mcgraw-hill/irwin ©2008 the mcgraw-hill companies, all rights reserved chapter9chapter9...
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McGraw-Hill/Irwin©2008 The McGraw-Hill Companies, All Rights Reserved
CHAPTER
9
CHAPTER
9
Introduction to Income-Producing Properties: Leases, Rents, and the
Market for Space
9-2
Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved
Property TypesProperty Types
• Residential Single Family Multifamily
• Nonresidential Commercial
• Office Buildings
• Retail
Industrial• Warehouse Space
• Manufacturing
9-3
Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved
Property TypesProperty Types
• Nonresidential Hotel/Motel
• One-night stays
• Destination resorts
Recreational Institutional
• Government
• Hospital
• University
9-4
Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved
Supply & DemandSupply & Demand
• Equilibrium Rent
• Equilibrium Vacancy Rate
• Short-Run Supply
• Long-Run Supply
• Demand Factors
9-5
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Location & User-TenantsLocation & User-Tenants
• Motivating Factors Increase sales
• Business type where success requires a higher revenue stream and heavy pedestrian traffic
Reduce operating costs• Business type where success is based on a lower
cost structure and large amount of land Clustering and submarkets
• Similar businesses and operating cost structures locate in similar locations
9-6
Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved
Popular Business Choice: LeasingPopular Business Choice: Leasing
• More cost-effective than owning Space requirements Owning is a heavy capital investment Stay out of the “real estate business”
• Maintenance and repair
Maintain operating flexibility
• This results in specialized real estate firms.
9-7
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Real Estate IncomeReal Estate Income
• Market Rent Supply & demand for specific property type Population demographics & income level Economic base of the area Economic forecasts
• Vacancy
9-8
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LeasesLeases
• Lessor-Owner, Lessee-Tenant
• Qualify the tenant – underwriting Financial capacity
• Some Lease Content Items Parties, Dates, Length Base rent & any adjustments, deposits Allowable uses & restrictions
9-9
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Lease IncomeLease Income
• Base Rent Initial rent
• Flat Rent Leases No rent change over lease term
• Step Up Leases Specified rent increases at specified times
• Indexed Leases Periodic rent adjustment-CPI Index
• Percentage Lease Rent partially based on sales Overage Rent
9-10
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Leases & ExpensesLeases & Expenses
• Gross Lease Tenant pays rent only Property owner pays all operating expenses
• Modified Full Service Lease Tenant pays rent & specified expenses
9-11
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Leases & ExpensesLeases & Expenses
• Expense Stops Tenant pays rent plus some pro-rated
operating expenses
• Pass-Through Leases Operating expenses paid by tenant Net, Net-Net, Net-Net-Net
• Combinations
9-12
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Effective RentEffective Rent
• Used to compare different leases Compute present value of rent stream Convert present value to an equivalent annual annuity
• Example 9-1: • Consider the following rent schedule
Year 1 = $12/square foot Year 2 = $14/square foot Year 3 = $15/square foot
• If the interest rate is 12%...
9-13
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Effective RentEffective Rent
• Step 1: Compute the present value
= 0
= 12
= 14
= 15
= 12
= $32.55
C0
CPT
C1
C2
C3
i
NPV
9-14
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Effective RentEffective Rent
• Step 2:
= $32.55
= 3
= 12
= $13.55
This is the effective rent for this rent schedule.
n
i
CPT PMT
PV
9-15
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Effective RentEffective Rent
• Use the same procedure to evaluate all potential lease alternatives.
• This measures the return to the lessor and cost to the lessee.
9-16
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Pro-Forma Cash Flow StatementPro-Forma Cash Flow Statement
Rental Income
+ Other Income
+ Recovery of Expenses
- Vacancy & Collections
- Concessions
______________________
Effective Gross Income (EGI)
9-17
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Pro-Forma Cash Flow StatementPro-Forma Cash Flow Statement
EGI
- Operating Expenses
______________________
Cash Flow from Operations (NOI)
- Lease Commissions
- Recurring Capital Outlays
- Nonrecurring Capital Outlays
______________________
Net Cash Flow
9-18
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Office LeasesOffice Leases
• Normally 3-7 Year Terms
• Renewal option
• Premium Rents
• Rent Discounts
• Right of first refusal
• Right to put back space
• Purchase option
9-19
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Industrial Property LeasesIndustrial Property Leases
• Similar to office leases
• Individualized and longer
• Tend to be pass-through
• Premiums & Discounts
9-20
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Retail LeasesRetail Leases
• Sales per Square Foot• Provisions on operations• Limits on Other Tenants• Anchor and In-Line Tenants
Rent Differences
• Common Area Maintenance (CAM)• Kick out clause• Co-Tenancy clause