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Commercial Leasing: Tenant & Commercial Leasing: Tenant &

Commercial Leasing: Tenant & - PowerPoint Presentation

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Commercial Leasing: Tenant & - PPT Presentation

Landlord Representation Instructor Clifford J Bogart CCIM TREC Course 090002317692 TREC Provider 0287 Schedule 800 830 am Registration Attendance PreCourse Announcements ID: 672065

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Slide1

Commercial Leasing:Tenant & Landlord Representation

Instructor:Clifford J. Bogart CCIM

TREC Course: # 09-00-023-17692TREC Provider: # 0287Slide2

Schedule

8:00 - 8:30 am Registration / Attendance / Pre-Course Announcements8:30 - 10:10 am Class

10:10 – 10:25 am Break10:25 – 12:00 pm Class

12:00 – 1:00 pm Lunch

1:00 – 2:30 pm Class

2:30 – 2:40 pm Break 2:40 – 4:00 pm Class 4:00 – 4:10 pm Break4:10 – 5:35 pm Class

Clifford J. Bogart Copyright 2011

2Slide3

OutlineLease vs. Own

Defining LeasesLease StructureOperating ExpensesDefining / Lease Structures

Increases in OpExCapsOpEx Cap Exercise?Comparing Leases

Measuring Space

Rent Structures

Concessions(Fill in the blanks table)Lease Comparison ExerciseLease AccountingNew FASB rulesTenant Improvements

Tenant Representation

Needs Analysis

The Leasing Process

Getting Clients

Landlord RepresentationMarketingThe Leasing / Proposal / Pricing ProcessConstructionGroup Problem

Clifford J. Bogart Copyright 2011

3Slide4

Clifford J. Bogart CCIM

Cliff Bogart CCIM is a veteran of the Houston, Dallas, and Austin, Texas commercial real estate markets since 1979. After working for The Vantage Company in Houston, CBRE in both Houston and Dallas, and

Homart Development Company, Cliff formed The Vanguard Commercial Group, Inc., a commercial real estate brokerage firm focusing and all aspects of leasing, Investor/Buyer representation, and consulting.   Throughout his career Cliff has been directly responsible for marketing and leasing over 6 million square feet of commercial space from both the Landlord and Tenant perspective. Cliff has alson represented numerous Investors and Users in the purchase and sale of commercial property including Office, Retail, Industrial, Multi-Family, and Land. In addition, between 2002 and 2005 Cliff partnered with

Scribcor

Texas, LLC to pursue and successfully secure a contract as the first Tenant Representative for the entire State of Texas lease portfolio. During that contract period Cliff and

Scribcor handled all lease transactions and lease administration for the Texas portfolio consisting of approximately 1,200 leases encompassing over 11,000,000 square feet. In 2011 Mr. Bogart began working with Carlson Associates , specialists in the design, engineering, and construction of Data Centers and other Mission Critical Facilities.  Mr. Bogart is an active commercial real estate instructor, writing and teaching a number of commercial real estate courses approved by the Texas Real Estate Commission for Mandatory Continuing Education. Cliff is also an approved instructor for TREC’s Ethics and Legal Update course. Additionally, Cliff is a faculty member and Senior Instructor for the CCIM Institute teaching CI 101 - Financial Analysis of Commercial Investment Real Estate, CI 103 - User Decision Analysis for Commercial Real Estate, and CI Intro – Introduction to Commercial Investment Real Estate. In 2011 Cliff was selected by the CCIM Institute as CI 103 Instructor of the Year.

.

Cliff is a 1976 graduate of Michigan State University with a BA in Business. He received his CCIM designation in 1995. He has been married to his wife Cheryl since 1978 and they have four children. Cliff is an avid runner and fitness advocate and enjoys movies, technology

, and reading

history.

