Lease Structures (Gross, Net, Percentage) Practice Questions

Question 1 of 5

A landlord is considering offering a percentage-only lease (no base rent) to a startup restaurant in a new food hall. What are the primary risks and benefits of this structure for the landlord?

• AThe benefit is attracting tenants who might not afford base rent and sharing in upside potential; the risks include receiving zero rent if the tenant fails, unpredictable cash flow for the landlord's mortgage and operating cost obligations, and difficulty verifying sales without established business history
• BThere are no risks — percentage-only leases guarantee higher returns than fixed rent, as the negotiated lease terms address the key commercial considerations including rent escalation, operating expenses, improvement allowances, and permitted use restrictions
• CPercentage-only leases are prohibited under the Commercial Tenancies Act, because percentage-only leases are legal in ontario, as the negotiated lease terms address the key commercial considerations including rent escalation, operating expenses, improvement allowances, and permitted use restrictions
• DThe only risk is tenant default, which is the same for any lease type, given that risks extend well beyond simple default

Question 2 of 5

A prospective tenant reviewing a gross lease proposal notices the landlord has quoted rent of $35 per square foot with no mention of additional rent. Which statement best describes the tenant's financial obligations under a standard gross lease?

• AThe tenant pays $35/sq ft which includes the landlord's operating costs (taxes, insurance, and common area maintenance), though the tenant may still be responsible for their own utilities, janitorial services, and business-specific costs as specified in the lease
• BThe tenant pays only $35/sq ft and is responsible for no additional operating costs whatsoever, including their own utilities and janitorial services
• CThe tenant pays $35/sq ft base rent plus a proportionate share of all building operating expenses separately
• DThe term 'gross lease' means the landlord will gross up the rent annually by the rate of inflation

Question 3 of 5

A landlord proposes a triple net lease to a tenant with a base rent of $14/sq ft. The landlord's estimated additional rent is $11/sq ft for year one. The tenant asks salesperson Chen why the base rent seems low compared to gross lease rates of $28/sq ft in the area. Which explanation is most accurate?

• AThe landlord is offering a below-market deal to attract tenants quickly, noting that base rent of $14/sq ft under a net lease is not necessarily below market
• BThe space must be inferior to the gross lease properties, which is why the rent is lower — base rent level does not necessarily indicate space quality
• CThe low base rent reflects the net lease structure — the $14 base rent plus $11 additional rent totals $25/sq ft, comparable to the area's gross rates once the gross lease landlord's management premium is considered; the apparent discount is the trade-off for the tenant accepting operating cost risk and variability
• DTriple net leases always have lower total costs than gross leases

Question 4 of 5

A food court tenant in a shopping centre pays rent based on a formula that includes base rent, percentage rent, and a food court operating charge for shared seating, cleaning, and waste management. Total occupancy cost is $85/sq ft for a 400 sq ft unit. How should a prospective food court tenant evaluate this cost?

• ACompare the per-square-foot cost to standard retail leases to determine if it is overpriced, given that food court economics are fundamentally different from standard retail
• BFood court leases should be compared to restaurant leases, not retail leases real estate
• C$85/sq ft is too expensive for any food court tenant to sustain
• DEvaluate food court economics differently than standard retail — food court units are small (200-600 sq ft) with extremely high revenue density per square foot; the $85/sq ft cost should be evaluated against projected sales per square foot (which can be $1,000-$2,000+/sq ft in a busy food court), resulting in an occupancy cost ratio of 4-9% — potentially very favourable despite the high per-square-foot cost

Question 5 of 5

A landlord offers two TIA structures for a 10-year lease on 4,000 sq ft: Option A is $60/sq ft ($240,000) upfront cash allowance. Option B is $0 TIA but rent-free for the first 18 months (base rent = $22/sq ft). Which option provides greater value to the tenant?

• AThey are always equal in value because landlords structure them equivalently, on the basis that landlords do not always structure inducement packages to be equivalent, as the negotiated lease terms address the key commercial considerations including rent escalation, operating expenses, improvement allowances, and permitted use restrictions
• Bthis approach is always better because free rent reduces the tenant's total lease cost; however, free rent provides value, but $132,000 in rent savings is less than $240,000 in tia
• COption A provides $240,000 in direct build-out funding; Option B provides rent savings of $22 x 4,000 x 1.5 years = $132,000 — Option A provides significantly more value ($108,000 difference), but the tenant should also consider: cash flow timing, the impact on additional rent during the free period, and whether the free rent applies to base rent only or total occupancy cost
• DThe options cannot be compared because they serve different purposes, as the negotiated lease terms address the key commercial considerations including rent escalation, operating expenses, improvement allowances, and permitted use restrictions