Owner’s Leased Fee Interest – Owner permits tenant to use the property in exchange for rent and right to repossess the space after lease ends
Landlord Proposal – The landlord’s response to tenant’s RFP. It should address as many of the RPF points as possible.
Provisions for Valid Leases – Owners and tenants names, description of property, consideration, legality of objective, offer and acceptance, in writing
Typical Lease Clauses – Parties to Lease, Premises and Building Description, Lease Term, Rent, Occupancy and Use, Utilities and Service, Parking Clause, Signage, Tenant Improvements, Alterations and Improvements, Casualty, Insurance Waivers Subrogation and Indemnity, Condemnation, Right to Relocate the Premises, Options to Review, Right to Assignment or Sublease Novation, Expansion and Contraction Options, Holdover Clause, Subordination, Estoppel Certificates, Default and Remedies, Surrender of Premises
Types of Due Diligence
- Market – Conduct market research reports to confirm supply and demand data
- Property – Research ownership, physical property characteristics, tenant/lease data, and management or third party contracts.
- People – Research the people authorized to sign for the opposing party
- Contractual – Understanding deadlines and paperwork related to the transaction
Cost Recovery – Also called depreciation, an accounting entry, not actual cash expense is the periodic allocation of the cost portion of an asset that wears out
Financial Leverage – Measures the degree to which debt is used to finance an investment
Debt Service Coverage Ratio – The ratio of NOI to ADS
Annual Debt Service – The ratio of NOI/DSCR
Time Value of Money – Economic principle that a dollar received today has greater value than a dollar received in the future.
Compounding – Process of determining the future value of an investment made today
Discounting – Pocess of determining the present value of money to be received in the future.
Internal Rate of Return IRR – Rate of return for each dollar in an investment earns while it is in the investment. Also referred to interest rate, yield or discount rate.
Net Operating Income NOI – Annual income generated by an income producing property after collecting all income from operations and deducting all expenses.
Potential Rental Income
- Vacancy and credit losses
= Effective Rental Income
+ Other Income
= Gross Operating Income
- Operating Expenses
= Net Operating Income
Direct Capitalization – Process of converting a future income stream into a PV by dividing a future income amount by a cap rate.
Disposition Cap Rate – Process of determining the property value by dividing next year’s NOI by the cap rate
Capitalization Rate – NOI/Sales Price
Basis – Method for determining a properties starting point for tax purposes
Tenant’s Leasehold Estate – Right to occupy space and use the space.
Tenant’s Request for Proposal (RFP) – Designed to put all the landlords on the same playing field by informing them of the tenant’s space and transaction requirements.
Key Components of a RFP – Client Description, Space Requirement, Purpose of Space, Load Factor, Location Within Building, Primary Lease Term, Rental Rate, Existing Lease Assumption, Beneficial Occupancy, Tenant Improvements, Options to Renew, Refurbishment Allowance/Improvement Package, Expansion Options, Operating Expense and Operating Expense Cam Stops, Concession Package, Technology Requirements, Construction, Space Planning, Management Company, Moving Expenses, Right to Terminate, Holding Over, Relocation of Premises, Parking, Signage, Building Security, After-hours Access, Right to Sublease or Assign, Non-Compete, Ownership Considerations, Building Considerations, Municipal Incentives, HVAC Costs, Environmental Issues, ADA Compliance, Janitorial, Amenities.
Fixed Rent – Contract rent remains the same for the term of the lease
Step Leases – Contract rents change by preset amounts and predetermined dates
Indexed Leases – Contract rent tied to movements in a pre-specified index, like the CPI.
Operating Expenses – Items such as real estate taxes, insurance, maintenance, utilities, janitorial, and security costs.
Expense Stops – Landlord agrees to pay the operating expenses up to a certain amount and the tenant is responsible for the amount about the “stop”.
Expense Caps – Tenant’s exposure to expenses is “capped” at a certain amount
Expense Pass-Throughs – The landlord passes through certain costs to the tenant based on % occupied by tenant
Base Contract Rent – Face or quoted contract dollar amount of the periodic rent
Rate – Amount expressed as a dollar amount per square foot.
Total Effective Rent = Base rent + additional costs – concessions/allowances
Total Effective Rate = Total effective rent / premises SF
Ave Annual Effective Rent = Total effective rent/ lease term (in years)
Ave Annual Effective Rate = Ave annual effective rent/premises SF
Discounted Effective Rent (Also called Net Present Value of Occupancy Costs) – Sum of all discounted cash flows discounted at the Present Value at the user’s discount rate
Total Cost of Occupancy – Total of ALL out of pocket costs to the user necessary to take occupancy.
Full Service Lease – All operating expenses included as part of the rent.
Modified Gross Lease – Base rent plus some of the operating expenses
Net Lease – Base rent plus all of the operating expenses, sometimes referred to as triple net.
Advantages of Leasing – Availability of Cash, Financing Flexibility, Additional Tax Deductions, Source of Financing, Low Risk of Obsolescence, Stability of Costs, Spatial Flexibility/Mobility, Technology, Location, Focus.
Disadvantages of Leasing – Cost, Loss of Asset’s salvage Value, Contractual Penalties, Appreciation, Control, Operational Control, Changes.
Advantages of Owning – Tax Savings, Appreciation, Income, Control
Disadvantages of Owning – Initial Capital Outlay, Financing, Financial Liability, Legal Compliance, Risks, Health Safety Liability, Inflexibility