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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 Rent Increase Per Year Year 1Year 2Year 3Year 4Year 5 Total 3% Base Rent Less: Free Rent (Negative) Total Income Calculate Base Rent

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Rent Table - Landlord's Initial Offer Rent Increase Per Year Year 1Year 2Year 3Year 4Year 5 Total 3% Base Rent $ 250,000 $ 257,500 $ 265,225 $ 273,182 $ 281,377 $ 1,327,284 Less: Free Rent (Negative) Total Income Base Rent

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Rent Table - Landlord's Initial Offer Rent Increase Per Year Year 1Year 2Year 3Year 4Year 5 Total 3% Base Rent $ 250,000 $ 257,500 $ 265,225 $ 273,182 $ 281,377 $ 1,327,284 Less: Free Rent (Negative) Total Income Calculate Free Rent

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Rent Table - Landlord's Initial Offer Rent Increase Per Year Year 1Year 2Year 3Year 4Year 5 Total 3% Base Rent $ 250,000 $ 257,500 $ 265,225 $ 273,182 $ 281,377 $ 1,327,284 Less: Free Rent (Negative) $ (20,833) $ - $ (20,833) Total Income Free Rent

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Rent Table - Landlord's Initial Offer Rent Increase Per Year Year 1Year 2Year 3Year 4Year 5 Total 3% Base Rent $ 250,000 $ 257,500 $ 265,225 $ 273,182 $ 281,377 $ 1,327,284 Less: Free Rent (Negative) $ (20,833) $ - $ (20,833) Total Income Calculate Total Income

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Rent Table - Landlord's Initial Offer Rent Increase Per Year Year 1Year 2Year 3Year 4Year 5 Total 3% Base Rent $ 250,000 $ 257,500 $ 265,225 $ 273,182 $ 281,377 $ 1,327,284 Less: Free Rent (Negative) $ (20,833) $ - $ (20,833) Total Income $ 229,167 $ 257,500 $ 265,225 $ 273,182 $ 281,377 $ 1,306,451 Total Income

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Rent Table - Landlord's Initial Offer Rent Increase Per Year Year 1Year 2Year 3Year 4Year 5 Total 3% Base Rent $ 250,000 $ 257,500 $ 265,225 $ 273,182 $ 281,377 $ 1,327,284 Less: Free Rent (Negative) $ (20,833) $ - $ (20,833) Total Income $ 229,167 $ 257,500 $ 265,225 $ 273,182 $ 281,377 $ 1,306,451 Leasing Costs Year 1Year 2Year 3Year 4Year 5 Total Leasing Commission % (Each Year) 6% Tenant Improvement (Negative) Leasing Commission (Negative) Soft Costs of Construction (Negative) Total Leasing Costs Calculate TI Allowance

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Rent Table - Landlord's Initial Offer Rent Increase Per Year Year 1Year 2Year 3Year 4Year 5 Total 3% Base Rent $ 250,000 $ 257,500 $ 265,225 $ 273,182 $ 281,377 $ 1,327,284 Less: Free Rent (Negative) $ (20,833) $ - $ (20,833) Total Income $ 229,167 $ 257,500 $ 265,225 $ 273,182 $ 281,377 $ 1,306,451 Leasing Costs Year 1Year 2Year 3Year 4Year 5 Total Leasing Commission % (Each Year) 6% Tenant Improvement (Negative) $ (200,000) Leasing Commission (Negative) Soft Costs of Construction (Negative) Total Leasing Costs $ (200,000) $ - $ (200,000) TI Allowance