Cell: 214-704-9862Email: cliff@vanguardcres.com

4

Clifford J. Bogart Copyright 2011Slide5

TopicsIntroduction

AgencyLeasing EconomicsUnderstanding MarketsTenant Representation

Landlord RepresentationThe Lease DocumentClifford J. Bogart Copyright 2011

5Slide6

I. Introduction

Commercial Leasing:Tenant and Landlord Representation

Clifford J. Bogart Copyright 2011

6Slide7

Clifford J. Bogart Copyright 20117

History

Traditional Representation / ListingLandlord Pays FeesAssumed all agents represented LandlordMarket Pressure caused TREC to change Agency rules

Responsibilities

Fiduciary responsibility to Landlord interests

Show all offersMarketingLandlord RepresentationSlide8

Clifford J. Bogart Copyright 20118

History

Occurred in practice prior to TREC formerly recognizing

Developed (Commercial RE) because of imbalance of expertise w/r/t complexities of lease transaction between Landlord and Tenant

ResponsibilitiesFiduciary responsibility to Tenant interestsUnderstand Clients needsUnderstand Market for comparable spaceUnderstand economics and dynamics of Leasing Process

Tenant RepresentationSlide9

II. AgencyClifford J. Bogart Copyright 2011

9Slide10

Types of Agency

Universal Agency – Very broad and general scope of power to the agent to act for the Principal; acquisition, disposition, expenditure of funds. Principal held accountable for actions of Agent. Not common in Real Estate transactions.

General Agency – More restricted than Universal. Agent authorized to conduct certain transactions and can obligate Principal to certain types of transactions. Most common form is Broker relationship with the broker’s associates. Listings, marketing activities, representation agreements, etc.Special Agency – A.k.a. “limited agency”. Agent can perform only those acts permitted by the Principal. Most common form of agency between real estate agent and client; authority does not extend beyond the terms of listing / representation agreement.

Clifford J. Bogart Copyright 2011

10Slide11

Agency: Client vs. Customer

Level of Service: A licensee works for a Client and

with a Customer. Client is an agency relationship usually written (Listing or Representation agreement). No agency relationship exists with Customer.Client: Entitled to accurate Information, Opinions, Advice, and Fiduciary responsibility.

Customer

: Entitled to accurate Information from licensee, honesty, fairness.

Clifford J. Bogart Copyright 201111Slide12

Intermediary versus Dual Agency

Dual AgencyAuthorized (Statutory) in 1993 and since replaced by Intermediary Statutes (1996)Not recommended by TREC even when authorizedLess than full representation to both partiesTreated as Customers not Clients (i.e., no advice or opinions)Cannot be Fiduciary to bothInherent liability risks if one party believes preference given to other

IntermediaryStatutorily authorized in 1996Must be written permission by both partiesMust disclose source of compensationAppointment by Intermediary must be agreed to in writing by both partiesAppointed licensees (sub-agents) may give advice, opinions

Clifford J. Bogart Copyright 2011

12Slide13

Agency Documentation

Landlord Representation: Listing AgreementTenant Representation: Letter of Representation

Disclosure of AgencyWhenHow: Information About Brokerage Services FormNational Association of Realtors: Two thirds of complaints are due to misrepresentation issues.

Clifford J. Bogart Copyright 2011

13Slide14

III. Leasing Economics

Leasing is the engine that drives value. In order to fully understand the Economics of Leasing, how it impacts value, and therefore, how and why a property owner would be willing to negotiate some items and not others, we must first understand the economics that underlie the Property as an Investment.Clifford J. Bogart Copyright 2011

14

ValueSlide15

Elements of an Investment

Cash Outflow

: Money expended for the Investment

Cash Inflow: Money you receive from the Investment

Timing

: When do the Cash Flows (positive or negative) occur?

Risk

: What is the probability that the predicted Cash Flows will occur? What is the variance? Clifford J. Bogart Copyright 201115Slide16

Investor Measures of Return / Value

Four Common Measurements for Real Estate InvestmentsCapitalized Value (a function of NOI)Cash-on-Cash

Present Value / Net Present ValueInternal Rate of Return / YieldClifford J. Bogart Copyright 2011

16Slide17

Capitalization

Capitalization - is a method that uses the Income of a property to determine Value. The relationship (ratio) of Income to Value is expressed by a factor known as a Cap Rate.

Cap Rate: Cap Rate = NOI / Value (Price)

The Cap Rate expresses a relationship between Net Operating Income (NOI) and Value.

