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CHAPTER 9

CHAPTER 9. Introduction to Income-Producing Properties: Leases, Rents, and the Market for Space. Property Types. Residential Single Family Multifamily Nonresidential Commercial Office Buildings Retail Industrial Warehouse Space Manufacturing. Property Types. Nonresidential

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CHAPTER 9

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  1. CHAPTER9 Introduction to Income-Producing Properties: Leases, Rents, and the Market for Space

  2. Property Types • Residential • Single Family • Multifamily • Nonresidential • Commercial • Office Buildings • Retail • Industrial • Warehouse Space • Manufacturing

  3. Property Types • Nonresidential • Hotel/Motel • One-night stays • Destination resorts • Recreational • Institutional • Government • Hospital • University

  4. Supply & Demand • Equilibrium Rent • Equilibrium Vacancy Rate • Short-Run Supply • Long-Run Supply • Demand Factors

  5. Location & 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

  6. Popular 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.

  7. Real Estate Income • Market Rent • Supply & demand for specific property type • Population demographics & income level • Economic base of the area • Economic forecasts • Vacancy

  8. Leases • 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. Lease 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

  10. Leases & Expenses • Gross Lease • Tenant pays rent only • Property owner pays all operating expenses • Modified Full Service Lease • Tenant pays rent & specified expenses

  11. Leases & 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

  12. Effective 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%...

  13. Effective Rent • Step 1: Compute the present value = 0 = 12 = 14 = 15 = 12 = $32.55 C0 C1 C2 C3 i CPT NPV

  14. Effective Rent • Step 2: = $32.55 = 3 = 12 = $13.55 This is the effective rent for this rent schedule. PV n i CPT PMT

  15. Effective Rent • Use the same procedure to evaluate all potential lease alternatives. • This measures the return to the lessor and cost to the lessee.

  16. Pro-Forma Cash Flow Statement Rental Income + Other Income + Recovery of Expenses - Vacancy & Collections - Concessions ______________________ Effective Gross Income (EGI)

  17. Pro-Forma Cash Flow Statement EGI - Operating Expenses ______________________ Cash Flow from Operations (NOI) - Lease Commissions - Recurring Capital Outlays - Nonrecurring Capital Outlays ______________________ Net Cash Flow

  18. Office Leases • Normally 3-7 Year Terms • Renewal option • Premium Rents • Rent Discounts • Right of first refusal • Right to put back space • Purchase option

  19. Industrial Property Leases • Similar to office leases • Individualized and longer • Tend to be pass-through • Premiums & Discounts

  20. Retail 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

  21. Apartment Leases • Shorter Term • Consumer protection laws • Gross Potential Rental Income • Full occupancy • Loss to Lease

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