INDIVIDUAL ASSIGNMENTS Intended Learning Outcomes for these individual exercises Now...

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INDIVIDUAL ASSIGNMENTS

Intended Learning Outcomes for these individual exercises

Now that we have the skills to evaluate returns and risk, let’s use those skills for this week’s assignments.

 Develop understanding of how leases are structured from an operating expense recovery perspective.
 Develop understanding of risks and opportunities with various real estate investment types.
 Define business plans taking into consideration operating cash flows (return ON investment)

and proceeds from sale or refinance (return OF investment). Brueggeman Text Chapter 9

1.) What is an expense stop and provide a simple example.
2.) What is meant by useable versus rentable space?
3.) What are: a) pass through expenses (b)recoverable expenses and (c) common area expenses.
4.) Your leasing agent presents the following options for a space for your building for a 5 year

term:
-  NET LEASE WITH STEPS: Rent is $15 PSF for year 1 and increases by $1.50 PSF each
  
  year. Assume tenant pays for OPEX.
-  NET LEASE WITH CPI Adjustments: Rent is $16 PSF in year 1. After year 1, rent will
  
  increase by the CPI, which is forecasted at 3% per year.
-  GROSS LEASE: Rent is $30 PSF with the lessor paying OPEX. OPEX is $9 in year 1 and will
  
  increase by $1 per year thereafter.
-  GROSS LEASE WITH expense stop and CPI adjustment: Rent will be $22 in year 1 and
  
  increase by the full amount of any change in the CPI after year 1 with an expense stop
  
  at $9 PSF. The CPI and OPEX are assumed to change by the same amount as above. REQUIRED: Calculate the effective rent to the owner after expenses for each lease alternative using a 10% discount rate. How do you rank these alternatives?
5.) A 3-floor office building features the following leases (each floor has a single tenant):
1. 1st FL: 20,000 RSF at $15 PSF with 3 years remaining on the lease with an expense stop
  
  of $4 PSF.
2. 2nd FL: 15,000 RSF and leasing for $15.50 PSF and has four years remaining on the lease
  
  with an expense stop of $4.50 PSF.
3. 3rd FL: 15,000 RSF with a new lease of $17 PSF for five years (market rate). The expense
  
  stop is $5.00 PSF which is what expenses are expected to be during the next year.
4. Management expenses = 5% of Effective Gross Income (EGI) and not included in
  
  expense stop.
5. Each lease has a CPI adjustment that provides for base rent to increase by half the rate
  
  of increase of CPI. CPI is projected at 3% increase per year.
6. Estimated OPEX for next year:
  1. Property Taxes $100,000
  2. Insurance $10,000
  3. Utilities $75,000
  4. Janitorial $25,000
  5. Maintenance $40,000
7. All expenses are projected to increase at 3% per year.

Brueggeman Text Chapter 11 – Use Excel to complete problems and paste results below with explanations

6|Page

Market Rental rate at which leases are expected to be renewed is also projected to increase by 3% per year. When a lease is renewed, it will have an expense stop equal to OPEX PSF in the first year of the lease.
Vacancy is estimated to be 10% of EGI in years 4 and 5.

Required:

Project EGI, expense reimbursements and NOI for the next 5 years. What is the going in cap rate if the purchase price is $5 Million?

Brueggeman Text Chapter 13

6.) Two investments have the following pattern of cash flows/expected returns:

Investment A: Year 1 $5,000, Year 2 $10,000, Year 3 $12,000 Year 4 $15,000, Year 4 Sale $120,000 Investment B: Year 1 $2,000, Year 2 $4,000, Year 3 $1,000, Year 4 $5,000, Year 4 Sale $180,000 Investment A requires an outlay of $110,000 and Investment B requires an outlay of $120,000. Required: Partition the IRRs for both investment scenarios in line with the model outlined on page 436

in the text.

Student Input

 What areas you might need help in understanding the content?
 What is one major learning takeaway for this week?
 What areas you might need help in understanding the content?

Question in PDF

wk3-indi-assign-n1j0l34g.pdf

Kushal · Accepted Answer

Q.1 to 3
		1	Expense Stop - It is a threshold for the operating expenses in a real estate setting, where the landloard pays all the opeartitng expenses below expense stop and anything above that has to be paid by the tenant.
			For example, landlord has kept the annual expense stop of 50,000. But the total expenses are 60,000. Hence, the tenant will pay the $10,000
		2	Usable area is the enclosed space of your office or home. It does not consider all the common areas like lobbies, staircases, lifts. However, the tenant has to pay for that on a prorata basis.
		3	Pass Through Expenses - Third party legal expenses around the lease agreement , renewals arepass through expenses
			Recoverable expenses - The additional expenses which the landlord charge to the tenants as a part of the rent. These expenses are incurred by the tenant.
			Common Area Expenses- Common area maintenane expneses are paid by the landlords and chanregdd back to the tenants for the operating expenses. This could be a part of the rent or not.
Q.4
		A.												Scenario	Net rent
		Net Lease With Steps											A.	Net Lease With Steps	$67.15
				t=1	t=2	t=3	t=4	t=5					B.

INDIVIDUAL ASSIGNMENTS Intended Learning Outcomes for these individual exercises Now that we have the skills to evaluate returns and risk, let’s use those skills for this week’s assignments.  Develop...

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