Rent and Effective Rent Flashcards
A commercial property comprising 10000 square metres of NLA is leased on a new 12 year lease at a gross rental of $2,000,000 per annum. Rent is to be paid monthly in advance. The tenant negotiated an 18 month rent free period as well as a lessors contribution to fit out of $500,000.
Using a discount rate of 9 % per annum, determine the effective rental reflected in the transaction on a per square metre per annum basis.
NOTE - ROUND YOUR ANSWER TO THE NEAREST WHOLE DOLLAR
Between 154 and 156
ANALYSIS
Face rent = $2,000,000 / 10,000 = $200 per square metre
EFFECTIVE RENT CALCULATIONS
Step 1 – Present Value of the Face Rent
PMT 200 / 12 Begin Mode (as rent is paid monthly in advance)
N 12 x 12
I 9/12 Compute PV PV = $1,475.50
LESS
Step 2 – Present Value of the Rent Free Period
PMT 200 / 12 Begin Mode (as rent is paid monthly in advance)
N 18
I 9/12 Compute PV (PV = $ 281.75 )
LESS
Step 3 – Present Value of the Fit out Contribution
$500,000 / 10,000 sq metres (PV = $ 50)
LEASE PRESENT VALUE $1,143.75
Step 4 – Recast Rent
PV 1,143.75 Begin Mode (as rent is paid monthly in advance)
N 12 x 12
I 9/12 Compute PMT PMT = $12.91 (per square metre per month)
Step 5 – Convert to an annual rental rate
$ 12.91 x 12 months = $155.03 effective per square metre
A retail shop comprising 160 m2 NLA is let on a new 5 year lease for $ 250,000 per annum gross. Further, the tenant was required to fit a new shop front, prior to occupation, at a cost to the tenant of $ 125,000. The owner provided a 5 month rent free period. Rent is paid monthly in advance.
Using a discount rate of 6.5%, calculate the effective annual rental on a per square metre basis.
NOTE - ROUND YOUR ANSWER TO THE NEAREST WHOLE DOLLAR
Between 1,594 and 1,596
EFFECTIVE RENT CALCULATIONS
Step 1 – Present Value of the Face Rent
PMT 1,562.50 / 12 Begin Mode (as rent is paid monthly in advance)
N 5 x 12
I 6.5 /12 Compute PV PV = $ 6,690.82
LESS
Step 2 – Present Value of the Rent Free Period
PMT 1,562.50 / 12 Begin Mode (as rent is paid monthly in advance)
N 5
I 6.5 /12 Compute PV (PV = $ 644.06 )
ADD
Step 3 – Present Value of the shop front (premium)
$125,000 / 160 sq metres PV = $ 781.25
LEASE PRESENT VALUE $ 6,828.01
Step 4 – Recast Rent
PV 6,828.01 Begin Mode (as rent is paid monthly in advance)
N 5 x 12
I 6.5 /12 Compute PMT PMT = $132.87 (per m2 per month)
Step 5 – Convert to an annual rental rate
$ 132.87 x 12 months = $1594.53 effective per m2
Adjust the following face rent to an effective rent by allowing for incentives.
Known data and assumptions:
Rental: $700 per square metre per annum paid monthly in advance
Incentive: 24 months rent-free
Lease term: 10 years
Discount rate: 9% per annum at monthly rests
NOTE: ROUND YOUR ANSWER TO THE NEAREST WHOLE DOLLAR
Between 505 and 507
Step 1 – Present Value of the Face Rent
PMT 700 / 12 Begin Mode (as rent is paid monthly in advance)
N 10 x 12
I 9/12 Compute PV PV = $4,639.47
LESS
Step 2 – Present Value of the Rent Free Period
PMT 700 / 12 Begin Mode (as rent is paid monthly in advance)
N 24
I 9/12 Compute PV (PV = $ 1,286.44 )
LEASE PRESENT VALUE $ 3,353.03
Step 3 – Recast Rent
PV 3,353.03 Begin Mode (as rent is paid monthly in advance)
N 10 x 12
I 9/12 Compute PMT PMT = $42,16 (per m2 per month)
Step 5 – Convert to an annual rental rate
$ 42.16 x 12 months = $505.92 effective per m2
An industrial property is let at a face rent of $135 per square metre per annum net. The lease is for 6 years. Rent is paid monthly in advance. Calculate the gross effective rent per annum on the basis that outgoings are presently $25 per square metre per annum, and that the tenant received a rent free period (rent only) of 6 months. Note - outgoings are recoverable monthly in advance on a pro rata basis. Use a discount rate of 7.5% nominal.
