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**Case Study 250,000 square foot suburban office building**

LL & T negotiating 10,000 square foot lease Case Study

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**First Things First Break out your calculator**

Remove the remainder of the pages in this chapter and sort them into separate piles: These instructions The Landlord’s Initial Proposal The Tenant’s Counter Proposal The Landlord’s Counter Proposal The various spreadsheets (end of chapter)

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**Landlord’s Initial Proposal**

Rent = $25 psf gross - 3% annual increases One month free rent (month 1) OEs estimated at $10 per square foot in year 1 with 2.5% annual increases Leasing commission is 6% of gross rent LL representative (2%) and T representative (4%) Lease legal fees = $1 psf Some owners include lease legal fees – others do not We will not include lease legal fees Construction allowance = $20 psf Landlord to contribute $0.20 psf for space planning Owner expects a 9% return

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Review the lease parameters of the Landlord’s Initial Offer and enter the data into the appropriate cells in your spreadsheet.

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**Rent Table - Landlord's Initial Offer Less: Free Rent (Negative)**

Calculate Base Rent Rent Table - Landlord's Initial Offer Rent Increase Per Year Year 1 Year 2 Year 3 Year 4 Year 5 Total 3% Base Rent Less: Free Rent (Negative) Total Income

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**Rent Table - Landlord's Initial Offer Less: Free Rent (Negative)**

Base Rent Rent Table - Landlord's Initial Offer Rent Increase Per Year Year 1 Year 2 Year 3 Year 4 Year 5 Total 3% Base Rent $ ,000 $ ,500 $ ,225 $ ,182 $ ,377 $ ,327,284 Less: Free Rent (Negative) Total Income

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**Rent Table - Landlord's Initial Offer Less: Free Rent (Negative)**

Calculate Free Rent Rent Table - Landlord's Initial Offer Rent Increase Per Year Year 1 Year 2 Year 3 Year 4 Year 5 Total 3% Base Rent $ ,000 $ ,500 $ ,225 $ ,182 $ ,377 $ ,327,284 Less: Free Rent (Negative) Total Income

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**Rent Table - Landlord's Initial Offer Less: Free Rent (Negative)**

Rent Increase Per Year Year 1 Year 2 Year 3 Year 4 Year 5 Total 3% Base Rent $ ,000 $ ,500 $ ,225 $ ,182 $ ,377 $ ,327,284 Less: Free Rent (Negative) $ (20,833) $ Total Income

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**Calculate Total Income**

Rent Table - Landlord's Initial Offer Rent Increase Per Year Year 1 Year 2 Year 3 Year 4 Year 5 Total 3% Base Rent $ ,000 $ ,500 $ ,225 $ ,182 $ ,377 $ ,327,284 Less: Free Rent (Negative) $ (20,833) $ Total Income

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**Rent Table - Landlord's Initial Offer Less: Free Rent (Negative)**

Total Income Rent Table - Landlord's Initial Offer Rent Increase Per Year Year 1 Year 2 Year 3 Year 4 Year 5 Total 3% Base Rent $ ,000 $ ,500 $ ,225 $ ,182 $ ,377 $ ,327,284 Less: Free Rent (Negative) $ (20,833) $ Total Income $ ,167 $ ,306,451

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**Calculate TI Allowance**

Rent Table - Landlord's Initial Offer Rent Increase Per Year Year 1 Year 2 Year 3 Year 4 Year 5 Total 3% Base Rent $ ,000 $ ,500 $ ,225 $ ,182 $ ,377 $ ,327,284 Less: Free Rent (Negative) $ (20,833) $ Total Income $ ,167 $ ,306,451 Leasing Costs Leasing Commission % (Each Year) 6% Tenant Improvement (Negative) Leasing Commission (Negative) Soft Costs of Construction (Negative) Total Leasing Costs

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**TI Allowance Rent Table - Landlord's Initial Offer **

Rent Increase Per Year Year 1 Year 2 Year 3 Year 4 Year 5 Total 3% Base Rent $ ,000 $ ,500 $ ,225 $ ,182 $ ,377 $ ,327,284 Less: Free Rent (Negative) $ (20,833) $ Total Income $ ,167 $ ,306,451 Leasing Costs Leasing Commission % (Each Year) 6% Tenant Improvement (Negative) $ (200,000) Leasing Commission (Negative) Soft Costs of Construction (Negative) Total Leasing Costs

