Powerpoint class 4 Flashcards
What is A Lease?
Contract between a property owner (lessor) and tenant (lessee) that transfers exclusive use and possession of space to the tenant
engines that drive values and returns
when we purchase multi-tenant properties, we acquire portfolios of leases
are one year leases common in residential properties?
yeee
In retail office, and industrial properties, leases may run for how long?
from 3 years to 20 years
advantages and disadvantages of longer leases
minimize transaction costs
provide rental rate security for tenant & owner
decrease tenant & owner flexibility
Base rents (minimum rent)
initial rent must be paid under the lease contract
Flat rents
rents remain the same for the term of the lease
when are flat rents common?
Common for lease with frequent tenants/users turnover
Apartment
Graduated/escalated/step-up rents
Rent bumps/escalations are specified in lease
ex: base rent =$18/sqft and will increase by $1/sqft each year for the 5 years
Office, Retail, Warehouse
Indexed rents
Rent increases are tied to, say, the CPI (not common in recent years)
we include caps in inflation and floors in deflation
why are indexed rents riskier?
how does this affect base rents usually?
Changes of rents are unknown (more risk)
lower base rents
Percentage rents features
in retail
percentage of over breakpoints of sales
indicator: sales
breakpoints
gross lease
tenant pays no operating expenses
net lease
tenant pays property taxes
net-net lease
tenant pays property taxes and insurance
triple-net lease
tenant pays all operating expenses
full service lease?
under some office leases, landlord required to pay for electricity, water, heat & air, custodial services
If tenant is responsible for some of, or all, operating expenses, according to lease, how may them pay it
pay them directly (typical in single-tenant properties)
reimburse landlord (typical in multi-tenant properties)
how do reimbursements (to landlord) show up in investment CF?
what about when the landlord paid for it (which then called for reimbursement)?
as expense reimbursement revenue
when paid for it, landlord incurs operating expense (at first)
Acceptance of premises
Tenants have specific time period (one week?) to notify landlord in writing) of any defects
Restrictions on alteration or improvements
Usually requires prior consent of landlord
–> landlords want to maintain integrity of building’s mechanical, electrical, and structural systems
Landlord may require tenant to restore to original configuration & remove trade fixtures & equipment
Assignment
all of tenant’s rights and obligations are transferred to another party
sublease
only a subset of tenant’s rights are transferred to third party
Most commercial leases prohibit any assignment & subletting without landlord’s prior consent
true or false
true
Lease Options
Contract provisions that give holder (not limited to tenants) the right–but not the obligation–to do something
what do tenant options include
lease renewal options
cancellation option
expansion options
–> Including right of first refusal on vacant adjacent space
relocation options
equivalent level rent (ELR)
Step 1: Calculate PV of lease (LPV) after concessions (and other costs)
Step 2: Calculate equivalent monthly annuity
Step 3: Calculate annual ELR
Concession
such as move-in allowance or rent reductions for a specified period of time.
how can administrators learn about features that aren’t immediately enabled?
the Feature Management page
Administrators can use the new Feature Management page to do what?
Learn which new features and feature enhancements can be enabled ahead of time in minor updates
Turn individual features on and off again for all users of any environment
Safely try out a feature in a new browser tab without enabling the feature for all users
Plan an approach to testing and preparation in time for upcoming change
–> For example, they can test on a sandbox environment with a copy of production data before they enable a feature in production
Some facts about the features listed on the Feature Management page include:
Only a subset of features releasing in minor updates are available in the page.
Features are primarily platform changes that affect the user experience.
Features are optional for a while, after which they’re permanently enabled in a future service update.
irreversible features
features that can’t be turned off after they have been turned on by an administrator
Typically, they are changes that can’t be safely reverted, or changes that persist or affect data
in an Effective Level rent (ELR) calculation, what does the Tenant’s discount rate reflect?
reflects only risk of lease in question
two main addition risks not accounted for in ELR
expected tenancy often longer than current lease term
expected rent pmts beyond existing lease are more risky than pmts within a lease
Releasing Costs
vacancy period (owner loses revenue)
search costs
–> owner pays leasing commissions
–> both use valuable time
tenant pays moving expenses
owner pays more TI’s (with more lease turnover)
Owner & tenant both negatively affected by releasing costs
what can we conclude when Owner & tenant both negatively affected by releasing costs?
