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

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

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

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  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. Calculate Base Rent

  6. Base Rent

  7. Calculate Free Rent

  8. Free Rent

  9. Calculate Total Income

  10. Total Income

  11. Calculate TI Allowance

  12. TI Allowance

  13. Calculate Leasing Commission

  14. Leasing Commission

  15. Calculate Space Planning Cost

  16. Space Planning Cost

  17. Calculate Annual Cash Flow

  18. Annual Cash Flow

  19. Calculate Cumulative Cash Flow

  20. Cumulative Cash Flow

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

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

  23. 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 / $261.257 = 1.07 years

  24. 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 / $261.257 = 1.07 years

  25. 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 / $261.257 = 1.07 years

  26. 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

  27. 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. 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

  29. Calculate IRR Calculated for You • Excel Formula - =IRR(cash outflow + annual cash flow Year 1, Year 2, etc.)

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

  31. Calculate Alternate Commissions

  32. Calculate Alternate Commissions

  33. Alternate Commissions

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

  35. Tenant’s Counter Offer • Changes proposed by the tenant: • Starting rent of $23 per square foot with 3% annual increases • Three (3) months of free rent • $25 per square foot tenant improvement allowance

  36. Tenant’s Counter Offer

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

  38. Landlord’s Counter Offer • Changes proposed by the landlord: • Starting rent of $24 per square foot with 3% annual increases • Two (2) months of free rent • $22.50 per square foot tenant improvement allowance

  39. Landlord’s Counter Offer

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

  41. 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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