Case Study 250,000 square foot suburban office building

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Presentation transcript:

Case Study 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 The Tenant’s Counter Proposal The Landlord’s Counter Proposal The various spreadsheets (end of chapter)

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

Review the lease parameters of the Landlord’s Initial Offer and enter the data into the appropriate cells in your spreadsheet.

Rent Table - Landlord's Initial Offer Less: Free Rent (Negative) Calculate Base Rent Rent Table - Landlord's Initial Offer Rent Increase Per Year Year 1 Year 2 Year 3 Year 4 Year 5 Total 3% Base Rent Less: Free Rent (Negative) Total Income

Rent Table - Landlord's Initial Offer Less: Free Rent (Negative) Base Rent Rent Table - Landlord's Initial Offer Rent Increase Per Year Year 1 Year 2 Year 3 Year 4 Year 5 Total 3% Base Rent $ 250,000 $ 257,500 $ 265,225 $ 273,182 $ 281,377 $ 1,327,284 Less: Free Rent (Negative) Total Income

Rent Table - Landlord's Initial Offer Less: Free Rent (Negative) Calculate Free Rent Rent Table - Landlord's Initial Offer Rent Increase Per Year Year 1 Year 2 Year 3 Year 4 Year 5 Total 3% Base Rent $ 250,000 $ 257,500 $ 265,225 $ 273,182 $ 281,377 $ 1,327,284 Less: Free Rent (Negative) Total Income

Rent Table - Landlord's Initial Offer Less: Free Rent (Negative) Rent Increase Per Year Year 1 Year 2 Year 3 Year 4 Year 5 Total 3% Base Rent $ 250,000 $ 257,500 $ 265,225 $ 273,182 $ 281,377 $ 1,327,284 Less: Free Rent (Negative) $ (20,833) $ - Total Income

Calculate Total Income Rent Table - Landlord's Initial Offer Rent Increase Per Year Year 1 Year 2 Year 3 Year 4 Year 5 Total 3% Base Rent $ 250,000 $ 257,500 $ 265,225 $ 273,182 $ 281,377 $ 1,327,284 Less: Free Rent (Negative) $ (20,833) $ - Total Income

Rent Table - Landlord's Initial Offer Less: Free Rent (Negative) Total Income Rent Table - Landlord's Initial Offer Rent Increase Per Year Year 1 Year 2 Year 3 Year 4 Year 5 Total 3% Base Rent $ 250,000 $ 257,500 $ 265,225 $ 273,182 $ 281,377 $ 1,327,284 Less: Free Rent (Negative) $ (20,833) $ - Total Income $ 229,167 $ 1,306,451

Calculate TI Allowance Rent Table - Landlord's Initial Offer Rent Increase Per Year Year 1 Year 2 Year 3 Year 4 Year 5 Total 3% Base Rent $ 250,000 $ 257,500 $ 265,225 $ 273,182 $ 281,377 $ 1,327,284 Less: Free Rent (Negative) $ (20,833) $ - Total Income $ 229,167 $ 1,306,451 Leasing Costs Leasing Commission % (Each Year) 6% Tenant Improvement (Negative) Leasing Commission (Negative) Soft Costs of Construction (Negative) Total Leasing Costs

TI Allowance Rent Table - Landlord's Initial Offer Rent Increase Per Year Year 1 Year 2 Year 3 Year 4 Year 5 Total 3% Base Rent $ 250,000 $ 257,500 $ 265,225 $ 273,182 $ 281,377 $ 1,327,284 Less: Free Rent (Negative) $ (20,833) $ - Total Income $ 229,167 $ 1,306,451 Leasing Costs Leasing Commission % (Each Year) 6% Tenant Improvement (Negative) $ (200,000) Leasing Commission (Negative) Soft Costs of Construction (Negative) Total Leasing Costs

