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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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Presentation on theme: "250,000 square foot suburban office building LL & T negotiating 10,000 square foot lease Case Study."— Presentation transcript:

1 250,000 square foot suburban office building LL & T negotiating 10,000 square foot lease Case Study

2 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)

3 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

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

5

6 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

7 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

8 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

9 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

10 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

11 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

12 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

13 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

14 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

15 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

16 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

17 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

18 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

19 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

20 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

21 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

22 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)

23 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

24 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

25 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

26 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

27 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

28 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

29 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

30 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.)

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

32 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

33 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

34 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

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

36 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

37 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

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

39 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

40 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

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

42 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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