Chapter 9: Leases, Cash Flows,

1
Chapter 9 Leases, Cash Flows, Investment Value

• Lease agreement between Lessor (owner) and
  Lessee (tenant)
• Rent
• Base Rent
• Step-up provisions
• CPI Adjustment (index lease)
• Percentage rent ( of lessors gross inc.)

2

• Who pays expenses?
• Gross lease Lessor pays all expenses
• Net Lease Lessee pays all expenses. Sometimes
  called a net-net-net lease or a triple net lease
• Expense stop lessor pays only up to some point.
• Expense pass-through common in shopping centers
  where common area expenses are passed through to
  the lessees.

3

• Rental Concessions are often offered in lieu of
  direct rent reductions. Usually a sign of a weak
  market.
• Equity Participation Owner gives key tenants
  equity in the property.
• Other Lease Options
• Lease renewal option
• Right of 1st refusal in case of a sale
• Tenant relocation option
• Effective Rent Ave. annual rent after
  subtracting the value of any concessions. Used
  to facilitate comparisons between leases

4
Calculation of Effective Rent

• Net Lease with steps
• yr 1 yr 2 yr 3 yr 4 yr 5
• Net Rent 10 11 12 13 14
• Ave Rent 12
• PV _at_ 10 44.77
• Effective Rent 11.81 The effective rent is the
  PMT, where n5 PV44.77 I10, the payment that
  amortizes the PV of the expected lease payments.

5

• Net Lease with free rent
• yr 1 yr 2 yr 3 yr 4 yr 5
• Net Rent 0 14 16 17 18
• Ave Rent 13
• PV _at_ 10 46.38
• Effective Rent 12.23
• See Exhibit 9-1 (page 266)

6
Homework

• Problems 9-1, 9-3, 9-4 (on page 285)