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Rent Table - Landlord's Initial Offer Rent Increase Per Year Year 1Year 2Year 3Year 4Year 5 Total 3% Base Rent $ 250,000 $ 257,500 $ 265,225 $ 273,182 $ 281,377 $ 1,327,284 Less: Free Rent (Negative) $ (20,833) $ - $ (20,833) Total Income $ 229,167 $ 257,500 $ 265,225 $ 273,182 $ 281,377 $ 1,306,451 Leasing Costs Year 1Year 2Year 3Year 4Year 5 Total Leasing Commission % (Each Year) 6% Tenant Improvement (Negative) $ (200,000) Leasing Commission (Negative) Soft Costs of Construction (Negative) Total Leasing Costs $ (200,000) $ - $ (200,000) Calculate Leasing Commission

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Rent Table - Landlord's Initial Offer Rent Increase Per Year Year 1Year 2Year 3Year 4Year 5 Total 3% Base Rent $ 250,000 $ 257,500 $ 265,225 $ 273,182 $ 281,377 $ 1,327,284 Less: Free Rent (Negative) $ (20,833) $ - $ (20,833) Total Income $ 229,167 $ 257,500 $ 265,225 $ 273,182 $ 281,377 $ 1,306,451 Leasing Costs Year 1Year 2Year 3Year 4Year 5 Total 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) $ - $ (278,387) Leasing Commission

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Rent Table - Landlord's Initial Offer Rent Increase Per Year Year 1Year 2Year 3Year 4Year 5 Total 3% Base Rent $ 250,000 $ 257,500 $ 265,225 $ 273,182 $ 281,377 $ 1,327,284 Less: Free Rent (Negative) $ (20,833) $ - $ (20,833) Total Income $ 229,167 $ 257,500 $ 265,225 $ 273,182 $ 281,377 $ 1,306,451 Leasing Costs Year 1Year 2Year 3Year 4Year 5 Total 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) $ - $ (278,387) Calculate Space Planning Cost

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Rent Table - Landlord's Initial Offer Rent Increase Per Year Year 1Year 2Year 3Year 4Year 5 Total 3% Base Rent $ 250,000 $ 257,500 $ 265,225 $ 273,182 $ 281,377 $ 1,327,284 Less: Free Rent (Negative) $ (20,833) $ - $ (20,833) Total Income $ 229,167 $ 257,500 $ 265,225 $ 273,182 $ 281,377 $ 1,306,451 Leasing Costs Year 1Year 2Year 3Year 4Year 5 Total 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) $ - $ (280,387) Space Planning Cost

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Rent Table - Landlord's Initial Offer Rent Increase Per Year Year 1Year 2Year 3Year 4Year 5 Total 3% Base Rent $ 250,000 $ 257,500 $ 265,225 $ 273,182 $ 281,377 $ 1,327,284 Less: Free Rent (Negative) $ (20,833) $ - $ (20,833) Total Income $ 229,167 $ 257,500 $ 265,225 $ 273,182 $ 281,377 $ 1,306,451 Leasing Costs Year 1Year 2Year 3Year 4Year 5 Total 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) $ - $ (280,387) Cash Flow Year 1Year 2Year 3Year 4Year 5Total Annual Cash Flow Cumulative Total Calculate Annual Cash Flow

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Rent Table - Landlord's Initial Offer Rent Increase Per Year Year 1Year 2Year 3Year 4Year 5 Total 3% Base Rent $ 250,000 $ 257,500 $ 265,225 $ 273,182 $ 281,377 $ 1,327,284 Less: Free Rent (Negative) $ (20,833) $ - $ (20,833) Total Income $ 229,167 $ 257,500 $ 265,225 $ 273,182 $ 281,377 $ 1,306,451 Leasing Costs Year 1Year 2Year 3Year 4Year 5 Total 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) $ - $ (280,387) Cash Flow Year 1Year 2Year 3Year 4Year 5Total Annual Cash Flow $ (51,220) $ 257,500 $ 265,225 $ 273,182 $ 281,377 $ 1,026,064 Cumulative Total Annual Cash Flow