Both prefer longer lease terms–all else equal
factors affecting Flexibility
tenant’s uncertainty about future space needs
owner wants to mix tenants in dynamic rental market
owner wants to gain control of space for a renovation
what can we conclude abut flexibility?
Flexibility considerations suggest shorter term leases are more vlauable to owner and tenant
Summary of Effects of Broader Considerations on Preferred Lease Term
Owner and Tenant want longer least terms to lower interlease risk
Owner and Tenant want longer least terms to lower releasing costs
Owner and Tenant want shorter least terms to increase flexibility
what are the most common office lease terms
3 ʹ 7 years with lease renewal options
most common office rent properties
Rents vary by locations and owners may charge premium rents (for with good views) or give rent discounts (middle floors)
office Rentable area
gross area - ͞”vertical penetrations”
Office Usable area
rentable area - common areas (conference rooms, lobbies, etc.)
how is office rent generally quoted
on rentable area
Tenant’s pro rata share of common area calculation
tenant’s usable area / total usable area
Office Properties: Expense STOP
owner is responsible for operating expenses up to a Stop Amount
–> stated as amount per SF of total building rentable space
Per SF expenses beyond stop passed through based on tenant’s pro rata share of building’s rentable area
what is the usual term for Industrial and Warehouse Properties
10 - 20 years
Industrial and Warehouse Properties: features
Net, Net-net, or Triple Net Lease are common
Might add Common Area Maintenance (CAM) charge
–> Campus-like development area
–> Landscaping and securities
Improvements are allowed to improve efficiency at the cost of tenant (pre-approval by owner)
Retail Properties features
A mix of tenants
Success indicators
–> Sales per s.f. of rentable space / customer traffic counts
Term: 3 - 5 years with renewal options
Percentage rents are common
Anchor tenants vs In-line tenants
Anchor tenants
generating customer traffic, low or no rents
In-line tenants
benefiting from customer traffic
Apartment Properties term
relatively short periods (e.g., 12 months)
Lease renewal of apartment properties
- automatically renewed on the same terms unless the landlord has taken steps to change the terms. (Quebec)
Ϯ2. automatically renewed on a “month to month” basis
When the landlord changes parts of the lease when it is renewed, a written notice has been sent to the tenant in advance
when should a notice be sent in the case of a fixed term with a lease longer than 12 months?
3 to 6 months before the lease ends
When the landlord changes parts of the lease when it is renewed, a written notice has been sent to the tenant in advance
when should a notice be sent in the case of a fixed term with a lease shorter than 12 months?
1 to 2 months before the lease ends
When the landlord changes parts of the lease when it is renewed, a written notice has been sent to the tenant in advance
when should a notice be sent in the case of an intermediate lease?
1 to 2 months before the proposed change to the lease
When the landlord changes parts of the lease when it is renewed, a written notice has been sent to the tenant in advance
when should a notice be sent in the case of leasing a room
10-20 days before the lease ends
Real Estate Cycle: Recovery Phase
Stage after recession
Vacancy rate: High (declining)
Construction rate: Low or no
Strategy: start to buy
Risks: how long it takes to recover
Real Estate Cycle: Expansion Phase
Vacancy rate: Low (decreasing)
Construction rate: Increasing (High)
Strategy: invest in value-added investment properties start to harvest discounted properties
Real Estate Cycle: Hyper Supply Phase
Supply starts to exceed demand
Vacancy rate: Low (start to rise)
Construction rate: High (start to drop)
Strategy: Liquidating inventories (CF shortage). Extend lease terms.
Real Estate Cycle: Recession Phase
Real estate prices fall dramatically
Vacancy rate: High (increasing)
Construction rate: Plunges (drop dramatically)
Sign of recovery: what point is the lowest point?
Strategy: buy deep-discounted properties, bank-owned properties, and foreclosed properties
Name the four general real estate investment styles and describe each
Identify three specialized styles within these general categories and give examples for each.