Calculate Leasing Commission Rent Table - Landlord's Initial Offer Rent Increase Per Year Year 1 Year 2 Year 3 Year 4 Year 5 Total 3% Base Rent $ 250,000 $ 257,500 $ 265,225 $ 273,182 $ 281,377 $ 1,327,284 Less: Free Rent (Negative) $ (20,833) $ - Total Income $ 229,167 $ 1,306,451 Leasing Costs Leasing Commission % (Each Year) 6% Tenant Improvement (Negative) $ (200,000) Leasing Commission (Negative) Soft Costs of Construction (Negative) Total Leasing Costs

Leasing Commission Rent Table - Landlord's Initial Offer Rent Increase Per Year Year 1 Year 2 Year 3 Year 4 Year 5 Total 3% Base Rent $ 250,000 $ 257,500 $ 265,225 $ 273,182 $ 281,377 $ 1,327,284 Less: Free Rent (Negative) $ (20,833) $ - Total Income $ 229,167 $ 1,306,451 Leasing Costs Leasing Commission % (Each Year) 6% Tenant Improvement (Negative) $ (200,000) Leasing Commission (Negative) $ (78,387) Soft Costs of Construction (Negative) Total Leasing Costs $ (278,387)

Calculate Space Planning Cost Rent Table - Landlord's Initial Offer Rent Increase Per Year Year 1 Year 2 Year 3 Year 4 Year 5 Total 3% Base Rent $ 250,000 $ 257,500 $ 265,225 $ 273,182 $ 281,377 $ 1,327,284 Less: Free Rent (Negative) $ (20,833) $ - Total Income $ 229,167 $ 1,306,451 Leasing Costs Leasing Commission % (Each Year) 6% Tenant Improvement (Negative) $ (200,000) Leasing Commission (Negative) $ (78,387) Soft Costs of Construction (Negative) Total Leasing Costs $ (278,387)

Space Planning Cost Rent Table - Landlord's Initial Offer Rent Increase Per Year Year 1 Year 2 Year 3 Year 4 Year 5 Total 3% Base Rent $ 250,000 $ 257,500 $ 265,225 $ 273,182 $ 281,377 $ 1,327,284 Less: Free Rent (Negative) $ (20,833) $ - Total Income $ 229,167 $ 1,306,451 Leasing Costs Leasing Commission % (Each Year) 6% Tenant Improvement (Negative) $ (200,000) Leasing Commission (Negative) $ (78,387) Soft Costs of Construction (Negative) $ (2,000) Total Leasing Costs $ (280,387)

Calculate Annual Cash Flow Rent Table - Landlord's Initial Offer Rent Increase Per Year Year 1 Year 2 Year 3 Year 4 Year 5 Total 3% Base Rent $ 250,000 $ 257,500 $ 265,225 $ 273,182 $ 281,377 $ 1,327,284 Less: Free Rent (Negative) $ (20,833) $ - Total Income $ 229,167 $ 1,306,451 Leasing Costs Leasing Commission % (Each Year) 6% Tenant Improvement (Negative) $ (200,000) Leasing Commission (Negative) $ (78,387) Soft Costs of Construction (Negative) $ (2,000) Total Leasing Costs $ (280,387) Cash Flow Annual Cash Flow Cumulative Total

Annual Cash Flow Rent Table - Landlord's Initial Offer Rent Increase Per Year Year 1 Year 2 Year 3 Year 4 Year 5 Total 3% Base Rent $ 250,000 $ 257,500 $ 265,225 $ 273,182 $ 281,377 $ 1,327,284 Less: Free Rent (Negative) $ (20,833) $ - Total Income $ 229,167 $ 1,306,451 Leasing Costs Leasing Commission % (Each Year) 6% Tenant Improvement (Negative) $ (200,000) Leasing Commission (Negative) $ (78,387) Soft Costs of Construction (Negative) $ (2,000) Total Leasing Costs $ (280,387) Cash Flow Annual Cash Flow $ (51,220) $ 1,026,064 Cumulative Total