It is an

Inverse Relationship with Value (Higher Cap Rate = Lower Value; Lower Cap Rate = Higher Value)Cap Value: Cap Value is determined by dividing NOI by the Cap Rate.

Clifford J. Bogart Copyright 2011

17Slide18

Capitalized Value

A key figure in the Capitalization process is Net Operating Income (NOI). Simply stated, NOI is the income remaining after subtracting Operating Expenses but before deducting Debt Service and Income Taxes.

Clifford J. Bogart Copyright 201118Rent – Operating Expenses =

Net Operating Income (

NOI

)Cap Rate = NOI / Value (Price)Capitalized Value = NOI / Cap RateNOI = Cap Rate x ValueSlide19

Capitalized ValueExample

Rent $1,000,000 - Op. Expenses ($600,000)

NOI $400,000Clifford J. Bogart Copyright 201119

Value

=

NOI = $400,000 = $5,000,000 Cap Rate .08 Cap Rates reflect Market conditions for type, location, age, etc., of Property. Investor specific Cap Rate expresses how much an individual Investor is willing to pay for a given NOI depending on Market conditions as well as the Investor’s preferences, risk tolerance, etc.Slide20

Capitalized ValueRelationship to Leasing

Leases individually mirror Investment as a wholeRent, Operating Expenses, Net Rent (NOI)Each lease contributes it’s proportionate share to the investment as a wholeAdjustments that increase / decrease Net Rent directly impact ValueAmortized Improvements

Caps on Operating ExpensesStepped RentsClifford J. Bogart Copyright 201120Slide21

Cash-on-Cash Return

Cash-on-Cash Return: The first years Cash Flow Before Taxes (CFBT) divided by the initial investment. Cash-on-Cash = Yr 1 CFBT / Initial $

Cash on Cash Return represents the yield on the first year’s pre-tax cash flow only. An Investor’s target C-on-C Return can be used to determine the price and/or down payment he is willing to pay for a property based on the projected CFBT

Clifford J. Bogart Copyright 2011

21Slide22

Present Value / Net Present Value

Present Value: The value today of a future cash flow. (Discount Rate, Time).Present Value of an Investment:

The sum of the present values of all future cash flows.Net Present Value of an Investment: The sum of the present values of all future cash flows minus the initial investment.

Clifford J. Bogart Copyright 2011

22Slide23

NPV: Determining Investment Value Using Target Yield

Clifford J. Bogart Copyright 2011

23

n $

0 (10,000) - (738 + 1,393 + 4,350 + 5,172 = $11,653) = $1,653

1 7972 1,6253 5,4804 7,036 i = 8% (e.g., Discount Rate, or, Target Yield) Solution: NPV = $1,653NPV of $1,653 means the Investment exceeds the target 8% return by $1,653.Slide24

Internal Rate of Return / Yield

IRR: That rate of Discount for which the sum of the Present Values of future cash flows is exactly equal to the initial capital investment (e.g., NPV = $0).

From page 25 Example: IRR would be determined by recalculating the cash flows at various discount rates until a rate is found where the resulting NPV equals $0. (Page 25 Example IRR = 13.325%)Clifford J. Bogart Copyright 2011

24Slide25

The Economics of Leases

We have examined Investment Property Value and various measurements of Value. Now we will examine “the engine that drives Value” – Leases.In the following slides we will look at the many factors that directly, and indirectly, affect the dollars generated by Leases which, as we have seen, directly impact Value for the Investor and the Cost of Occupancy for the Tenant.

Clifford J. Bogart Copyright 201125Slide26

Clifford J. Bogart Copyright 201126

Lobby

Tele/

Elec

M W

Premises

Stairwell

Elevators

Orange + Blue + Yellow + Green =

Gross Area

Orange + Blue + Yellow =

Floor Rentable Area

Orange + Blue =

Floor Usable Area

Orange

=

Tenant Usable Area

Leasing Economics: Measuring Area

Gross / Rentable / UsableSlide27

Leasing Economics:Components of Rent

Rentable Space vs. Usable Space (Office)Usable:

Area within the Tenant’s demised walls. The space the Tenant actually “uses”.Rentable: The Usable area plus an allowance (usually expressed as a percentage; CAF) to account for, and have the tenants pay for, areas that tenants use in common, e.g., corridors, bathrooms, lobbies, mechanical / electrical.