- Core
- Core plus
- Value added
- Opportunistic
Under Core:
- -> Office Properties
- -> Trophy Properties
- -> Gateway Markets
Under Core Plus:
- -> Properties to be re-tenanted
- -> Properties needing minor capital improvements
- -> Properties to be leveraged
Under Value Added:
- -> Properties with excess land to be developed
- -> Properties to have greater amenities (fitness center, restaurant)
- -> Properties needing major improvement (eg. parking lot expansion, improving elevators)
Under Opportunistic:
- -> Raw land development
- -> Distressed assets
- -> Loans in default
How may supply and demand affect a property’s projected NOI?
(1. ) Expected market rents and vacancy rates
(2. ) Expenses associated with operating the property
(3. ) Nature of any leases on the property
What factors would result in a property increasing in value over a holding period?
rental growth increasing
Inflation: This causes rents as well as the final sale price to be higher.
Demand: Increased demand for space may increase value if the supply of space doesn’t increase as well.
Why should investors be concerned about market rents if they are purchasing a property subject
to leases?
Even if the investment is an existing building that has already been leased, the income can be affected when the existing leases expire and are renewed at the market rent at the time
What is the equity dividend rate?
the ratio of a single year’s Before Tax Cash Flow and the Equity Investment in the property
Equity Dividend Rate = Before Tax Cash Flow (BTCF) ÷ Equity Investment
What is the significance of a debt coverage ratio?
a measurement of a firm’s available cash flow to pay current debt obligations
NOI / Debt service
What are depreciation allowances in Real Estate?
the process used to deduct the costs of buying and improving a rental property
What is meant by a tax shelter?
a vehicle used by individuals or organizations to minimize or decrease their taxable incomes and, therefore, tax liabilities
How is the gain from the sale of real estate taxed?
capital gains
What is meant by an effective tax rate?
the percent of their income that an individual or a corporation pays in taxes
What is the significance of the passive activity loss limitation (PAL) rules for real estate
investors?
Passive activity loss rules are a set of IRS rules that prohibit using passive losses to offset earned or ordinary income
Passive activity loss rules prevent investors from using losses incurred from income-producing activities in which they are not materially involved
Existing leases:
a. Can be ignored by potential investors when estimating investment value.
b. Must be considered more carefully when valuing a multitenant office building than valuing an apartment complex.
c. Are more important when estimating market value than estimating investment value.
d. Should be assumed to have remaining terms of 10 years when estimating investment value.
b. Must be considered more carefully when valuing a multitenant office building than valuing an apartment complex.
As a tenant, you wish to turn over all rights and responsibilities of your unexpired lease term to a new tenant. If allowed to do so by the owner, you are:
a. Releasing your leasehold interest.
b. Subleasing your leasehold interest.
c. Assigning your leasehold interest.
d. Relieving your leasehold interest.
c. Assigning your leasehold interest.
Lease provisions that grant the tenant the right, but not the obligation, to do something generally result in:
a. A lower base rent.
b. A higher base rent.
c. An indexed base rent.
d. Nothing—a base rent is generally not affected by tenant options.
b. A higher base rent.
Which of the following statements regarding tenant improvements (TIs) is the least true in the context of commercial
real estate leases?
a. TIs are usually stated as a dollar per square foot amount.
b. Tenants can generally negotiate higher TIs for existing space than for space in a newly developed project.
c. Tenants can generally negotiate higher TIs for space in a newly developed project than for space in an existing project.
d. The magnitude of the TIs is often a heavily negotiated lease term.
b. Tenants can generally negotiate higher TIs for existing space than for space in a newly developed project.
In shopping center leases, rents are typically quoted on the basis of what type of area occupied by the tenant?
a. Gross leasable area.
b. Net leasable area.
c. Rentable area.
d. Usable area.
a. Gross leasable area.
The typical anchor tenant in a neighborhood shopping center is a:
a. Nationally known department store.
b. Regional department store.
c. “Big box” retailer such as Home Depot and Best Buy.
d. Grocery store.
d. Grocery store.
