Transcript Slide 1
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9
Introduction to IncomeProducing Properties:
Leases, Rents, and the
Market for Space
©2008 The McGraw-Hill Companies,
All Rights Reserved
McGraw-Hill/Irwin
Property Types
• Residential
Single Family
Multifamily
• Nonresidential
Commercial
• Office Buildings
• Retail
Industrial
• Warehouse Space
• Manufacturing
9-2
Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved
Property Types
Hotel/Motel
• One-night stays
• Destination resorts
Recreational
Institutional
• Government
• Hospital
• University
9-3
Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved
Popular Business Choice: Leasing
• More cost-effective than owning
Space requirements
Owning is a heavy capital investment
Stay out of the “real estate business”
• Maintenance and repair
Maintain operating flexibility
• This results in specialized real estate
firms.
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Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved
Leases
• Lessor-Owner, Lessee-Tenant
• Qualify the tenant – underwriting
Financial capacity
• Some Lease Content Items
Parties, Dates, Length
Base rent & any adjustments, deposits
Allowable uses & restrictions
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Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved
Lease Income
• Base Rent
Initial rent
• Flat Rent Leases
No rent change over lease term
• Step-up Leases
Specified rent increases at specified times
• Indexed Leases
Periodic rent adjustment-CPI Index
• Percentage Lease
Rent partially based on sales
Overage Rent
9-6
Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved
Responsibility for Expenses
• Gross / full service lease
Owner/landlord pays all expenses
• Net lease
tenant pays all operating expenses
• Expenses stop
Owner pays up to the “stop”
Expenses in excess of the stop are “passes
through” to tenants
The stop is typically the expenses per s.f. in the
first year of the lease
There can be a “cap” on the amount passed
through
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Example of Expense Stop
• A tenant has an expenses stop of $5 per s.f.
based on expenses the first year of the lease
• Expenses per s.f. are currently $7 per s.f. and
the tenant has 15,000 s.f. of leaseable area
• How much does the owner and tenant pay in
expenses for this tenant’s space?
• A: The owner pays $5 x 15,000= $75,000
The tenant pays ($7-$5) x 15,000= $30,000
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Pro-Forma Cash Flow Statement
Rental Income
+ Other Income
+ Recovery of Expenses
- Vacancy & Collections
- Concessions
______________________
Effective Gross Income (EGI)
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Pro-Forma Cash Flow Statement
EGI
- Operating Expenses
______________________
Cash Flow from Operations (NOI)
- Lease Commissions
- Recurring Capital Outlays
- Nonrecurring Capital Outlays
______________________
Net Cash Flow
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Effective rent
• We need a single measure to compare
leasing alternatives
• To calculate effective rent, we need to:
Calculate the PV of expected net rental
stream to the owner of the building
• Net of any operating expenses paid by owner
Calculate an equivalent level annuity over
the term of lease which has the same PV
• This measures the return to the lessor
and cost to the lessee.
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Effective rent - Examples
• What are the effective rents for the following 6
5-year leases at 10% discount rate?
• 1. net lease with steps
$10 / sf for 1st year and increases by $1 each of the
following 4 years
Tenants pay all operating expenses
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Effective rent - Examples
• 2. net lease with one year free rent
Free rent in the 1st year
$14.50 / sf for 2st year and increases by $1
per year thereafter
Tenants pay all operating expenses
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Effective rent - Examples
• 3. net lease with CPI adjustments
$11 / sf for 1st year and increases by CPI in
each following 4 years
Tenants pay all operating expenses
CPI is expected to grow at 2% during year
2, 3% year 3, 4% year 4 and 5% year 5
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Effective rent - Examples
• 4. gross lease
$17.50 / sf for 1st year and stays flat
Lessor responsible for all operating
expenses
Expenses estimated to be $4 in year1, and
increase by $0.50 each year
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Effective rent - Examples
• 5. gross lease with expense stop
Base rent $15.5 / sf for 1st year and stays
flat
Lessor responsible for operating expenses
up to an expense stop of $4/sf
Expenses expected to be $4 for year 1, and
increase by 50 cents each year
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Effective rent - Examples
• 6. gross lease with expense stop and
CPI adjustment
$14.5 / sf for 1st year and increases by CPI
changes in each of the following 5 years
Expense stop at $4/sf
CPI is expected to be 2% during year 2, 3%
year 3, 4% year 4 and 5% year 5
Expenses expected to be $4 for year 1, and
increase by 50 cents each year
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Office Leases: Load factors
• Load factor for floor =
Rental area per floor
Usable area per floor
Example: a floor has 20K rental area and
2K common area, or 18K usable area.
Q: What is the square footage that a
tenant with 4,500 sf usable area need to
pay for?
Load factor = 20K/18K = 1.11
4,500 * 1.11 = 5,000
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Office Leases: Load factors
• Load factor for building can be
calculated similarly
• Example: 200K rentable sf over 10 floors and
a first floor lobby/common area of 20K.
• If $20 per sf base rents, what is total rents for
4,500 sf?
• 20K/200K = 10% (building load factor of 1.1)
• Revised load factor = 1.11*(1+10%) = 1.222
• Rentable sf = 4,500*1.222 = 5,500 sf
• @ $20/sf, the rent is 5,500*20 = $ 110,000
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Retail Leases
• Overage Rents
Assume 1,000 sf of rentable space with a
base rent of $35/sf and 8% overage rents
at breakpoint of $900K. If the expected
sale is $1 million, what is the expected
rents?
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Retail Leases
Common area maintenance (CAM)
Anchor vs in-line tenants
CAM /sf for in-line space =
total CAM expenses – contribution by anchor
Total rentable space by in-line tenants
Example: A a million sf mall, of which 1.2 million is
rentable, costs $5 million per year for CAM
expenses. Of the 1.2 million rentable anchors
occupy 700K sf, and pay $2/sf CAM charge.
Q: what is CAM charge per sf for in-line tenants?
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