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This lecture handout is from Real Estate Investment Analysis course. Keywords in this lecture are: Leases and Effective Rent, Introduction to Leases, Real Estate Leases, Base Rent, Market Rent, Rent Adjustments, Percentage Leases and Overage Rent, Expense Allocations, Common Area Maintenance, Tenant Improvements
Typology: Exercises
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NOTE: There is an excellent discussion of general lease terms in Concept Boxes 9.1, 9.2, 9.3 and 9.4 in your text. You will be responsible for all of the material contained in these boxes, even if we do not discuss it in class.
a) Rent Base rent
Asking rent
Contract rent
Market rent
b) Rent adjustments
Indexed leases
Step leases
Percentage leases and overage rent
Breakpoint
Natural breakpoint
Example: Suppose a lease for a 2,500 square foot store specifies base rent of $12 psf and percentage rent of 6% of sales above the natural breakpoint. What is the natural breakpoint?
If total sales in a year are $600,000, how much total rent will the tenant pay?
If the contract specifies a breakpoint of $400,000, how much total rent will the tenant pay?
c) Expense Allocations
b) Total rentable area – Also known as gross leasable area or rentable square feet.
c) Usable area – Also known as office area or usable square feet.
d) Common areas
e) Load factor – Also known as the add-on factor or the common area factor.
Floor load factor
Example: Suppose four tenants in a building share the fifth floor that has a total rentable area of 27,000 square feet. Tenant A occupies 10, square feet of usable area, while Tenants B, C & D each have 5, square feet of usable area. What is the load factor for this floor?
Building load factor
Example: Suppose that the total rentable space in this building is 165,000 square feet, of which 15,000 square feet are building common areas. (In other words, if one tenant were leasing the entire building, it would lease 165,000 square feet.) What is the building load factor?
What is the total load factor for a tenant on the fifth floor of this building?
What is the total rentable area for Tenant B?
c) Example: A tenant would like to lease 8,000 sf of space for five years. Operating expenses for this space are expected to cost $2.00 psf in the first year; these expenses are expected to increase at the same rate as overall inflation (3 percent). Assume a 10 percent discount rate. Consider the choice among three different lease alternatives: Net lease with base rent of $22.00 psf each year.
Effective rent to landlord =
Effective cost to tenant =
Gross lease with steps. Base rent will be $22.00 psf in the first year, increasing by $1 psf each year.
Effective rent to landlord =
Effective cost to tenant =
Gross lease with CPI adjustment. Base rent is $23.50 per year, increasing at the same rate as overall inflation rate in future years.
Effective rent to landlord =
Effective cost to tenant =
Which option would you choose if you were the landlord? Why?
Which option would you choose if you were the tenant? Why?
