Chapter 6 — Quiz

Twenty-four self-check questions. Answer from memory first; the key is collapsed at the bottom.

Multiple choice

1. In a triple-net lease, the tenant pays, in addition to base rent: - (a) utilities, janitorial, and trash - (b) property taxes and nothing else - (c) property taxes, building insurance, and common-area maintenance - (d) percentage rent above a breakpoint

2. A natural breakpoint in a percentage-rent clause equals: - (a) the tenant's forecast revenue - (b) annual base rent divided by the percentage rate - (c) annual base rent multiplied by the percentage rate - (d) whatever the landlord and tenant negotiate

3. A 2,800-square-foot space at \$28.00 base plus \$6.00 NNN produces an all-in annual occupancy cost of: - (a) \$78,400 - (b) \$95,200 - (c) \$16,800 - (d) \$112,000

4. That same \$95,200 of rent, measured against \$1,200,000 of actual revenue, is an occupancy percentage of: - (a) 6.1% - (b) 7.1% - (c) 7.9% - (d) 9.5%

5. The lease clause that most determines whether a restaurant can ever be sold is: - (a) the exclusivity clause - (b) assignment and subletting - (c) the holdover clause - (d) the escalation clause

6. A good-guy clause: - (a) forgives rent already owed at the time of surrender - (b) prevents the landlord from leasing to a competitor - (c) ends the guarantor's personal liability for rent accruing after a proper surrender - (d) caps annual increases in common-area maintenance

7. Setting rent commencement at "a stated number of days after delivery of possession," rather than at the certificate of occupancy, primarily: - (a) reduces the tenant's base rent - (b) shifts construction-delay risk onto the tenant - (c) shortens the permit process - (d) increases the tenant-improvement allowance

8. Which category of change order is fully under the operator's control? - (a) concealed conditions - (b) authority-required work - (c) allowance reconciliation - (d) owner-requested changes

9. A common industry rule of thumb for construction contingency on a second-generation restaurant conversion is: - (a) 2–3% of hard cost - (b) 5% of the total project cost - (c) 10–15% of hard cost - (d) whatever is left after the equipment is bought

10. An allowance in a construction contract is: - (a) a discount the contractor offers for early payment - (b) a placeholder dollar figure for scope not yet fully specified, reconciled later by change order - (c) the portion of each draw withheld until completion - (d) money the landlord contributes toward the build-out

11. Holdover rent in a commercial lease is typically: - (a) the same as the last month's rent - (b) 110–120% of the last month's rent - (c) 150–200% of the last month's rent - (d) prohibited by statute in most states

12. Second-generation space is attractive to a restaurant tenant primarily because: - (a) the rent is always lower - (b) some of the expensive invisible infrastructure may be reusable - (c) it comes with a certificate of occupancy already issued - (d) landlords will not require a personal guarantee on one

13. The most common reason a tenant ends up in holdover is: - (a) a dispute over the security deposit - (b) the landlord refuses to renew - (c) the renewal-option notice deadline was missed - (d) construction on the replacement space ran late

14. Retainage is: - (a) the deposit a landlord holds against damage - (b) a percentage of each construction payment withheld until completion - (c) the contractor's fee within a cost-plus contract - (d) the portion of the TI allowance held back for lien waivers

15. A relocation clause is particularly dangerous to a restaurant tenant because: - (a) restaurants cannot be moved under most health codes - (b) it voids the liquor license automatically - (c) the build-out is a large sunk cost embedded in the specific space - (d) it always eliminates the renewal options

16. On 2,800 square feet starting at \$28.00, ten years of 3% annual escalation compared with \$1.00-per-square-foot steps every two years costs the tenant roughly: - (a) \$12,000 more - (b) \$59,000 more - (c) \$140,000 more - (d) about the same

Short answer

17. Write the formula for a natural breakpoint, and the formula for the revenue required to hold occupancy at a target percentage.

18. A 3,000-square-foot space rents at \$27.00 base plus \$7.00 NNN. Compute the all-in annual occupancy cost and the occupancy percentage against a \$1,320,000 forecast.

19. Explain in two sentences why occupancy percentage is a riskier number to rely on than food cost percentage.

20. Name three protections a tenant should negotiate around CAM charges.

21. A CAM estimate of \$6.00 per square foot on 2,800 square feet reconciles at \$6.85 per square foot. Compute the true-up invoice.