Calculate Cumulative Cash Flow Rent Table - Landlord's Initial Offer Rent Increase Per Year Year 1 Year 2 Year 3 Year 4 Year 5 Total 3% Base Rent $ 250,000 $ 257,500 $ 265,225 $ 273,182 $ 281,377 $ 1,327,284 Less: Free Rent (Negative) $ (20,833) $ - Total Income $ 229,167 $ 1,306,451 Leasing Costs Leasing Commission % (Each Year) 6% Tenant Improvement (Negative) $ (200,000) Leasing Commission (Negative) $ (78,387) Soft Costs of Construction (Negative) $ (2,000) Total Leasing Costs $ (280,387) Cash Flow Annual Cash Flow $ (51,220) $ 1,026,064 Cumulative Total

Cumulative Cash Flow Rent Table - Landlord's Initial Offer Rent Increase Per Year Year 1 Year 2 Year 3 Year 4 Year 5 Total 3% Base Rent $ 250,000 $ 257,500 $ 265,225 $ 273,182 $ 281,377 $ 1,327,284 Less: Free Rent (Negative) $ (20,833) $ - Total Income $ 229,167 $ 1,306,451 Leasing Costs Leasing Commission % (Each Year) 6% Tenant Improvement (Negative) $ (200,000) Leasing Commission (Negative) $ (78,387) Soft Costs of Construction (Negative) $ (2,000) Total Leasing Costs $ (280,387) Cash Flow Annual Cash Flow $ (51,220) $ 1,026,064 Cumulative Total $ 206,280 $ 471,505 $ 744,687

Calculate Net Effective Rent Simple Payback Simple Payback (Years) years Return on Investment (ROI) Cumulative Return on Investment (ROI) Net Present Value (NPV) Calculation (assuming a 9% Discount Rate) Net Present Value of this Cash Flow Internal Rate of Return (IRR) Calculation Initial Cash Outflow Cash Inflow - Year 1 Cash Inflow - Year 2 Cash Inflow - Year 3 Cash Inflow - Year 4 Cash Inflow - Year 5 Internal Rate of Return Calculation: Cumulative cash flow / square feet / lease term (years)

Net Effective Rent Net Effective Rent $ 20.52 Simple Payback Simple Payback (Years) years Return on Investment (ROI) Cumulative Return on Investment (ROI) Net Present Value (NPV) Calculation (assuming a 9% Discount Rate) Net Present Value of this Cash Flow Internal Rate of Return (IRR) Calculation Initial Cash Outflow Cash Inflow - Year 1 Cash Inflow - Year 2 Cash Inflow - Year 3 Cash Inflow - Year 4 Cash Inflow - Year 5 Internal Rate of Return Calculation: Cumulative cash flow / square feet / lease term (years) $1,026,064 / 10,000 square feet / 5 years = $ 20.52

Calculate Simple Payback Net Effective Rent $ 20.52 Simple Payback Simple Payback (Years) years Return on Investment (ROI) Cumulative Return on Investment (ROI) Net Present Value (NPV) Calculation (assuming a 9% Discount Rate) Net Present Value of this Cash Flow Internal Rate of Return (IRR) Calculation Initial Cash Outflow Cash Inflow - Year 1 Cash Inflow - Year 2 Cash Inflow - Year 3 Cash Inflow - Year 4 Cash Inflow - Year 5 Internal Rate of Return 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

Calculate Simple Payback Net Effective Rent $ 20.52 Simple Payback Simple Payback (Years) years Return on Investment (ROI) Cumulative Return on Investment (ROI) Net Present Value (NPV) Calculation (assuming a 9% Discount Rate) Net Present Value of this Cash Flow Internal Rate of Return (IRR) Calculation Initial Cash Outflow Cash Inflow - Year 1 Cash Inflow - Year 2 Cash Inflow - Year 3 Cash Inflow - Year 4 Cash Inflow - Year 5 Internal Rate of Return 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