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**Calculate Leasing Commission**

Rent Table - Landlord's Initial Offer Rent Increase Per Year Year 1 Year 2 Year 3 Year 4 Year 5 Total 3% Base Rent $ ,000 $ ,500 $ ,225 $ ,182 $ ,377 $ ,327,284 Less: Free Rent (Negative) $ (20,833) $ Total Income $ ,167 $ ,306,451 Leasing Costs Leasing Commission % (Each Year) 6% Tenant Improvement (Negative) $ (200,000) Leasing Commission (Negative) Soft Costs of Construction (Negative) Total Leasing Costs

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**Leasing Commission Rent Table - Landlord's Initial Offer **

Rent Increase Per Year Year 1 Year 2 Year 3 Year 4 Year 5 Total 3% Base Rent $ ,000 $ ,500 $ ,225 $ ,182 $ ,377 $ ,327,284 Less: Free Rent (Negative) $ (20,833) $ Total Income $ ,167 $ ,306,451 Leasing Costs Leasing Commission % (Each Year) 6% Tenant Improvement (Negative) $ (200,000) Leasing Commission (Negative) $ (78,387) Soft Costs of Construction (Negative) Total Leasing Costs $ (278,387)

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**Calculate Space Planning Cost**

Rent Table - Landlord's Initial Offer Rent Increase Per Year Year 1 Year 2 Year 3 Year 4 Year 5 Total 3% Base Rent $ ,000 $ ,500 $ ,225 $ ,182 $ ,377 $ ,327,284 Less: Free Rent (Negative) $ (20,833) $ Total Income $ ,167 $ ,306,451 Leasing Costs Leasing Commission % (Each Year) 6% Tenant Improvement (Negative) $ (200,000) Leasing Commission (Negative) $ (78,387) Soft Costs of Construction (Negative) Total Leasing Costs $ (278,387)

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**Space Planning Cost Rent Table - Landlord's Initial Offer **

Rent Increase Per Year Year 1 Year 2 Year 3 Year 4 Year 5 Total 3% Base Rent $ ,000 $ ,500 $ ,225 $ ,182 $ ,377 $ ,327,284 Less: Free Rent (Negative) $ (20,833) $ Total Income $ ,167 $ ,306,451 Leasing Costs Leasing Commission % (Each Year) 6% Tenant Improvement (Negative) $ (200,000) Leasing Commission (Negative) $ (78,387) Soft Costs of Construction (Negative) $ (2,000) Total Leasing Costs $ (280,387)

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**Calculate Annual Cash Flow**

Rent Table - Landlord's Initial Offer Rent Increase Per Year Year 1 Year 2 Year 3 Year 4 Year 5 Total 3% Base Rent $ ,000 $ ,500 $ ,225 $ ,182 $ ,377 $ ,327,284 Less: Free Rent (Negative) $ (20,833) $ Total Income $ ,167 $ ,306,451 Leasing Costs Leasing Commission % (Each Year) 6% Tenant Improvement (Negative) $ (200,000) Leasing Commission (Negative) $ (78,387) Soft Costs of Construction (Negative) $ (2,000) Total Leasing Costs $ (280,387) Cash Flow Annual Cash Flow Cumulative Total

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**Annual Cash Flow Rent Table - Landlord's Initial Offer **

Rent Increase Per Year Year 1 Year 2 Year 3 Year 4 Year 5 Total 3% Base Rent $ ,000 $ ,500 $ ,225 $ ,182 $ ,377 $ ,327,284 Less: Free Rent (Negative) $ (20,833) $ Total Income $ ,167 $ ,306,451 Leasing Costs Leasing Commission % (Each Year) 6% Tenant Improvement (Negative) $ (200,000) Leasing Commission (Negative) $ (78,387) Soft Costs of Construction (Negative) $ (2,000) Total Leasing Costs $ (280,387) Cash Flow Annual Cash Flow $ (51,220) $ ,026,064 Cumulative Total

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**Calculate Cumulative Cash Flow**