22. What is the difference between a permitted use clause and an exclusivity clause, and why should the first be drafted broadly?

23. Explain the claim that "an allowance is a change order you have already agreed to and not yet priced."

24. Bellwether's construction line is \$310,000, of which \$264,000 is the general contractor's contract sum and \$9,000 is contingency. State the contingency as a percentage of the contract sum, and state what the rule of thumb would have required in dollars.

Answer key — try all twenty-four first **1.** (c) — Taxes, insurance, and common-area maintenance are the three "nets." Utilities are an operating cost, not occupancy. **2.** (b) — Base rent ÷ percentage rate. At \$78,400 and 6%, the natural breakpoint is \$1,306,667. **3.** (b) — 2,800 × (\$28 + \$6) = 2,800 × \$34 = **\$95,200**, or \$7,933 a month. **4.** (c) — \$95,200 ÷ \$1,200,000 = **7.9%**. The rent did not change; only the denominator did. **5.** (b) — When you sell a restaurant you are largely selling the lease. A landlord with an absolute consent right holds a veto over the value of the business. **6.** (c) — It caps *future* liability after a proper surrender: vacant, broom-clean, rent current, adequate notice. It does not forgive arrears and it does not forgive damage. **7.** (b) — It starts a clock the landlord controls the beginning of and you control the end of, so every day of permit or construction delay is rent you pay on a closed building. **8.** (d) — Owner-requested changes are the only optional category. Concealed conditions and authority requirements are what the contingency is for; allowance reconciliation is avoided by not carrying allowances. **9.** (c) — 10–15% of hard cost, higher for older buildings and higher again for anything with unknowns in the inheritance inventory. **10.** (b) — A placeholder inside the contract sum for unspecified scope, adjusted by change order when the real number lands. **11.** (c) — 150–200% of the last month's rent, month to month, sometimes with consequential damages if the landlord has a replacement tenant waiting. **12.** (b) — The expensive parts of a restaurant build-out are the mechanical, electrical, and plumbing infrastructure. Note that "present" is not the same as "usable." **13.** (c) — The option-notice deadline, commonly nine to twelve months before expiration, arrives on an ordinary Tuesday years after anyone last read the lease. **14.** (b) — Commonly 5–10% of each payment, released after substantial completion and punch-list correction. It is your only remaining leverage at the end of a job. **15.** (c) — \$310,000 of build-out is embedded in the floors, walls, and roof of that particular space. Relocation means paying to build it again. **16.** (b) — 3% annual compounding totals about \$898,769 over ten years; the step schedule totals \$840,000. The difference is **\$58,769**. **17.** $\text{Natural breakpoint} = \text{annual base rent} \div \text{percentage rate}$; and $\text{Required revenue} = \text{annual occupancy cost} \div \text{target occupancy \%}$. **18.** 3,000 × \$34.00 = **\$102,000** a year. \$102,000 ÷ \$1,320,000 = **7.7%**. **19.** Food cost percentage measures something that has already happened — you counted the inventory and you know the sales. Occupancy percentage in a plan divides a contractual number by a forecast, so it is a prediction wearing the costume of a measurement, and the half you cannot control is the half underneath. **20.** Any three of: a cap on controllable CAM increases (commonly 4–5%, cumulative rather than compounding); exclusion of capital expenditures or their amortization over useful life; an audit right with the landlord paying if the error exceeds a threshold; a stated and verifiable proportionate share; a cap on the landlord's management fee; a two-way gross-up provision. **21.** 2,800 × (\$6.85 − \$6.00) = 2,800 × \$0.85 = **\$2,380**, invoiced after the landlord's year-end and payable in cash you did not forecast. **22.** The *permitted use* clause states what **you** may do in your space; the *exclusivity* clause is the landlord's covenant not to lease other space in the property to a competing use. Draft the first broadly because a narrow use clause can later block catering, private events, retail sales, takeout, or a delivery-only brand — every one of which is a revenue line this book will teach you to build. **23.** An allowance is scope you have not specified, carried at a number nobody has priced. When the real cost arrives, the contract sum adjusts by change order — so the change order is structurally guaranteed at the moment you sign. Finishing the drawings before you bid is what eliminates it. **24.** \$9,000 ÷ \$264,000 = **3.4%**. At the 10–15% rule of thumb the contingency would have been **\$26,400 to \$39,600**, so the budget is \$17,400 to \$30,600 light before anything has gone wrong.