NOTE - ROUND YOUR ANSWER TO THE NEAREST WHOLE DOLLAR
Between 145 and 147
EFFECTIVE RENT CALCULATIONS
Step 1 – Present Value of the Face Rent
PMT (135 + 25) / 12 Begin Mode (as rent is paid monthly in advance)
N 12 x 6
I 7.5 /12 Compute PV PV = $775.97
LESS
Step 2 – Present Value of the Rent Free Period
PMT 135 / 12 Begin Mode (as rent is paid monthly in advance)
N 6
I 7.5 /12 Compute PV (PV = $ 66.46)
LEASE PRESENT VALUE $ 709.50
Step 3 – Recast Rent
PV 709.50 Begin Mode (as rent is paid monthly in advance)
N 12 x 6
I 7.5 /12 Compute PMT PMT = $12.19 (per m2 per month)
Step 4 – Convert to an annual rental rate
$ 12.19 x 12 months = $ 146.29 gross effective per m2 per annum
Determine the effective annual rental rate on a per square metre basis reflected in the following transaction:
Lease term 6 years, NLA 800 square metres, Owners contribution to fit out $100,000, Face Rent $ 350,000 per annum,
Recoverable outgoings $64,000 pa (Rent & Outgoings are paid monthly in advance),
Rent Free period 6 months (rent only), Discount Rate 7.5%.
NOTE - ROUND YOUR ANSWER TO THE NEAREST WHOLE DOLLAR
Between 446 and 448
ANALYSIS
Face Rent - $350,000 / 800m2 = $437.50 m2
Recoverable Outgoings - $64,000 / 800m2 = $80 m2
Fit Out Contribution - $100,000 / 800 m2 = $125 m2
ANSWER
Step 1 – Present Value of the Face Rent
PMT (437.50 + 80) / 12 Begin Mode (as both paid monthly in advance)
N 6 x 12
I 7.5 /12 Compute PV PV = $ 2509.78
LESS
Step 2 – Present Value of the Rent Free Period
PMT 437.50 / 12 Begin Mode (as rent is paid monthly in advance)
N 6
I 7.5 /12 Compute PV (PV = $ 215.38)
Step 3 – Present Value of the Fit Out Contribution
$100,000 / 800 m2 = (PV = $ 125.00)
LEASE PRESENT VALUE $ 2,169.40
Step 4 – Recast Rent
PV 2196.40 Begin Mode (as rent is paid monthly in advance)
N 6 x 12
I 7.5 /12 Compute PMT PMT = $37.27 (per m2 per month)
Step 5 – Convert to an annual rental rate
$ 37.27 x 12 months = $ 447.31 gross effective per m2 per annum
LEASE TERM - 5 years
FACE RENT - $600 per square metre p/a - paid monthly in arrears
INCENTIVE - 1 Year Rent Free
DISCOUNT RATE - 10% per annum at monthly rests
What is the effective annual rental based on a per square metre per annum basis?
NOTE - ROUND YOUR ANSWER TO THE NEAREST WHOLE DOLLAR
$455 per m2 per annum.
1) PV OF FACE RENT 600/12 = PMT, 5 X 12 = N, 10/12 = I END MODE
PV = $ $2,353.268
2) PV OF RENT FREE 600/12 = PMT, 12 = N, 10/12 = I END MODE
PV = $ 568.725
3) LEASE PV = $1784.543
4) EFFECTIVE MONTHLY RENT PV = $1784.543, N =60, I =10/12 END MODE
PMT = $37.916
5) CONVERT TO ANNUAL RATE
$37.916 X 12 = $ 454.99 SAY $455
A proposal has been sent to a tenant with the choice of the following three rental options:
- Pay $100,000 per annum in advance for ten years
- Pay nothing each year and just pay a lump sum of $1,753,100 at the end of the ten years, or
- Pay a lump sum of $675,000 at the start of the ten year lease.
Which of the above three rental options has the most favourable equivalent financial value for the tenant? Use a discount rate of 10% pa.
A. $100,000 per annum in advance for ten years has the lowest equivalent present value
B. Nothing every year and to pay $1,753,100 at the end of ten years has the lowest equivalent present value
C. A lump sum now of $675,000 has the lowest equivalent present value
D. All three options have the same equivalent present value
C.
1) $100,000 PMT, 10N, 10 I - BGN MODE = PV $675,902.38
2) FV $1,753,100, N10, I 10 = PV $ 675,895.94
3) $675,000 - IS LOWEST PV AND SO BEST DEAL
From the following data calculate the effective rent on a rate per square metre per annum basis:
Term 7 years
Lease rent $3,000,000 per annum payable monthly in arrears
Rent free period 18 months
Up-front cash payment $200,000
Demised premises 4000 square metres
Discount rate 8% pa at monthly rests
Calculations to be made to 2 decimals places, with answer rounded to the nearest dollar.
