Introduction to IncomeProducing Properties: Leases,

1
Chapter 9

• Introduction to Income-Producing Properties
  Leases,
• Rents, and the Market for Space

2
Overview

• Property Types
• Supply Demand
• Short-Run Supply
• Long-Run Supply
• Determinants of Supply and Demand for Major
  Property Types
• Location User-Tenants

3
Property Types
4
Supply Demand

• Equilibrium Market Rent
• Determined by the supply and demand for space
• In the short-term supply of space is fixed
• Equilibrium Vacancy Rate
• Vacant space because tenants moving and the time
  it takes for newly constructed space to be
  offered for lease

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Short-Run Supply
6
Long-Run Supply
7
Determinants of Supply and Demand for Major
Property Types
8
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

9
The Business of Real Estate

• Most real estate used by firms is leased rather
  than owned
• Leasing is more cost-effective than owning
• Space requirement can be met without significant
  capital commitment
• Stay out of the real estate business
• Maintenance and repair
• Maintain operating flexibility
• This results in specialized real estate firms

10
Real Estate Income

• Market Rent
• Supply demand for specific property type
• Population demographics income level
• Economic base of the area
• Economic forecasts
• Vacancy
• Allowance for unused space. It should always be
  included in cash flow projections
• It is more predictable for space already in use
• It is difficult to estimate for newly constructed
  properties

11
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
• Use of and maintenance responsibility for common
  areas
• Responsibilities for specific expenses

12
Lease Income

• Base Rent
• Initial rent or minimum 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 dollar amount of rent that exceeds
  the base rent

13
Leases Expenses

• Recoveries
• Operating expenses are usually shared with
  tenants
• These operating expenses are prorated among
  tenants
• Typical operating expenses
• Cleaning, repairs, maintenance, landscaping,
  water/sewer, security, management, real estate
  taxes, insurance
• Gross Leases
• Tenant pays rent only
• Property owner pays all operating expenses
• Modified Full Service Leases
• Tenant pays rent specified expenses

14
Leases Expenses Continued

• Leases with Expense Recoveries in Excess of
  Expense Stops
• Tenant pays rent plus some pro-rated
  recoverable operating expenses after an
  expense stop is reached
• Pass-Through Leases
• Expense pass-through leases that require tenant
  payments on expenses
• Net leases all operating expenses are passed to
  tenant with usually no expense stops
• Net, net leases all operating expenses plus
  property taxes and insurance costs are passed to
  tenant
• Net, net, net leases (triple net) in additions
  to all above expenses, tenant pays for
  maintenance, repairs, and building alterations
  (tenant improvements)
• Combinations
• Leases can be designed to serve for the best
  interest of parties involved and therefore they
  may have features that are not distinct

15
Effective Rent

• Used to compare different leases
• Compute present value of rent stream
• Convert present value to an equivalent annual
  annuity
• 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, what is the
  effective rent?

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Effective Rent Continued
17
Effective Rent Continued
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Effective Rent Continued
19
Effective Rent Continued
20
Pro-Forma Cash Flow Statement
21
Office Leases

• Normally 3-7 year terms
• Renewal option of tenant
• Premium rents for highly desirable space
• Rent discounts for space
• Right of first refusal
• Right to rent contiguous space as it becomes
  available
• Right to put back space
• Purchase option

22
Industrial Property Leases

• Similar to office leases
• Individualized and longer
• Tend to be pass-through or
• Net
• Net, net
• Net, net, net leases
• Premiums discounts

23
Retail Leases

• Sales per square foot
• Provisions on operations
• Limits on other tenants
• Anchor and in-line tenants
• Rent differences
• Common Area Maintenance (CAM)

24
Apartment Leases

• Shorter term
• Consumer protection laws
• Gross potential rental income
• Based on full occupancy
• Loss to lease - lease difference between new and
  old leases times number of old leases/units