Rent Table - Landlord's Initial Offer Rent Increase Per Year Year 1 Year 2 Year 3 Year 4 Year 5 Total 3% Base Rent $ ,000 $ ,500 $ ,225 $ ,182 $ ,377 $ ,327,284 Less: Free Rent (Negative) $ (20,833) $ Total Income $ ,167 $ ,306,451 Leasing Costs Leasing Commission % (Each Year) 6% Tenant Improvement (Negative) $ (200,000) Leasing Commission (Negative) $ (78,387) Soft Costs of Construction (Negative) $ (2,000) Total Leasing Costs $ (280,387) Cash Flow Annual Cash Flow $ (51,220) $ ,026,064 Cumulative Total

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**Cumulative Cash Flow Rent Table - Landlord's Initial Offer **

Rent Increase Per Year Year 1 Year 2 Year 3 Year 4 Year 5 Total 3% Base Rent $ ,000 $ ,500 $ ,225 $ ,182 $ ,377 $ ,327,284 Less: Free Rent (Negative) $ (20,833) $ Total Income $ ,167 $ ,306,451 Leasing Costs Leasing Commission % (Each Year) 6% Tenant Improvement (Negative) $ (200,000) Leasing Commission (Negative) $ (78,387) Soft Costs of Construction (Negative) $ (2,000) Total Leasing Costs $ (280,387) Cash Flow Annual Cash Flow $ (51,220) $ ,026,064 Cumulative Total $ ,280 $ ,505 $ ,687

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**Calculate Net Effective Rent**

Simple Payback Simple Payback (Years) years Return on Investment (ROI) Cumulative Return on Investment (ROI) Net Present Value (NPV) Calculation (assuming a 9% Discount Rate) Net Present Value of this Cash Flow Internal Rate of Return (IRR) Calculation Initial Cash Outflow Cash Inflow - Year 1 Cash Inflow - Year 2 Cash Inflow - Year 3 Cash Inflow - Year 4 Cash Inflow - Year 5 Internal Rate of Return Calculation: Cumulative cash flow / square feet / lease term (years)

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Net Effective Rent Net Effective Rent $ Simple Payback Simple Payback (Years) years Return on Investment (ROI) Cumulative Return on Investment (ROI) Net Present Value (NPV) Calculation (assuming a 9% Discount Rate) Net Present Value of this Cash Flow Internal Rate of Return (IRR) Calculation Initial Cash Outflow Cash Inflow - Year 1 Cash Inflow - Year 2 Cash Inflow - Year 3 Cash Inflow - Year 4 Cash Inflow - Year 5 Internal Rate of Return Calculation: Cumulative cash flow / square feet / lease term (years) $1,026,064 / 10,000 square feet / 5 years = $ 20.52

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**Calculate Simple Payback**

Net Effective Rent $ Simple Payback Simple Payback (Years) years Return on Investment (ROI) Cumulative Return on Investment (ROI) Net Present Value (NPV) Calculation (assuming a 9% Discount Rate) Net Present Value of this Cash Flow Internal Rate of Return (IRR) Calculation Initial Cash Outflow Cash Inflow - Year 1 Cash Inflow - Year 2 Cash Inflow - Year 3 Cash Inflow - Year 4 Cash Inflow - Year 5 Internal Rate of Return Calculation Step 1 - (determine average annual income) - Total income / lease term (years) - $1,306,284 / 5 years = $261,257 Calculation Step 2 - Total leasing costs / average annual income = simple payback - $280,387 / $ = 1.07 years

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**Calculate Simple Payback**

Net Effective Rent $ Simple Payback Simple Payback (Years) years Return on Investment (ROI) Cumulative Return on Investment (ROI) Net Present Value (NPV) Calculation (assuming a 9% Discount Rate) Net Present Value of this Cash Flow Internal Rate of Return (IRR) Calculation Initial Cash Outflow Cash Inflow - Year 1 Cash Inflow - Year 2 Cash Inflow - Year 3 Cash Inflow - Year 4 Cash Inflow - Year 5 Internal Rate of Return Calculation Step 1 - (determine average annual income) - Total income / lease term (years) - $1,306,284 / 5 years = $261,257 Calculation Step 2 - Total leasing costs / average annual income = simple payback - $280,387 / $ = 1.07 years

