4.4 + Flashcards
(73 cards)
Assessing Retail Property Costs
- Operating Costs (CAM/additional rent):
- Includes property taxes, insurance, maintenance and repairs, janitorial, management fees, utilities, and CAM (common area maintenance).
- Tenants typically pay their proportionate share based on their occupied area (e.g., 2,000 sq ft in a 10,000 sq ft plaza = 20% of operating costs).
- Tenant Incentives:
- Lease incentives, such as tenant improvement (TI) allowances or free rent, are common in retail and affect effective occupancy costs.
- Capital Expenditures (CapEx):
- Upgrades to signage, layout changes, façade improvements-especially important as retail evolves toward lifestyle and experience-based centers (see “retail experience in an open-air village” trend).
Analyzing Land Use & Demand for Retail
- Land Use/Zoning:
- Confirm permitted and discretionary uses for the property in the municipal Land Use Bylaw (e.g., retail, restaurant, or specialty use).
- Ensure compliance with parking requirements, signage, building design, and accessibility (see “minimum width and depth requirements,” “surface treatments,” and “parking allocation based on GFA”).
- Demand Drivers:
- Population growth, household income, consumer spending and preferences, trade area analysis, and proximity to anchors or complementary businesses.
- Retail demand is also shaped by shifts such as e-commerce, distribution needs, and consumer trends toward unique, experience-oriented retail (“lifestyle centre” trend).
- Situation Assessment/SWOT:
- Identify unique advantages (location, traffic counts, nearby anchors), weaknesses (outdated design), opportunities (new adjacent development), and threats (online competition, local vacancies).
Operating Expense Ratio
Purpose: Evaluates cost efficiency.
Formula:
OER=Total Operating ExpensesGross Scheduled Income×100OER=Gross Scheduled IncomeTotal Operating Expenses×100
Example:
* Expenses = $300,000
* Income = $800,000
* OER = $\frac{300,000}{800,000} \times 100 = 37.5%$
Benchmark: Typically 35–45% for stabilized properties.
items of value and rent-related concessions that affect net effective rent calculations include:
Items of Value and Rent-Related Concessions Affecting Net Effective Rent
1. Rent-Free Period
* Time during which tenant occupies the premises at no (base) rent.
* The value is calculated as:
(Area of Leased Premises × Rent) × (Rent-Free Period in months ÷ 12)
* Example: Three months rent-free on a four-year lease reduces the tenant’s actual rent paid over the term.
2. Early Occupancy Period
* Tenant allowed to occupy and prepare/fixture space before lease commencement, often without base rent due.
* May require payment for utilities or services, but typically lowers the net effective rent.
3. Expense Stop
* Establishes a maximum amount the landlord/tenant will pay for certain operating expenses.
* Expenses above the “stop” are paid by the other party, which can limit cost exposure for tenants and impact the actual rent paid.
4. Tenant Improvement (TI) Allowance
* Landlord provides funds or allowances for tenant to construct/renovate premises.
* This financial incentive is factored into net effective rent as a benefit to the tenant and reduces their effective occupancy cost.
5. Graduated Rent
* Rent increases over time (e.g., starts low and escalates).
* Low rents in the early period impact the blended or average effective rent.
6. Percentage Rent
* Tenant pays base rent plus a percentage of gross sales (typically in retail leases).
* Actual paid rent may be higher or lower depending on sales, affecting net effective rent calculations.
7. Facilities Upgrades
* Landlord-provided upgrades or improvements that have monetary value can be considered a concession.
Calculating Value of Uneven Cash Flows
- Identify Cash Flows:
* Annual Cash Flows: Net income after debt service (e.g., Hypo Office’s Year 1: $957,825, Year 2: $960,201).
* Reversionary Value: Sale proceeds minus mortgage balance (e.g., Hypo Office’s Year 5: $19,558,293). - Determine Equity Discount Rate (r’):
* Use the rearranged WACC formula to account for leverage (e.g., Hypo Office’s r’ = 12.36%).
r′=WACC−(LTV×Rd)Equity %r′=Equity %WACC−(LTV×Rd) - Discount Each Cash Flow:
PVEquity=∑Cash Flowt(1+r′)tPVEquity=∑(1+r′)tCash Flowt
* Example:
* Year 1: $957,825 / (1 + 0.1236)^1
* Year 5: $19,558,293 / (1 + 0.1236)^5 - Sum All Discounted Cash Flows:
* Total PVEquity = Sum of individual discounted cash flows (e.g., Hypo Office: $13.8M).
What does present value convey
If the present value is greater than or equal to the cost of acquiring the property than it meets the investors rate of return.
Premises Lease schedule
- Building plan or floor plan showing exact configuration of leased premises with all mechanical details. REquired by tenants interor designer or archetecht.
Land: Plot plan/ site plan
shows overal lands, dimensions, access and egress systems, boundary road highways, parking, loading facilities with common areas.
Schedule for tenant work, landlords work
- Details the scope, timing, and specifications of all construction or improvements to be completed by either party before occupancy.
- Includes requirements for permits, approvals, and standards for tenant improvements.
- Operating/Additional Rent and CAM (Common Area Maintenance) Schedule
- Outlines tenant’s obligations for operating costs, property taxes, insurance, and share of common area expenses.
- Provides calculation methods for proportionate share and categories of recoverable costs.
Schedule of Use, Restrictions, and Exclusive Rights
- Defines permitted, restricted, or exclusive uses for the premises.
- May set out radius restrictions, continuous use requirements, and limitations on assignment or subletting.
Promotion fund schedule
- Specifies tenant’s contribution to marketing or promotional activities for the development/shopping centre.
Rent Concessions
Rent free period
early occupancy period
expense stop
excalations
Early occupancy period
referred to as ficturring period. Landlores require, lease to be fully executed, deposits paid, all landlord work is completed. Tenant has incuranct.
Steps of Landlord representation
- perform preliminary research
- conduct discovery session
- perform a situation assesment
- Develp and present the listing proposal
- Documetn the rep relationship
- impliment leasing bstrategy to find suitable denants.
Documents that should be requested from the landlord.
- Title
- Copy of landlords standard lease and offer to lease.
- Site plan for the property.(exterior of building)
- operating cost breakdown
- Floor plan for the premises leased. (interior)
- Documentation outlining existing lease agreemeent providsions.
When do you use a notice instead of a waiver
To inform the seller of third party appraisals.
What’s the difference between asset and property management
Property manager= day to day operations
Asset manager= respositioning and sipositioning of assets, creating value on a period basis
Three phases of commercial real estate.
- Development, 2. Construction, 3. Asset managment and operations,
Economic Covenents
financial and influencial to income generation. Example rent abatemetn, early occupeancy periods, tenatn improvement allowances.
Non-economic covenents
Can impact the value of space for a tenant. Exclusivity clause, visability, signages.
Economic vacancy
rental units that are vacant and units in use but not generating income.
Adjusted NOI
NOI- capital expenditures- reserves
Break Even occupancy
Percentage of property that must be leased to cover all operating expenses and debt service obligations.
