CHP 55 - Lease Analysis Flashcards
Major commercial leases
gross net percentage ground sublease assignment turnkey build-to-suit sale-leaseback
Gross lease
Office and industrial - most apartment leases.
Net LEase
Office and industrial. Tenant pays rent + some operating expenses
Percentage Lease
Retail - rent based on percentage of gross sales
Ground Lease
Long term net lease on land alone.
Tenant owns improvements
Assignment
Tenant transfers all interest in leased property to another party
Turnkey
Landlord turns premesis over in a ready-to-use ocndition
Build to Suit
Landlord develops property to tenants needs - Increased rent
Core clauses of Lease
Preamble Premises Lease Term Rent Security Deposit Rules and Regulations Use Default
Basic components found in the preamble
Parties Date of lease execution legal address statement of desire to enter into lease Agreement to abide by convenents
“additional rent” clause
FOcuses on tenant’s obligations for covering operational expenses
The insurance clause of a commercial lease requires
The tenant’s policies to cover landlord, lender and maintenence personnel
Premesis Clause
The configuration and quantity of area to be leased
Rule and Regulations Clause
Landlord is not liable for rule infractions committed by other tenants
Service and utilities clause….
Landlord promises to provide sufficient janitorial services at specific times
Waiver of subrogation….
Parties agree not to sue each other for certain types of damages
As is clause….
Protects landlord against claims that certain imprvements were not completed or delivered
Turnkey Lease
Tenant’s improvements have already been completed
Lease Term clause establishes these 2 things
Occupancy period & How the ten ant improvement construction affects intitial day of payable rent
The tenant’s security deposit
May be in the form of a letter of credit if approved by the landlord
Income after all expenses are deducted from gross receipts
Net Operating Income NOI
Market rent is also known as
Economic rent
Retail market rent factors
- demographic
- median income
- % of income famililes spend on goods
Market rent for office building factors
- how many similar firms
- Liklihood of more firms relocating
- # of employees
- Amount of space needed
Kinds of expenses with income properties
Variable
Fixed
Variable Expenses
Fluctuate according to occupancy
Variable Expense Examples
Management Fees
Utilities
CLeaning
Fixed Expense Examples
Real Estate Taxes
Insurance Premiums
Repairs and Maintenance
Ads and Promo
Calculating NOI
Potential Income - Vacancy/Collection losses = Effective Income
Effective Income - Operating Expenses = NOI
Cash Flow Before Tax
Cash received after the net operating income has been calculated and any mortgage-related expenses BUT BEFORE taxes
Annual Debt Service
annual amount of principal and interest paid to a lender
CFBT
Cash Flow Before Taxes =
NOI - Annual Debt Service
Tax Liability
Net operating income - allowable deductions including depreciation and mortgage interest
Based on taxable incoem rather than cash flow
Depreciation is also known as
Cost Recovery
Cash Flow After Tax =
BTCA - Tax Liability
What does an Account Income Statement Show
revenues when earned and expenses when incurred
What does a real estate operating statement show
cash flows from operations and non-operating cash flows
Non-Operating Cash Flows
Debt service
Income Taxes
Capital Expenditures
Gross (rental) Leasing Income
Revenue that would generate if there were no vacancies
Effective Rental Income
Gross leasing income - losses from vancancy or uncollected rent =
NOI - Debt Service =
Cash Flow Before Tax
The amount of cash that remains after operating expenses, obligations to the lender and income taxes paid
Cash Flow After Tax
Cash on Cash return is AKA
Equity dividend rate
Cash on Cash return =
Cash Flow Before Tax / Total Cash Invested
ROI =
NOI/Price
ROE =
CFAT/Equity
Break Even Ratio
The percentage of gross income required to meet cash expenditures
Det Coverage Ratio measures…
investors ability to pay property’s mortgage from the cash generated from rental
Income Approach AKA
Income capitalziation Approach
Capitalization Rate
the recapture rate of original investment over the economic life of investment
Cap rate influenced by…
Operating conditions, prevailing interest rates & risk
Value =
Income/ (Cap) Rate
What does Cap rate measure
Risk involved in an investment
Higher Risk =
Higher Cap Rate
Value goes up as cap rate goes
Down
Cap Rate =
NOI/Value or Price
Pre-Tax cash flow vs. Net income
PTCF accoutns for a property’s financing
In an annual operating statement debt service is
Subtracted from net income to derive pre-tax cash flow
What identified what an investor actually yields from the investment
After tax cash flow
The operating expense ratio indicates…
How profitable the property is
An investor requires a given return on existing property would….
Identify the required price in view of its existing net operating income
