Real Estate Finance and Investments: Lecture 8

1
Real Estate Finance and Investments Lecture 8

• Industrial, Office, and Shopping Center Real
  Estate

2
Real Estate Finance and Investments Lecture 8

• Primer on Commercial Leases

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Characteristics of Commercial Leases

• Agreement and Consideration
• Meeting of the Minds
• Owner sets asking price, and makes proposal to
  tenant
  
• Tenant accepts, and lease is commenced
• Common Lease Clauses
• Fixtures Clause
• Tenant Improvements Clause
• Hours-Of-Business Clause
• Use Clause
• Signage Clause
• Condemnation Clause

4
Commercial Rental Structures

• Gross Lease
• Landlord pays for all expenses
• Expense Stops
• Net Lease
• Tenant pays for pro-rata share of determined
  expenses
  
• Triple-Net (NNN) Tenant pays for pro-rata share
  of Common Area Maintenance (CAM), Ad Valorem
  Taxes, Hazard Insurance

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Commercial Rental Structures

• Percentage Rent (Overage Rent)
• Portion of Tenants rent based on business
  income
  
• Fixed Rental Portion Overage Portion
• Recapture Clause (helps hedge owner risk of
  tenants poor business performance)
  
• Escalated Rents
• Flat rent amount over a set period, increases
  periodically thereafter
  
• Escalators contracted or based on consumer
  indices
  

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Examples of Rental Structures

• 1. Tenant pays 50,000, and Landlord/Owner pays
  all operating expenses.
  
• 2. Tenant pays 30,000 annually, PLUS 2 of all
  retail sales over 750,000. The stores gross
  sales were 900,000.
  
• 3. Tenant pays 10,000 annually plus its share of
  hazard insurance, ad valorem taxes, and CAM
  totaling 30,000 per year.
  
• 4. Tenant pays 24,000 annually for the first
  year, and the Landlord pays all operating
  expenses. In years 2 through 6, the rent
  increases by an amount equal to the respective
  CPI, or 3.5.

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Real Estate Finance and Investments Lecture 8

• Industrial Real Estate

8
Industrial Building Investments

• Industrial buildings have the advantages of
  reliable, credit-worthy tenants, long-term
  leases, and opportunities to shift many operating
  expenses to tenants
• Business operators, short on capital, prefer to
  channel resources into business expansion rather
  than real estate ownership
  

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Demand for Industrial Space

• Largely a function of demand for products
  produced by industrial sector
  
• Periodic shifts in demand for industrial space of
  various types and in different locations reflect
  alterations in composition of the industrial
  sector
• Growth in service and technology
• Decrease for products of heavy industry

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Locations Factors

• Near fuel or power supply
• Near markets
• Synergy

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Types of Industrial Buildings

• No official classification system for industrial
  buildings. Can be characterized by nature of
  buildings construction or type of tenant it
  attracts
• Heavy industrial buildings
• Loft buildings
• Modern one-story structures
• Incubator Buildings

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Real Estate Finance and Investments Lecture 8

• Office Real Estate

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Office Building Investments

• Dramatic growth in service sector has increased
  demand
  
• Demand for office space is a derived demand
  related to demand for services supplied by
  occupants of office buildings
  
• Unlike owner-owned office buildings,
  investor-owned buildings tend to be more
  functional and less luxurious
  
• Multi-year leases
• Options to renew on occupied space

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Difficulties ofAnalyzing Office Space

• Analysts need to know how many tenants made local
  relocations (within the same market area)
  
• Gross Absorption vs. Net Absorption
• Tenants planning on future expansion may have
  leased extra space (shadow space)
  
• Office market made up of distinctive class
  levels

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Office Property Definitions

• Gross Square Feet Total constructed area
• Net Useable / Leasable Area Area of a building
  that can be leased
  
• Efficiency Ratio / Core Factor Percentage of
  total useable space to the total gross space in
  the building

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Office Class Levels

• Class A Excellent location and accessibility,
  high-quality building and management, over 100K
  sf in CBD, over 50K sf in suburbs, rent rates
  upper 33
• High land values in a CBD create need for Class
  A structures.

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Class A
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Office Class Levels

• Class B Good location and access, structure
  showing minimal obsolescence or deterioration,
  minimum size 50K sf in CBD, minimum 25K sf in
  suburbs, rental rates in upper 60 of market

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Class B
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Office Class Levels

• Class C Buildings generally more than 15
  years old, with rent rates in the lower 40 of
  the market, located in less-desirable areas,
  little (if any) common space and amenities

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Class C
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Office Market Trends

• Demand may decrease from hotelling and office
  sharing
  
• Telecommunicating allows employees to work from
  home
  
• Less filing space required, as files are saved
  electronically
  
• Increased density of occupancy per worker has
  created problems with parking
  
• Green design, intelligent buildings, and
  increased security have become more important.
  

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Real Estate Finance and Investments Lecture 8

• Shopping Center Real Estate

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Shopping Center Investments

• Investors and developers have long provided
  favorable lease terms to anchor tenantsmajor
  stores that attract customers
  
• Recently, developers have allowed major tenants
  to construct their own buildings on sites leased
  from owners

25
Lease Arrangement in Shopping Centers

• Owners set base rental rate and increase rental
  rates as tenants sales volume increases
  (percentage clause)
  
• Large shopping center tenants typically lease
  space on net basis, paying all expenses
  associated with operation of their space smaller
  tenants often pay own utility expenses
• Shopping center tenants often pay common area
  maintenance fee

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Types of Shopping Centers

• Neighborhood shopping centers
• Community shopping centers
• Regional shopping malls
• Super-regional shopping malls
• Lifestyle centers