Tulabe
y Plaza: Leasing Decisions in Commercial Real Estate
Group Homework Assignment
1. Assuming a 10% discount rate for each of the prospective anchor tenants, calculate their
espective Present Value (PV) and Effective Rent. Tenant Improvements (TIs) and Leasing
Commissions (LCs) are to be paid during the first year of the analysis (lease) period.
a. Walgreens: Calculate both for the original 25-year term and then the entire 50-year term
(i.e. inclusive of the extension options).
. Ha
or Freight
c. PetSmart
d. Planet Fitness
2. What are some concerns you would have for applying the same 10% discount rate for each
anchor tenant scenario? What discount rates would you assign for each prospective tenant, and
how did you determine those rates?
3. Using the different discount rates your group used in question 2 above, now calculate new PV
and Effective Rents for each of the prospective anchor tenants. How does this compare with the
PV and Effective Rents from question 1 above?
a. Walgreens: Calculate both for the original 25-year term and then the entire 50-year term
(i.e. inclusive of the extension options).
. Ha
or Freight
c. PetSmart
d. Planet Fitness
4. Using the total cu
ent annual in-line tenant income of the center, estimate the after-debt cash
flow for each of the prospective anchor tenant scenarios. Which tenant(s) will result in the
greatest risk in terms of after-debt cash flow?
5. Your group has been hired by Benedict Clarke as an outside consultant to provide an overall
leasing strategy for Tulabe
y Plaza.
a. Based on your analysis from questions 1 through 4 above, which anchor tenant would
you recommend and why?
. Which of the “Non-Anchor Tenant Possibilities” have the best synergies with your
proposed anchor tenant? Are there therefore any existing in-line tenants you would
choose not to renew?
Tulabe
y Plaza: Leasing Decisions in Commercial Real Estate
KE1101
March 30, 2020
C R A I G F U R F I N E
Tulabe
y Plaza:
Leasing Decisions in Commercial Real Estate
“Tis isn’t as easy as I thought it would be,” Benedict Clarke murmured to himself. It had been
only three years since Clarke had purchased a thriving retail shopping center outside of Orlando,
Florida. Now, in January 2019, his anchor tenant had declared bankruptcy, and vacancies in
his inline spaces had been more difcult to fll than he had anticipated, given the rise in online
shopping.
The Property
Tulabe
y Plaza was a 59,100-square-foot gross leasable area (GLA) neighborhood shopping
center located in the Southeast Orlando submarket (Exhibit 1). Te property contained two
uildings, with 8,650 and 50,450 square feet of leasable space, respectively. Located nea
y,
ut not part of the property, were two freestanding buildings cu
ently occupied by banks. Te
property was located across the street from a Publix grocery store (Exhibit 2).
Clarke’s initial years of ownership had been rather uneventful, but the property’s anchor
tenant, a nationwide electronics retailer, had recently vacated its space and ceased paying rent.
Looking over the property’s site plan (Exhibit 3) and rent roll (Exhibit 4), Clarke realized that he
would have to address the shopping center’s vacancies. He also considered that the leases of some
of his existing tenants would soon expire. Wishing for an existing tenant to vacate might have
seemed counterintuitive, given the changes that were undoubtedly facing the shopping center.
Nevertheless, Clarke wondered whether upcoming lease expirations were an opportunity to change
the overall tenant mix. Of course, his experience suggested that every vacated space typically took
©2019, 2020 by the Kellogg School of Management at Northwestern University. Tis case was prepared by Professor
Craig Furfne with research assistance from Benjamin Engleman ’13 and Ricardo Ikeda ’13. Cases are developed solely
as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations
of efective or inefective management. Some details may have been fctionalized for pedagogical purposes. To order
copies or request permission to reproduce materials, call XXXXXXXXXXor XXXXXXXXXXoutside the United States
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ecording, or otherwise—without the permission of Kellogg Case Publishing.
For the exclusive use of J. Zettel, 2022.
