End of Chapter 8 Questions and Answers 1. What are the elements of a valid contract? i. Offer ii. Acceptance iii. Consideration iv. Written evidence of an agreement 2. What type of deed would you like to have if you are the buyer? Answer: A General Warranty Deed providing the most extensive guarantee possible for good title. 3. What type of deed is usually used to help clean up a title? Answer: Quitclaim deed. 4. What is the difference between a general and special warranty deed? Answer: A special warranty deed only guarantees good title during and after ownership by the seller but not covering the time before ownership while a general warranty deed covers all periods. 5. What are some reasons that a contract might be invalidated? When capacity is lacking, the contract was formed under undue influence or duress 6. Cite some examples of clear public purpose for title transfer through eminent domain. Answer: Schools, police stations, libraries, parks, streets, airports and government property. 7. What is just compensation? Do you always need to lose an entire property in order to receive just compensation? Answer: Just compensation is a payment for the loss in value suffered as a result of eminent domain. No, an owner need not have the entire property taken away and it should not be taken unless it is actually required for the new development. Just compensation is owed because of property value damage even if all of the site is not needed. 8. How does adverse possession work? What are the elements required? Answer: When someone has used another’s property exclusively, open, continuously, visible and hostile (claiming ownership) for the statutory period of time (several years in most states) then he or she become the actual owner. This provision in law allows for greater utilization of land as a valuable resource with the notion that if the owner really cared they would have objected to the possession at some time prior to the statue of limitations expiring. 9. What are possible causes of foreclosure? Answer: Any default in the mortgage contract including failure to pay property taxes, maintain the property or defaulting on the mortgage payment. 10. Who usually ends up with the land after a mortgage default foreclosure? Answer: The lender most often. 11. Define a lease and distinguish a lease from a freehold interest in real estate. Answer: A lease is a type of real estate interest that includes possession but no ownership. A free hold estate is unlimited in duration and is inheritable, while a lease is limited in duration and is not inheritable. 12. Define a lessor and lessee. Answer: Lessor is the term used for property owner when he leases it out. Lessee is the tenant who has leased a property from the lessor. 13. Does a lease terminate if a property is sold? Answer: No, unless the lease has a clause permitting termination upon sale. 14. Distinguish base rent from percentage rent? Answer: “Base” rent is the dollar amount due during each period of lease, independent of any other obligations of lessor or lessee. Percentage rent is the share the owner receives from the tenant’s earnings from sales. If the rent includes base rent, then the percentage rent is applied above a break point of the tenant’s sales. If the rent is based only on percentage rent then there is no break point. 15. What is a pass through operating expense? Are all operating expenses passed through? Answer: When a lease is net or triple net and/or when the building is a multiple tenant building such as a regional shopping center, the tenant will often receive an expense bill from the landlord in the form of what is called “pass through expenses”. These expenses are for utilities, common area maintenance and other operating expenses. They are paid by the landlord and then added to the lease invoice for the tenant to pay based on a prorate share, usually based on the square feet occupied as a percentage of the total leaseable space. Sometimes pass through expenses include an additional administrative charge. If a cap exists on the pass through expenses, then the landlord would have to pay any extra charges beyond this cap or expense stop. Hence not all operating expenses are passed through. 16. What is a gross lease versus a triple net lease? What is an absolute net lease? Answer: A gross lease includes operating expenses such as utilities and maintenance as part of the lease rent. The landlord bears the risk that these items are higher or lower than projected and pays the operating expenses while the tenant pays a known rent each period. 17. What are percentage rent and a sales break point? If the sales break point is $250 per year per square foot and the percentage of overage is 5% for all sales above the break point then what is the overage rent when sales run $450 dollars per square foot? Answer: Percentage rent also called overage rent is based upon sales above some break point, such as $250 per square foot. In this case: Overage rent is 5% of sales above $250 (sales break point). Overage rent = 5% * (450 – 250) = $10 in addition to the base rent. 18. Is a lease the same thing as a business contract with the same requirements? Answer: A lease is a written agreement between the property owner and a tenant that stipulates the payment and conditions under which the tenant may possess the real estate for a specified period of time; hence it is just like a business contract.
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