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Rent Table - Landlord's Initial Offer Rent Increase Per Year Year 1Year 2Year 3Year 4Year 5 Total 3% Base Rent $ 250,000 $ 257,500 $ 265,225 $ 273,182 $ 281,377 $ 1,327,284 Less: Free Rent (Negative) $ (20,833) $ - $ (20,833) Total Income $ 229,167 $ 257,500 $ 265,225 $ 273,182 $ 281,377 $ 1,306,451 Leasing Costs Year 1Year 2Year 3Year 4Year 5 Total 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) $ - $ (280,387) Cash Flow Year 1Year 2Year 3Year 4Year 5Total Annual Cash Flow $ (51,220) $ 257,500 $ 265,225 $ 273,182 $ 281,377 $ 1,026,064 Cumulative Total Calculate Cumulative Cash Flow

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Rent Table - Landlord's Initial Offer Rent Increase Per Year Year 1Year 2Year 3Year 4Year 5 Total 3% Base Rent $ 250,000 $ 257,500 $ 265,225 $ 273,182 $ 281,377 $ 1,327,284 Less: Free Rent (Negative) $ (20,833) $ - $ (20,833) Total Income $ 229,167 $ 257,500 $ 265,225 $ 273,182 $ 281,377 $ 1,306,451 Leasing Costs Year 1Year 2Year 3Year 4Year 5 Total 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) $ - $ (280,387) Cash Flow Year 1Year 2Year 3Year 4Year 5Total Annual Cash Flow $ (51,220) $ 257,500 $ 265,225 $ 273,182 $ 281,377 $ 1,026,064 Cumulative Total $ (51,220) $ 206,280 $ 471,505 $ 744,687 $ 1,026,064 Cumulative Cash Flow

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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 Calculate Net Effective Rent Calculation: Cumulative cash flow / square feet / lease term (years)

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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 Net Effective Rent Calculation: Cumulative cash flow / square feet / lease term (years) $1,026,064 / 10,000 square feet / 5 years = $ 20.52

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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 Calculate Simple Payback 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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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 Calculate Simple Payback 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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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 Simple Payback 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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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 Calculate ROI 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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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 ROI 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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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 Calculate Net Present Value Calculated for You 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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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 $ 229,167 Cash Inflow - Year 2 $ 257,500 Cash Inflow - Year 3 $ 265,225 Cash Inflow - Year 4 $ 273,182 Cash Inflow - Year 5 $ 281,377 Internal Rate of Return83.99% Calculate IRR Calculated for You 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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Lease Commission Options Rent Tables Year 1Year 2Year 3Year 4Year 5Totals Base Rent (net of concessions) $ 229,167 $ 257,500 $ 265,225 $ 273,182 $ 281,377 $ 1,306,451 Leasing Commission Option #1 - Flat Commission Year 1Year 2Year 3Year 4Year 5Totals Leasing Commission Rate6% Leasing Commission $ 13,750 $ 15,450 $ 15,914 $ 16,391 $ 16,883 $ 78,387 Leasing Commission Option #1 - Staggered Commission Year 1Year 2Year 3Year 4Year 5Totals Leasing Commission Rate Leasing Commission Calculate Alternate Commissions

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Lease Commission Options Rent Tables Year 1Year 2Year 3Year 4Year 5Totals Base Rent (net of concessions) $ 229,167 $ 257,500 $ 265,225 $ 273,182 $ 281,377 $ 1,306,451 Leasing Commission Option #1 - Flat Commission Year 1Year 2Year 3Year 4Year 5Totals Leasing Commission Rate6% Leasing Commission $ 13,750 $ 15,450 $ 15,914 $ 16,391 $ 16,883 $ 78,387 Leasing Commission Option #1 - Staggered Commission Year 1Year 2Year 3Year 4Year 5Totals Leasing Commission Rate8%6% 5% Leasing Commission Calculate Alternate Commissions

