1i. A building owner is evaluating the following alternatives for leasing space in an office building for the next five years:
Net lease with steps. Rent will be $15 per square foot the first year and will increase by $1.50 per square foot each year until the end of the lease. All operating expenses will be paid by the tenant.
Net lease with CPI adjustments. The rent will be $16 per square foot the first year. After the first year, the rent will be increased by the amount of any increase in the CPI. The CPI is expected to increase 3 percent per year.
Gross lease. Rent will be $30 per square foot each year with the lessor responsible for payment of all operating expenses. Expenses are estimated to be $9 during the first year and increase by $1 per year thereafter. Gross lease with expense stop and CPI adjustment. Rent will be $22 the first year and increase by the full amount of any change in the CPI after the first year with an expense stop at $9 per square foot. The CPI and operating expenses are assumed to change by the same amount as outlined above.
a.Calculate the effective rent to the owner (after expenses) for each lease alternative using a 10 percent discount rate.
b.How would you rank the alternatives in terms of risk to the property owner?
c.Considering your answers to parts (a) and (b), how would you compare the four alternatives?
1ii. How does the use of leases shift the risk from lessor to the lessee?
2i. As CFO for Everything.Com, you are shopping for 5,000 square feet of usable office space for 25 of your employees in Center City, USA. A leasing broker shows you space in Apex Atrium, a 10-story multitenanted office building. This building contains 300,000 square feet of gross building area. A total of 45,000 square feet is interior space and is nonrentable. The nonrentable space consists of areas contained in the basement, elevator core, and other mechanical and structural components. An additional 30,000 square feet of common area is the lobby area usable by all tenants. The 5,000 square feet of usable area that you are looking for is on the seventh floor, contains 28,000 square feet of rentable area, and is leased by other tenants who occupy a combined total of 20,000 square feet of usable space. The leasing broker indicated that base rents will be $30 per square foot of rentable area.
a.Calculate total rentable area in the building as though it would be rented to one tenant.
b.Calculate the load factor and common area on the seventh floor only.
c.Calculate the rentable area, including the load factor for common areas on the seventh floor and the total rent per square foot that will be paid by Everything.Com for the coming year if it chooses to lease the space.
d.Adjust (b) assuming that the owner adjusts the load factor for other common areas in the building.
e.Calculate total rent per square foot, assuming that adjusted load factors are applied to usable area for both the common areas in the building lobby and on the seventh floor.
2ii. What is the difference between base rents and effective rents?
3i. An owner of the Atrium Tower Office Building is currently negotiating a five-year lease with ACME Consolidated Corp. for 20,000 rentable square feet of space. ACME would like a base rent of $20 per square foot with step-ups of $1 per year beginning one year from now. Atrium would provide full service under the lease terms. The owner of Atrium Tower believes that the $20 lease is too low and is trying to negotiate $24 per square foot with the same step-ups. However, Atrium would provide ACME with a $50,000 move-in allowance and $100,000 in tenant improvements (TIs) if the lease at $24 psf is signed.
a.Assuming that Atrium’s owner believes that his required rate of return on investment should be 10 percent per year, is the $24 in rents per square foot combined with the move-in allowance and TIs justified?
b.ACME informs Atrium that it has 1 year remaining on its existing 20,000-square-foot lease in an older building at $15 per square foot. ACME is willing to pay Atrium $23 per square foot with step-ups on the new lease, but is demanding that Atrium “buy out” the old lease in lieu of the moving allowance and TIs. Should Atrium agree to the lease buyout or agree to the lease at $24 per square foot with the move-in allowance and TIs?
3ii. What is meant by usable vs. rentable space?
4i. CAM charges for retail leases in a shopping mall must be calculated. The retail mall consists of a total area of 2.8 million square feet, of which 800,000 square feet has been leased to anchor tenants that have agreed to pay $2 per rentable square foot in CAM charges. In-line tenants occupy 1.3 million square feet, and the remainder is common area, which the landlord believes will require $8 per square foot to maintain and operate each year. If the owner is to cover total CAM charges, how much will in-line tenants have to pay per square foot?
4ii. What are CAM charges?