This document is authorized for use only by Juliana Zettel in FINC 635 Real Estate Spring 2022 taught by Heather Boren, Pepperdine University from Jan 2022 to May 2022.
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2
T U L A B E R R Y P L A Z A KE1101
K E L L O G G S C H O O L O F M A N A G E M E N T
six months to fll and required potentially signifcant tenant-specifc improvement expenditures
(TIs).
Leasing Opportunities and Costs
With signifcant vacancy and lease renewals, Clarke realized that leasing commissions (LCs)
and TIs were major costs to be considered in the operation of Tulabe
y Plaza over the near term.
His leasing
oker, Alice Cho, charged a commission of 3% of total lease revenue (total rental
payments less TIs) for new tenants, and 1.5% for renewing existing tenants. Tese commissions
were due immediately upon the signing of a new lease.
TIs varied widely according to the type of tenant, so Clarke carefully reviewed a list of
prospective anchor tenants, which Cho had put together for him, that outlined each tenant’s
specifc lease terms, including their TI needs (Exhibit 5). Clarke noticed immediately that the
lease terms ofered by the potential anchor tenants difered not only in terms of required TIs but
also in terms of base rent and term. Cho had also provided similar information for potential inline
tenants (Exhibit 6).
Clarke understood from Cho that the most important decision he needed to make was how to
fll the anchor space in the shopping center. An anchor tenant tends to drive trafc to other stores
in a plaza, and as a result, is typically ofered lower rent on a per-square-foot basis. An anchor’s
ability to drive trafc to inline stores depends crucially on the similarity of the anchor’s typical
customer and the demographics of the local population.* Tus, Clarke had to give serious thought
to which tenants would be best for Tulabe
y Plaza.
The Decision
Clarke understood that he needed to act quickly. Because his tenants had triple net leases,
Clarke didn’t personally incur any operating expenses. However, he was responsible for any capital
expenditures on the property, which historically averaged around $85,000/year. He also had annual
mortgage payments on the property of $750,000/year. He certainly didn’t want to think about
what might happen if he didn’t make every mortgage payment on time. As he sat down at his desk
to start crunching some numbers, the words “Skilled fnancial analysts can make a spreadsheet to
justify anything—so think carefully about your assumptions,” echoed through his head. If only he
could recall where he had frst heard them . . .
* Tere were cu
ently just over 5,300 people (2,200 households) living within three miles of the shopping center,
with a median age of 43, household income of $104,000, and home price of $403,000.
For the exclusive use of J. Zettel, 2022.
This document is authorized for use only by Juliana Zettel in FINC 635 Real Estate Spring 2022 taught by Heather Boren, Pepperdine University from Jan 2022 to May 2022.
3
T U L A B E R R Y P L A Z A KE1101
K E L L O G G S C H O O L O F M A N A G E M E N T
Exhibit 1: Southeast Submarket of Orlando, Florida
Source: REIS.
For the exclusive use of J. Zettel, 2022.
This document is authorized for use only by Juliana Zettel in FINC 635 Real Estate Spring 2022 taught by Heather Boren, Pepperdine University from Jan 2022 to May 2022.
4
T U L A B E R R Y P L A Z A KE1101
K E L L O G G S C H O O L O F M A N A G E M E N T
Exhibit 2: Aerial View of Tulabe
y Plaza
Source: CoStar.
Note: Property outlined in yellow.
For the exclusive use of J. Zettel, 2022.
This document is authorized for use only by Juliana Zettel in FINC 635 Real Estate Spring 2022 taught by Heather Boren, Pepperdine University from Jan 2022 to May 2022.
5
T U L A B E R R Y P L A Z A KE1101
K E L L O G G S C H O O L O F M A N A G E M E N T
Exhibit 3: Site Plan
Source: Tulabe
y Plaza LLC.
For the exclusive use of J. Zettel, 2022.
This document is authorized for use only by Juliana Zettel in FINC 635 Real Estate Spring 2022 taught by Heather Boren, Pepperdine University from Jan 2022 to May 2022.
6
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