Simple Payback Net Effective Rent $ 20.52 Simple Payback Simple Payback (Years) 1.07 years Return on Investment (ROI) Cumulative Return on Investment (ROI) Net Present Value (NPV) Calculation (assuming a 9% Discount Rate) Net Present Value of this Cash Flow Internal Rate of Return (IRR) Calculation Initial Cash Outflow Cash Inflow - Year 1 Cash Inflow - Year 2 Cash Inflow - Year 3 Cash Inflow - Year 4 Cash Inflow - Year 5 Internal Rate of Return 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

Calculate ROI Net Effective Rent $ 20.52 Simple Payback Simple Payback (Years) 1.07 years Return on Investment (ROI) Cumulative Return on Investment (ROI) Net Present Value (NPV) Calculation (assuming a 9% Discount Rate) Net Present Value of this Cash Flow Internal Rate of Return (IRR) Calculation Initial Cash Outflow Cash Inflow - Year 1 Cash Inflow - Year 2 Cash Inflow - Year 3 Cash Inflow - Year 4 Cash Inflow - Year 5 Internal Rate of Return Calculation: (Total cash flow of each year – operating expenses ($10 psf x 10,000 sq ft = $100,000) - total leasing costs) / total leasing costs

ROI Net Effective Rent $ 20.52 Simple Payback Simple Payback (Years) 1.07 years Return on Investment (ROI) Cumulative Return on Investment (ROI) 87.62% Net Present Value (NPV) Calculation (assuming a 9% Discount Rate) Net Present Value of this Cash Flow Internal Rate of Return (IRR) Calculation Initial Cash Outflow Cash Inflow - Year 1 Cash Inflow - Year 2 Cash Inflow - Year 3 Cash Inflow - Year 4 Cash Inflow - Year 5 Internal Rate of Return Calculation: (Total cash flow of each year – operating expenses ($10 psf x 10,000 sq ft = $100,000) - total leasing costs) / total leasing costs

Calculate Net Present Value Calculated for You Net Effective Rent $ 20.52 Simple Payback Simple Payback (Years) 1.07 years Return on Investment (ROI) Cumulative Return on Investment (ROI) 87.62% Net Present Value (NPV) Calculation (assuming a 9% Discount Rate) Net Present Value of this Cash Flow $727,798 Internal Rate of Return (IRR) Calculation Initial Cash Outflow Cash Inflow - Year 1 Cash Inflow - Year 2 Cash Inflow - Year 3 Cash Inflow - Year 4 Cash Inflow - Year 5 Internal Rate of Return 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

Calculate IRR Calculated for You Net Effective Rent $ 20.52 Simple Payback Simple Payback (Years) 1.07 years Return on Investment (ROI) Cumulative Return on Investment (ROI) 87.62% Net Present Value (NPV) Calculation (assuming a 9% Discount Rate) Net Present Value of this Cash Flow $727,798 Internal Rate of Return (IRR) Calculation Initial Cash Outflow $ (280,387) Cash Inflow - Year 1 $ 229,167 Cash Inflow - Year 2 $ 257,500 Cash Inflow - Year 3 $ 265,225 Cash Inflow - Year 4 $ 273,182 Cash Inflow - Year 5 $ 281,377 Internal Rate of Return 83.99% Excel Formula - =IRR(cash outflow + annual cash flow Year 1, Year 2, etc.)

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

Calculate Alternate Commissions Lease Commission Options Rent Tables Year 1 Year 2 Year 3 Year 4 Year 5 Totals Base Rent (net of concessions) $ 229,167 $ 257,500 $ 265,225 $ 273,182 $ 281,377 $ 1,306,451 Leasing Commission Option #1 - Flat Commission Leasing Commission Rate 6% Leasing Commission $ 13,750 $ 15,450 $ 15,914 $ 16,391 $ 16,883 $ 78,387 Leasing Commission Option #1 - Staggered Commission