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Simple Payback Net Effective Rent $ Simple Payback Simple Payback (Years) 1.07 years Return on Investment (ROI) Cumulative Return on Investment (ROI) Net Present Value (NPV) Calculation (assuming a 9% Discount Rate) Net Present Value of this Cash Flow Internal Rate of Return (IRR) Calculation Initial Cash Outflow Cash Inflow - Year 1 Cash Inflow - Year 2 Cash Inflow - Year 3 Cash Inflow - Year 4 Cash Inflow - Year 5 Internal Rate of Return Calculation Step 1 - (determine average annual income) - Total income / lease term (years) - $1,306,284 / 5 years = $261,257 Calculation Step 2 - Total leasing costs / average annual income = simple payback - $280,387 / $ = 1.07 years

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Calculate ROI Net Effective Rent $ Simple Payback Simple Payback (Years) 1.07 years Return on Investment (ROI) Cumulative Return on Investment (ROI) Net Present Value (NPV) Calculation (assuming a 9% Discount Rate) Net Present Value of this Cash Flow Internal Rate of Return (IRR) Calculation Initial Cash Outflow Cash Inflow - Year 1 Cash Inflow - Year 2 Cash Inflow - Year 3 Cash Inflow - Year 4 Cash Inflow - Year 5 Internal Rate of Return Calculation: (Total cash flow of each year – operating expenses ($10 psf x 10,000 sq ft = $100,000) - total leasing costs) / total leasing costs

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ROI Net Effective Rent $ Simple Payback Simple Payback (Years) 1.07 years Return on Investment (ROI) Cumulative Return on Investment (ROI) 87.62% Net Present Value (NPV) Calculation (assuming a 9% Discount Rate) Net Present Value of this Cash Flow Internal Rate of Return (IRR) Calculation Initial Cash Outflow Cash Inflow - Year 1 Cash Inflow - Year 2 Cash Inflow - Year 3 Cash Inflow - Year 4 Cash Inflow - Year 5 Internal Rate of Return Calculation: (Total cash flow of each year – operating expenses ($10 psf x 10,000 sq ft = $100,000) - total leasing costs) / total leasing costs

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**Calculate Net Present Value**

Calculated for You Net Effective Rent $ Simple Payback Simple Payback (Years) 1.07 years Return on Investment (ROI) Cumulative Return on Investment (ROI) 87.62% Net Present Value (NPV) Calculation (assuming a 9% Discount Rate) Net Present Value of this Cash Flow $727,798 Internal Rate of Return (IRR) Calculation Initial Cash Outflow Cash Inflow - Year 1 Cash Inflow - Year 2 Cash Inflow - Year 3 Cash Inflow - Year 4 Cash Inflow - Year 5 Internal Rate of Return Excel Formula - =NPV(discount rate, (total income Year 1, Year 2, etc.) - landlord costs =NPV(9%, ($229,167 + $257,500 + $265,225 + $273,182 + $281,37) - $280,387 = $727,797

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**Calculate IRR Calculated for You**

Net Effective Rent $ Simple Payback Simple Payback (Years) 1.07 years Return on Investment (ROI) Cumulative Return on Investment (ROI) 87.62% Net Present Value (NPV) Calculation (assuming a 9% Discount Rate) Net Present Value of this Cash Flow $727,798 Internal Rate of Return (IRR) Calculation Initial Cash Outflow $ (280,387) Cash Inflow - Year 1 $ ,167 Cash Inflow - Year 2 $ ,500 Cash Inflow - Year 3 $ ,225 Cash Inflow - Year 4 $ ,182 Cash Inflow - Year 5 $ ,377 Internal Rate of Return 83.99% Excel Formula - =IRR(cash outflow + annual cash flow Year 1, Year 2, etc.)

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**As a group, review the rent table and financial parameters for this deal**

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**Calculate Alternate Commissions**

Lease Commission Options Rent Tables Year 1 Year 2 Year 3 Year 4 Year 5 Totals Base Rent (net of concessions) $ ,167 $ ,500 $ ,225 $ ,182 $ ,377 $ ,306,451 Leasing Commission Option #1 - Flat Commission Leasing Commission Rate 6% Leasing Commission $ ,750 $ ,450 $ ,914 $ ,391 $ ,883 $ ,387 Leasing Commission Option #1 - Staggered Commission

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**Calculate Alternate Commissions**

Lease Commission Options Rent Tables Year 1 Year 2 Year 3 Year 4 Year 5 Totals Base Rent (net of concessions) $ ,167 $ ,500 $ ,225 $ ,182 $ ,377 $ ,306,451 Leasing Commission Option #1 - Flat Commission Leasing Commission Rate 6% Leasing Commission $ ,750 $ ,450 $ ,914 $ ,391 $ ,883 $ ,387 Leasing Commission Option #1 - Staggered Commission 8% 5%