Area Conversions:

CAF = R/U – 1

R = U x (1 + CAF)U = R / (1 + CAF)Clifford J. Bogart Copyright 201127Slide28

BOMA Area DefinitionsBuilding Owners and Managers Association

GROSS BUILDING AREA shall mean the total constructed area of a building. It is generally not used for leasing purposes.

GROSS MEASURED AREA shall mean the total area of a building enclosed by the DOMINANT PORTION, excluding parking areas and loading docks (or portions of same) outside the building line. It is generally not

used for leasing purposes and is calculated on a floor by floor basis.

MAJOR VERTICAL PENETRATION

s shall mean stairs, elevator shafts, flues, pipe shafts, vertical ducts, and the like, and their enclosing walls. Atria, lightwells and similar penetrations above the finished floor are included in this definition. Not included, however, are vertical penetrations built for the private use of a tenant occupying OFFICE AREA

s on more than one floor. Structural columns, openings for vertical electric cable or

telephone distribution, and openings for plumbing lines are not considered to be

MAJOR VERTICAL

PENETRATIONs.FLOOR RENTABLE AREA shall mean the result of subtracting from the GROSS MEASURED AREA of a floor

the MAJOR VERTICAL PENETRATION

s on that same floor. It is generally fixed for the life of the building

and is rarely affected by changes in corridor size or configuration.

USABLE AREA

shall mean the measured area of an

OFFICE AREA, STORE AREA

, or

BUILDING COMMON

AREA

on a floor. The total of all the

USABLE AREA

s for a floor shall equal

FLOOR USABLE AREA

of that

same floor.

OFFICE AREA

shall mean the area where a tenant normally houses personnel and/or furniture, for which a

measurement is to be computed.

Clifford J. Bogart Copyright 2011

28Slide29

Clifford J. Bogart Copyright 201129

The Components of Rent

Net RentSlide30

Clifford J. Bogart Copyright 201130

Operating Expenses

Operating Expenses: The costs of “Operating” the Property including: Taxes (and costs incurred in an effort to reduce taxes),

Insurance,

Janitorial

Maintenance (Building, Landscape, Elevator, etc.) Management, Utilities. Slide31

Operating Expenses

Typically does not include Marketing costs;

costs for services provided to, and reimbursed by, individual Tenants or costs associated with enforcement of individual leases Capital Expenditures other than the amortization of Cap Exp’s incurred for the purpose of reducing Operating Expenses, or, incurred due to Governmental mandate.

Clifford J. Bogart Copyright 2011

31Slide32

Operating Expense Recovery Clifford J. Bogart Copyright 2011

32

If Operating Expenses are included in Rent the Landlord must have a way to cover increases in Operating Expenses over time. Otherwise, increases in Operating Expenses will reduce Net Rent (NOI) and therefore the value of the Building (Investment). Most “Gross” or “Full Service” leases have a mechanism to have the Tenant “reimburse” the Landlord for increases in Operating Expenses from year-to-year.

Base Year

– The most common mechanism for expense recovery is the “Base Year” Expense Stop wherein the Tenant pays increases in Operating Expenses over the actual Operating Expenses for the Base Year of the lease.

Limitations – Caps on billable Excess Operating Expenses / “Pass-throughs”; Cumulative, Year-to-year, Partial Cap (i.e., “Controllables”) Slide33

Operating Expenses Over The Term

Clifford J. Bogart Copyright 2011

33Slide34

Operating Expenses: Grossing Up

In order to minimize the impact of large swings in year-to-year Operating Expense Reimbursements due to changes in Building occupancy levels - those Operating Expenses that vary directly with occupancy are often “Grossed-Up” prior to the calculation of “overages” (a.k.a. “pass-throughs,” “reimbursables”) due.