Calculate Alternate Commissions Lease Commission Options Rent Tables Year 1 Year 2 Year 3 Year 4 Year 5 Totals Base Rent (net of concessions) $ 229,167 $ 257,500 $ 265,225 $ 273,182 $ 281,377 $ 1,306,451 Leasing Commission Option #1 - Flat Commission Leasing Commission Rate 6% Leasing Commission $ 13,750 $ 15,450 $ 15,914 $ 16,391 $ 16,883 $ 78,387 Leasing Commission Option #1 - Staggered Commission 8% 5%

Alternate Commissions Lease Commission Options Rent Tables Year 1 Year 2 Year 3 Year 4 Year 5 Totals Base Rent (net of concessions) $ 229,167 $ 257,500 $ 265,225 $ 273,182 $ 281,377 $ 1,306,451 Leasing Commission Option #1 - Flat Commission Leasing Commission Rate 6% Leasing Commission $ 13,750 $ 15,450 $ 15,914 $ 16,391 $ 16,883 $ 78,387 Leasing Commission Option #1 - Staggered Commission 8% 5% $ 18,333 $ 13,659 $ 14,069 $ 77,425

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

Tenant’s Counter Offer Rent Table - Tenant's Counter Offer Year 1 Year 2 Year 3 Year 4 Year 5 Total Rent Increase Per Year 3% Base Rent $ 230,000 $ 236,900 $ 244,007 $ 251,327 $ 258,867 $ 1,221,101 Less: Free Rent (Negative) $ (57,500) $ - Net Operating Income $ 172,500 $ 1,163,601 Leasing Costs Leasing Commission Per Year 6% Tenant Improvement (Negative) $ (250,000) Leasing Commission (Negative) $ (69,816) Soft Costs of Construction (Negative) $ (2,000) $ (321,816) Cash Flow Annual Cash Flow $ (149,316) $ 841,785 Cumulative Total $ 87,584 $ 331,591 $ 582,918 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

Tenant’s Counter Offer Net Effective Rent $ 16.84 Simple Payback Simple Payback (Years) 1.38 years Return on Investment (ROI) Cumulative Return on Investment (ROI) 6.21% Net Present Value (NPV) Calculation (assuming a 9% Discount Rate) Net Present Value of this Cash Flow $570,545 Internal Rate of Return (IRR) Calculation Initial Cash Outflow $ (321,816) Cash Inflow - Year 1 $ 172,500 Cash Inflow - Year 2 $ 236,900 Cash Inflow - Year 3 $ 244,007 Cash Inflow - Year 4 $ 251,327 Cash Inflow - Year 5 $ 258,867 Internal Rate of Return 60.25%

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

Landlord’s Counter Offer Rent Table - Landlord's Counter Offer Year 1 Year 2 Year 3 Year 4 Year 5 Total Rent Increase Per Year 3% Base Rent $ 240,000 $ 247,200 $ 254,616 $ 262,254 $ 270,122 $ 1,274,193 Less: Free Rent (Negative) $ (40,000) $ - Net Operating Income $ 200,000 $ 1,234,193 Leasing Costs Leasing Commission Per Year 6% Tenant Improvement (Negative) $ (225,000) Leasing Commission (Negative) $ (74,052) Soft Costs of Construction (Negative) $ (299,052) Cash Flow Annual Cash Flow $ (99,052) $ 935,141 Cumulative Total $ 148,148 $ 402,764 $ 665,019 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

Landlord’s Counter Offer Net Effective Rent $ 18.70 Simple Payback Simple Payback (Years) 1.21 years Return on Investment (ROI) Cumulative Return on Investment (ROI) 45.51% Net Present Value (NPV) Calculation (assuming a 9% Discount Rate) Net Present Value of this Cash Flow $650,457 Internal Rate of Return (IRR) Calculation Initial Cash Outflow $ (299,052) Cash Inflow - Year 1 $ 200,000 Cash Inflow - Year 2 $ 247,200 Cash Inflow - Year 3 $ 254,616 Cash Inflow - Year 4 $ 262,254 Cash Inflow - Year 5 $ 270,122 Internal Rate of Return 71.66%

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

Agree that no deal can be done 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