$543 psm pa
Convert to per sqm rate:
= $3,000,000 / 4,000 = $750/sqm
Step 1: PV of the Face Rent
PMT = 750 /12
N = 7 x 12
I = 8 / 12
COMP PV = 4,009.95 /sqm
Step 2: Less, PV of the Rent Free Period
PMT = 750 /12
N = 18
I = 8 / 12
COMP PV = (1,056.81) /sqm
Step 3: Less, PV of the Upfront Cash Payment
= (200,000) / 4,000
= (50.00) /sqm
Lease Present Value
= 4,009.95 - 1,056.81 - 50
= 2,903.14 /sqm
Step 4: Recast Rent
PV = 2,903.14
N = 7 x 12
I = 8 / 12
FV = 0
COMP PMT = 45.25 /sqm
Step 5: Convert to an Annual Rate
= 45.25 x 12
= $542.99 /sqm, rounded to $543 /sqm
What is the rental for a lease with a five year review basis when all the market evidence is based on a two year pattern?
Solve this question on an annual in arrears basis.
The market rental evidence for a vacant strata office, based on a normal two year rent review pattern, is assessed at $380 per square metre per annum. Rentals are estimated to be increasing at a growth rate of 5% per annum.
The proposed tenant for the strata office has asked for a five year lease with no rent review for the term of the lease.
What annual rent should the tenant pay? Use a Discount rate of 10% pa and assume rents are paid annually in arrears.
$408.15 per m2 per annum
Calculate the value of the estimated cashflow based on a two yearly rent review pattern:
Year 1 $380 psm
Year 2 $380 psm
Year 3 $418.95 psm (NB plus 5% = 399 plus 5% = 418.95)
Year 4 $418.95 psm
Year 5 $461.89 psm (NB plus 5% =439.8975 plus 5% = 461.8924)
PV of cashflow for years 1 and 2 is n=2 i= 10 pmt= 380 PV=? Answer $659.5041
PV of cashflow for years 3 and 4 is n=2 i= 10 pmt= 418.95 PV=? Answer $727.1033
Discounted back 2 years n=2 i= 10 FV= 727.1033 Answer $600.9118
PV of cashflow for year 5 is n=5 i= 10 FV= 461.89 PV=? Answer $286.7988
Total $1547.2148
Total present value of the cashflow is $1,547.21.
When this is amortised over the lease term it equates to: (don’t divide by 5! AMORTISE)
n=5 i= 10 PV= 1547.21
pmt=? Answer $408.15 psm pa but say $408 psm pa.
An impending vacancy on level 3 of a property is imminent in six months’ time when the lease is due to expire. When the current lease does expire, you believe it will take an additional six months to secure a tenant and that a rent-free incentive of one year will also need to be offered. Level 3 has an area of 400 square metres and a market rent of $500 per square metre per annum. Assume rent is paid monthly in arrears.
Use 10% pa at monthly rests to calculate the loss in value to the property due to the above impending vacancy/loss of rent/rent free incentive.
$264,034
Pending vacancy in 6 months time
Allow 6 months to find a tenant and 12 months rent free
N= 18 i= 10/12 pmt = 200,000/12 PV = ?
Answer is $277,513.77
Defer for 6 months
N= 6 i= 10/12 FV = 277,513,77 PV = ? Answer is $ 264,033.96
Compare the following two lease ‘deals’ and advise which is financially the better deal for a lessee.
Deal A Deal B
Term 3 years 3 years
Face rent $300 per square metre pa $420 per square metre pa
Incentive none 9 months rent free
From 5/06 5/06
Reviews 3 yearly to market 3 yearly to market
Assume a discount rate of 9% at monthly rests with payments made in advance.
Deal A Better
Deal A: Effective rent is $300 psm pa
Deal B: Effective rent is $304 psm pa
Deal A is a lower effective rent and therefore a better deal for the lessee
Workings (for Deal B)
Step 1: PV of the Face Rent
BGN Mode
PMT = 420 /12
N = 3 x 12
I = 9 / 12
COMP PV = 1,108.90 /sqm
Step 2: Less, PV of the Rent Free Period
PMT = 420 /12
N = 9
I = 9 / 12
COMP PV = (305.78) /sqm
Lease Present Value
= 1,108.90 - 305.78
= 803.12 /sqm
Step 3: Recast Rent
PV = 803.12
N = 3 x 12
I = 9 / 12
FV = 0
COMP PMT = 25.35 /sqm
Step 4: Convert to an Annual Rate
= 25.35 x 12
= $304.20 /sqm, rounded to $304 /sqm
Lease term 8 years
Rent Free period 18 months
Face Rent $425 per square metre per annum gross
Discount rate 7.5%
Rent is paid monthly in advance.
Determine the effective annual rental rate on a per m2 basis.
$324.83 gross effective rent p/sqm p.
What is an incentive?
A benefit provided by the owner to the tenant over and above the use of the premises. Some common examples are:
‒ Rent free period / Fit out contribution / Rental Abatement
What is a premium?
A benefit provided by the tenant to the owner over and above the payment of rent. Main examples would be:
‒ Capital improvements or lump sum up front payment
What is Effective Rental?
Is the face rent adjusted for any relevant incentive or premium which may apply. In these cases the effective rent will be below or above the face rent.