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Lease Commission Options Rent Tables Year 1Year 2Year 3Year 4Year 5Totals Base Rent (net of concessions) $ 229,167 $ 257,500 $ 265,225 $ 273,182 $ 281,377 $ 1,306,451 Leasing Commission Option #1 - Flat Commission Year 1Year 2Year 3Year 4Year 5Totals Leasing Commission Rate6% Leasing Commission $ 13,750 $ 15,450 $ 15,914 $ 16,391 $ 16,883 $ 78,387 Leasing Commission Option #1 - Staggered Commission Year 1Year 2Year 3Year 4Year 5Totals Leasing Commission Rate8%6% 5% Leasing Commission $ 18,333 $ 15,450 $ 15,914 $ 13,659 $ 14,069 $ 77,425 Alternate Commissions

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

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Rent Table - Tenant's Counter Offer Year 1Year 2Year 3Year 4Year 5 Total Rent Increase Per Year 3% Base Rent $ 230,000 $ 236,900 $ 244,007 $ 251,327 $ 258,867 $ 1,221,101 Less: Free Rent (Negative) $ (57,500) $ - $ (57,500) Net Operating Income $ 172,500 $ 236,900 $ 244,007 $ 251,327 $ 258,867 $ 1,163,601 Leasing Costs Year 1Year 2Year 3Year 4Year 5 Total Leasing Commission Per Year6% Tenant Improvement (Negative) $ (250,000) $ - $ (250,000) Leasing Commission (Negative) $ (69,816) $ - $ (69,816) Soft Costs of Construction (Negative) $ (2,000) $ - $ (2,000) Total $ (321,816) $ - $ (321,816) Cash Flow Year 1Year 2Year 3Year 4Year 5Total Annual Cash Flow $ (149,316) $ 236,900 $ 244,007 $ 251,327 $ 258,867 $ 841,785 Cumulative Total $ (149,316) $ 87,584 $ 331,591 $ 582,918 $ 841,785 Tenant’s Counter Offer Changes proposed by the tenant: o Starting rent of $23 per square foot with 3% annual increases o Three (3) months of free rent o $25 per square foot tenant improvement allowance

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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 $ 172,500 Cash Inflow - Year 2 $ 236,900 Cash Inflow - Year 3 $ 244,007 Cash Inflow - Year 4 $ 251,327 Cash Inflow - Year 5 $ 258,867 Internal Rate of Return60.25% Tenant’s Counter Offer

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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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Rent Table - Landlord's Counter Offer Year 1Year 2Year 3Year 4Year 5 Total Rent Increase Per Year 3% Base Rent $ 240,000 $ 247,200 $ 254,616 $ 262,254 $ 270,122 $ 1,274,193 Less: Free Rent (Negative) $ (40,000) $ - $ (40,000) Net Operating Income $ 200,000 $ 247,200 $ 254,616 $ 262,254 $ 270,122 $ 1,234,193 Leasing Costs Year 1Year 2Year 3Year 4Year 5 Total Leasing Commission Per Year6% Tenant Improvement (Negative) $ (225,000) $ - $ (225,000) Leasing Commission (Negative) $ (74,052) $ - $ (74,052) Soft Costs of Construction (Negative) $ - Total $ (299,052) $ - $ (299,052) Cash Flow Year 1Year 2Year 3Year 4Year 5Total Annual Cash Flow $ (99,052) $ 247,200 $ 254,616 $ 262,254 $ 270,122 $ 935,141 Cumulative Total $ (99,052) $ 148,148 $ 402,764 $ 665,019 $ 935,141 Landlord’s Counter Offer Changes proposed by the landlord: o Starting rent of $24 per square foot with 3% annual increases o Two (2) months of free rent o $22.50 per square foot tenant improvement allowance

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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 $ 200,000 Cash Inflow - Year 2 $ 247,200 Cash Inflow - Year 3 $ 254,616 Cash Inflow - Year 4 $ 262,254 Cash Inflow - Year 5 $ 270,122 Internal Rate of Return71.66% Landlord’s Counter Offer

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

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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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