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Homework Assignment #7

1. Based on the following information, develop a front door “Simple Financial


Feasibility Analysis” (SFFA) for this project estimating the required minimum
market gross rent per SF that will support development.

• 40,000 NRSF office building project.


• Acquisition & construction cost = $1,500,000;
• Estimated operating costs (to landlord) = $100,000/yr.
• Projected stabilized occupancy = 95%.
• Permanent loan available on completion @ 9% (interest-only loan) with 130%
debt service coverage requirement on the net operating income, and 75%
maximum loan-to-value ratio.

Answer:
1500000 X .75 = 1125000 Max loan
1125000 X .09 = 101250/yr debt svc
101250 X 1.3 = 131625 Required NOI
131625 + 100000 = 231625 Required EGI
231625 / .95 = 243816 Required PGI
243816 / 40000 = $6.10 / SF Gross rent required.

2. What is the Effective Rent (under 10% discount rate assumption) for a 7-year net
lease with rent fixed at $20/SF, in which the landlord agrees to give the tenant one
year free rent up front and to pay for $10/SF worth of tenant improvements?

Answer:
N=6, I=10, PMT=20, FV=0, PV=87.1052
LPV = 87.1052 – 10 = 77.1052
Or CF0 = -10, CF1 to CF6 = 20, I = 10, NPV = 77.1052

(Change calculator to begin mode)


N=7, PV=77.1052, PMT=14.40
Effective rent = $14.40

3. Define gross lease and net lease.

Answer:
Gross lease: Landlord pays the operating expenses. This is also called a full
service lease because the landlord provides such services as electricity, heat,
water, cleaning, maintenance, security and so on, and no expense to the tenant.

Net lease: Tenant is responsible for paying the operating expenses of the building.
In a triple net lease, almost all of the operating expenses are charged to the tenant,
including insurance and property tax. The landlord still have some expenses such
as the property manager’s fees and cost associated with leasing activities.
4. Define and discuss:
a. Graduated rent
b. Revaluated rent
c. Indexed rent
d. Percentage rent

Answer:
Graduated rent: Rent changes over time. The timing and the dollar amount of
each change specified in the lease.

Revaluated rent: Rent changes at times specified in the lease but dollar
amount of each change depends on the market. For example, the lease may
call for appraisal every 5 year, and rent is set at a predetermined percentage of
the appraised value. Or re-evaluate every five years on the new lease signed
by comparable properties.

Indexed rent: Rent based on publicly observable index, ex. CPI or PPI. The
rent adjustment is set at a percentage of the adjustment of the index. For
example, Rent change is set at 50% of the CPI index adjustment means if CPI
index increased 5%, rent will increase 2.5%.

Percentage rent: Rent is set at a percentage of sales or net income together


with a fixed base rent. For example, tenant pays $10/SF plus 5% of gross
sales.

5. Discuss some of the leasing strategy considerations

Answer:
See lecture outline.