5i. A retail lease for 10,000 square feet of rentable space is being negotiated for a five-year term. Option A calls for a base rent of $25 per square foot for the coming year with step-ups of $1 per year each year thereafter. CAM charges are expected to be $3 for the coming year and are forecasted to increase by 6 percent at the end of each year thereafter. Option B calls for a lower base rent of $23 per square foot with the same step-ups and CAM charges, but the tenant must pay overage rents based on a percentage lease clause. The clause specifies that the tenant must pay 8 percent on gross sales over a breakpoint level of $900,000 per year. The owner believes that the tenant’s gross sales will be $850,000 during the first year but should increase at a rate of 10 percent per year each year thereafter.
a.If the property owner believes that a 12 percent rate of return should be earned annually on this real estate investment, which option is best?
b.What if sales are expected to increase by 20 percent per year?
5ii.What are (a) pass through expenses, (b) recoverable expenses, (c) common area expenses? Give examples of each.
6i. You have been asked to develop a pro forma statement of cash flow for the coming year for Autumn Seasons, a 200-unit suburban garden apartment community. This community has a mix of 40 studio, 80 one- and 80 two-bedroom apartments with current rents of $550, $600, and $800, respectively. Leases with tenants are usually made for 12-month periods. Current rents are expected to remain fixed for the next six months. After that time, rents for each apartment type should increase by $10 per unit and remain at those levels for the remainder of the year. Ten studios were leased 3 months ago for $500, 20 one-bedroom units were leased 2 months ago for $580, and 10 two-bedroom units were leased last month for $805. All other units have been leased recently at current rents. All of the previously leased units also are on 12-month leases. When those leases roll over, all are expected to be renewed at market rents upon rollover for an additional 12 months. Presently, 4 studios, 6 one- and 6 two-bedroom units are vacant. This vacancy pattern should remain the same for the remainder of the year.
Autumn Seasons anticipates that during the coming year, it will earn other income from laundry facilities, the awarding of an exclusive cable TV contract, parking, plus fees from net deposits, late fees, etc. of $200,000. Autumn Seasons expects to pay total turnover and operating expenses of $400 per month, per occupied unit during the next year. However, it expects to recover some of these expenses for heating and central cooling that it provide to tenants in an amount totaling $100 per month, per occupied unit. During the next year, it is also anticipated that $100,000 will be required for recurring, make ready expenses (carpet, paint, drywall repair, etc.) and another $250,000 will be required for non-recurring items including countertops, parking lot repairs, etc. A total of $10,000 in fees will be paid to Apartment Locator Services, a company that provides marketing services and new tenants for Autumn.
a.Prepare a statement of operating cash flow (NOI) for the coming year.
b.Add to (a) anticipated outlays for recurring and non-recurring items and commissions. What will be net cash flow for the coming year?
6ii. What is an estoppel? Why is it used?
7i. You have been asked to develop a pro forma statement of cash flow for the coming (base) year for Summer Place Mall. The information given to you is listed below.
a.From the above data, develop a pro forma statement for a base year showing net operating income (NOI) for Summer Place.
b.If you plan to begin work on future pro formas for Summer Place, list at least five major factors that you would consider.
7ii. What is meant by “loss to lease”?
8.You have been asked to develop a pro forma statement of cash flow for Betts Distribution Center, an Internet-based order fulfillment/distribution/office/warehouse property. In addition to recoverable operating expenses, the new tenant will be billed for pass throughs including insurance and property taxes, which will then be paid by the owner. The information given to you is listed below.
a.Develop a pro forma statement for the Betts property for a base year showing net operating income (NOI).
b.If you plan to begin work on future pro formas for Betts, list at least five major factors that you would consider.
9.You have been asked to develop a pro forma statement of cash flow for West Office Plaza. The information given to you is listed below.
a.Develop a pro forma statement of cash flow for a base year showing net operating income (NOI) for West Office Plaza.
b.If you plan to begin work on future pro formas for West Office Plaza, list at least five major factors that you would consider.
10.Spreadsheet Problem. Refer to the effective rent example on page 275 in the book that is replicated in the Ch9 Eff.Rent tab in the Excel workbook provided on the Web site.
a.Suppose the CPI is expected to increase by 4 percent starting in year 2 and remain at 4 percent per year rather than the original pattern that is 2 percent in year 2, 3 percent in year 3, 4 percent in year 4, and 5 percent in year 5. What leases will be affected? What is the new effective rent on these leases?
b.Supposed that in addition to the change in part (a), expenses increase by $1 per year instead of $.50. What leases will be affected? What is the new effective rent on these leases?
(Reference Page 275 effective rent example)