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**Alternate Commissions**

Lease Commission Options Rent Tables Year 1 Year 2 Year 3 Year 4 Year 5 Totals Base Rent (net of concessions) $ ,167 $ ,500 $ ,225 $ ,182 $ ,377 $ ,306,451 Leasing Commission Option #1 - Flat Commission Leasing Commission Rate 6% Leasing Commission $ ,750 $ ,450 $ ,914 $ ,391 $ ,883 $ ,387 Leasing Commission Option #1 - Staggered Commission 8% 5% $ ,333 $ ,659 $ ,069 $ ,425

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**What lease commission structures are used in your area?**

For Discussion What lease commission structures are used in your area?

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**Tenant’s Counter Offer**

Rent Table - Tenant's Counter Offer Year 1 Year 2 Year 3 Year 4 Year 5 Total Rent Increase Per Year 3% Base Rent $ ,000 $ ,900 $ ,007 $ ,327 $ ,867 $ ,221,101 Less: Free Rent (Negative) $ (57,500) $ Net Operating Income $ ,500 $ ,163,601 Leasing Costs Leasing Commission Per Year 6% Tenant Improvement (Negative) $ (250,000) Leasing Commission (Negative) $ (69,816) Soft Costs of Construction (Negative) $ (2,000) $ (321,816) Cash Flow Annual Cash Flow $ (149,316) $ ,785 Cumulative Total $ ,584 $ ,591 $ ,918 Changes proposed by the tenant: Starting rent of $23 per square foot with 3% annual increases Three (3) months of free rent $25 per square foot tenant improvement allowance

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**Tenant’s Counter Offer**

Net Effective Rent $ Simple Payback Simple Payback (Years) 1.38 years Return on Investment (ROI) Cumulative Return on Investment (ROI) 6.21% Net Present Value (NPV) Calculation (assuming a 9% Discount Rate) Net Present Value of this Cash Flow $570,545 Internal Rate of Return (IRR) Calculation Initial Cash Outflow $ (321,816) Cash Inflow - Year 1 $ ,500 Cash Inflow - Year 2 $ ,900 Cash Inflow - Year 3 $ ,007 Cash Inflow - Year 4 $ ,327 Cash Inflow - Year 5 $ ,867 Internal Rate of Return 60.25%

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**Would the asset manager do this deal?**

For Discussion Review the rent table and financial parameters of the Tenant’s Counter Offer Would the asset manager do this deal?

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**Landlord’s Counter Offer**

Rent Table - Landlord's Counter Offer Year 1 Year 2 Year 3 Year 4 Year 5 Total Rent Increase Per Year 3% Base Rent $ ,000 $ ,200 $ ,616 $ ,254 $ ,122 $ ,274,193 Less: Free Rent (Negative) $ (40,000) $ Net Operating Income $ ,000 $ ,234,193 Leasing Costs Leasing Commission Per Year 6% Tenant Improvement (Negative) $ (225,000) Leasing Commission (Negative) $ (74,052) Soft Costs of Construction (Negative) $ (299,052) Cash Flow Annual Cash Flow $ (99,052) $ ,141 Cumulative Total $ ,148 $ ,764 $ ,019 Changes proposed by the landlord: Starting rent of $24 per square foot with 3% annual increases Two (2) months of free rent $22.50 per square foot tenant improvement allowance

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**Landlord’s Counter Offer**

Net Effective Rent $ Simple Payback Simple Payback (Years) 1.21 years Return on Investment (ROI) Cumulative Return on Investment (ROI) 45.51% Net Present Value (NPV) Calculation (assuming a 9% Discount Rate) Net Present Value of this Cash Flow $650,457 Internal Rate of Return (IRR) Calculation Initial Cash Outflow $ (299,052) Cash Inflow - Year 1 $ ,000 Cash Inflow - Year 2 $ ,200 Cash Inflow - Year 3 $ ,616 Cash Inflow - Year 4 $ ,254 Cash Inflow - Year 5 $ ,122 Internal Rate of Return 71.66%

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**As a group, review the rent table and financial parameters for this deal**

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**Agree that no deal can be done**

What’s Next? Parties will continue to go back and forth with counter offers until they: Reach a deal or Agree that no deal can be done

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