. Unless such provisions are made, the buildings become the property of the owner of the land at the expiration of the lease.
Another form of lease which has been developed is known as a "sky lease." A low building is so erected as to allow the addition of other stories as soon as the demand for additional space arises. The lease which grants the privilege of erecting these additional stories, under terms similar to those of a ninety-nine-year lease, is known as a sky lease.
Drawing the Lease. In a large number of places real estate boards or other similar bodies have standardized the form of a lease so that under ordinary circumstances a careful agent can prepare a lease in a satisfactory manner. In special cases, however, the problem is much more complicated, for there are many provisions that cannot be standardized. This is particularly true of the long-term leases. A ninety-nine-year lease, for example, practically disposes of real estate at the same time guaranteeing an income to the lessor. But his heirs, or his heirs' heirs, are also bound by the provisions of the lease, and the omission of any provisions may prove a source of endless expensive litigation and dissatisfaction.
It is therefore wise for the real estate dealer to refer the drawing of a lease, or at least its examination before it is signed, to a competent and experienced attorney. Long experience would be necessary to insure justice and fairness to both parties for the entire life of the lease and at its expiration unless the writer of leases was trained in that kind of activity.
Rent Regulation. On account of the shortage of housing facilities immediately after the Great War and the effort of some unscrupulous landlords to take ad-vantage of the situation, a considerable movement developed toward regulation by the state of rent and renting conditions. The state in which this movement was most restrictive was New York, although several states where there are large cities also passed regulatory laws. In New York it was made illegal for a landlord to raise the rent on his tenants unless he should file with a commission provided by the Act data showing his action was justified. Tearing down dwelling units for any other reason than the erection of others was forbidden, and tenants could not be ejected except for the purpose of rebuilding on the same spot, or for the use of the dwelling by the landlord himself.
In nearly every state where such regulations were passed they have been repealed, or having been enacted for a certain length of time, they have automatically expired. In the city of New York the law has survived longest on account of the congestion of population in that city. The expiration of such laws indicates their emergency character, and the recognition of legislative authorities that they perverted to a greater or less degree the operation of natural laws. One of the disadvantages which is almost unescapable under the operation of such laws is that they check building and aggravate the very condition which they are designed to alleviate, That such laws should appear during a crisis is not strange, however, and they will probably be revived if the situation of extreme building shortage arises again. When tenants feel oppressed by their landlords, it is natural that they should look, where the popular eye ordinarily looks, to legislation for relief, not realizing that the situation is caused by abnormal conditions and seeking to remove those conditions. But as soon as the emergency has passed and the natural forces have time to work themselves out, the need for the legislation having passed, it lapses into desuetude.
It may as well be said that landlords themselves are in a large measure responsible for the passage of these laws even in an emergency. In times of fluctuating prices, rent is one of the slowest elements to respond to the movement. The landlord suffers heavily in the rising market, for he is unable to raise his rents in proportion to other rising prices. The increase in rents lags behind other prices. This condition causes no comment on the part of tenants. But when other prices begin to fall and rent, following the regular course but behind it, continues to rise, attention is focused on the landlord and he is berated. He has only one recourse, and that would be to open his books to his tenants. In many cases this would remove suspicion and criticism. But not many landlords take their tenants thus into their confidence. An interesting example of the results to be obtained by frankness occurred when a landlord sent to his tenants a notice of increased rents accompanied by a statement showing that, allowing five per cent on his in-vestment, his costs had increased so that an increased rent of twenty cents a room a week was necessary to cover the costs. His increase met with no opposition.
The Constructive Attitude in the Rent Department. More and more real estate men are coming to see the opportunities in the rental department for building up their business. The renter of today ought to be the home-owner of tomorrow, and the wide-awake rental department can establish wide contacts and furnish valuable "leads" to the sales department.
This constructive attitude should run through all the dealings of the rental department. It ought not to be sufficient for a member of this department to collect rents month after month and deliver receipts in return. He ought to be building up a desire for ownership in every tenant with whom he comes into contact. This can be done by skillfully calling attention to the advantages of home-owning.
The opportunities and advantages of such a department are put thus by the manager of a large property renting and management organization :
Such a department renders natural assistance to the balance of the organization. It pays the office overhead if headed by a man with adequate experience, furnishes the clerical department for the balance of the organization and is a natural feeder or business getter, and in that way forms contact. There is the real estate proposition that finds its way into your office because of your management department that would not probably have arrived there otherwise. There is the contact with a number of property owners already investors who may be encouraged to make additional deals. Many of the properties which our departments will manage are for sale or will be so offered. Quite naturally those properties will be offered to the sales department within our own office. There is contact with hundreds and maybe thousands of tenants, all of whom or many of whom are real prospects for the brokerage, home building, and subdivision department.
Not least of the advantages offered in the conduct of a management department within a real estate organization is the advertising and publicity that results. Not only is there the contact between the tenant and the owner but there are the trade people with whom the office comes in contact in the management and the operation of the property, all of which offers another opportunity for prospects to the brokerage and home building departments.
1. The instrument used in renting- properties is known as a lease. The chief features of the lease which require special attention are : (1) its provisions favor the landlord ;
(2) it establishes a relationship of landlord and tenant;
(3) it should make all charges payable as rent.
2. The interests of landlord and tenant in renting of residential property are frequently adverse. The function of the real estate agent is to harmonize those interests as far as possible, remembering always that he represents the landlord and it is his duty to secure as large a return as possible, within the limits of fairness, on his landlord's investment.
3. Discrepancies in residential rent are sometimes to be explained by the hesitancy with which the landlord increases the rent of a "sitting" tenant.
4. The renting of business property is a highly developed phase of leasing. The rentable value of business property depends upon the number of people who pass by the lo-cation and the opportunity for the display of goods.
5. A system of "clocking" has been developed, especially by chain stores, which enables their managers to determine very accurately the amount of sales which can be made in a year at each prospective location. The value of business property is established by this system of "clocking."
6. It is to the landlord's advantage to make a long-term lease when property values are falling; when they are rising his interests are served better by a short-term lease.
7. The interests of both parties to a lease are probably best protected by a lease establishing a minimum rent supplemented by a percentage of sales.
8. The management of office buildings is another specialized activity which has arisen from congestion of business in large cities. Office space is rented on a square-foot basis and the price is determined by the advantages which are offered by the building and the particular space rented.
9. The ninety-nine-year lease gives opportunity for the owner of real estate to secure a certain and determined income and for the business man to erect his building with a minimum of capital.
10. In the drawing of special forms and leases the services of an attorney are almost indispensable.
11. Regulation arises from the emergency created by housing shortage. It may be regarded as a temporary phenomenon.
12. Rental departments furnish a big opportunity for development of other departments as well as increasing home ownership.