Clifford J. Bogart Copyright 201134

Operating Expenses By Type

Category

TypeSalaries Semi-VariableRep. & Maint. VariableJanitorial Semi-Variable

Elevators Fixed or Variable

Garage Fixed

Security Fixed

Utilities Semi-Variable

Insurance Fixed Ad Valor. Tax Fixed or Variable

Administrative Fixed or VariableSlide35

ExampleScenario 1: No Gross-Up

100,000 sf Building

Year 1 - 40% Occupancy: Fixed $300,000 Variable $100,000 Op Exp Per SF

$4.00

Year 2 - 100% Occupancy:

Fixed $300,000 Variable $275,000 Op Exp Per SF $5.75

Yr 1 to Yr 2 increase w/o Gross-up = $1.75/sf or 43.8%

Clifford J. Bogart Copyright 2011

35Slide36

ExampleScenario 2: Expenses Grossed-Up to 100% Occup.

100,000 sf Building

Year 1 - 40% Occupancy: Actual Grossed-Up Fixed $300,000 $300,000 Variable $100,000 $250,000 Op Exp Per SF

$4.00 $5.50

Year 2 - 100% Occupancy:

Fixed $300,000 $300,000 Variable $275,000 $275,000 Op Exp Per SF $5.75 $5.75

Yr 1 to Yr 2 increase w Gross-up = $.25/sf or 4.55%

Clifford J. Bogart Copyright 2011

36Slide37

Lease StructuresClifford J. Bogart Copyright 2011

37

Leases are structured (terms and the responsibilities of the parties) in many different ways that typically vary based on the type of property, market norms, location (local, regional, national) and investor preferences. Lease structures are most easily defined by how Operating Expenses are handled. Is it the Landlord’s or the Tenant’s responsibility to directly pay, or reimburse the other party, for the various Operating Expenses?Slide38

CommonLease Structures

Full Service / Gross

Property Taxes

Property

Insurance

Maintenance

Management

Water

Janitorial

Electric

Clifford J. Bogart Copyright 2011

38

Included in Base Rent:* Paid / Reimbursed by Tenant:

*

Subject to Expense Stop

Types of Properties Most Likely to Use This Lease Structu

re

Multi-Tenant OfficeSlide39

CommonLease Structures

Net of Electric (“Plus E”; Single Net)

Property Taxes

Property

Insurance

Maintenance

Management

Water

Janitorial

Electric

Clifford J. Bogart Copyright 2011

39

Included in Base Rent:* Paid / Reimbursed by Tenant:

*

Subject to Expense Stop

Types of Properties Most Likely to Use This Lease Structu

re

Class A and some Class B Multi-Tenant Office

Particularly prevalent in DFW AreaSlide40

CommonLease Structures

Modified Gross a.k.a. Industrial Gross

Property Taxes

Property

Insurance

Maintenance

Management

Water

Janitorial

Electric

Clifford J. Bogart Copyright 2011

40

Included in Base Rent:* Paid / Reimbursed by Tenant:

*

Subject to Expense Stop

Types of Properties Most Likely to Use This Lease Structu

re

Flex

Office / Showroom

Single Tenant OfficeSlide41

CommonLease Structures

Triple Net (NNN)

Property Taxes

Property

Insurance

Maintenance

Management

Water

Janitorial

Electric

Clifford J. Bogart Copyright 2011

41

Included in Base Rent:* Paid / Reimbursed by Tenant:

*

Subject to Expense Stop

Types of Properties Most Likely to Use This Lease Structu

re

Industrial / Warehouse

Retail Slide42

Lease Structure ActivityAngel Computers is considering four buildings; two office, one flex, and one retail. Office Building A is Full Service, Office B is net of Electricity, Flex C is Modified Gross with Taxes, Insurance, and CAM included in Base Rent, and Retail D is NNN. Below are the respective sizes, rates, and expense estimates. Angel wants you to compare apples-to-apples and tell them what their total annual rent will be for each choice in the first year.

Clifford J. Bogart Copyright 2011

42

Office

A

Office B

Flex C

Retail

D

Size

(SF)

6,500

6,300

7,200

6,750

Per

SF

$

Per SF

$

Per SF

$

Per SF

$

Base Rent

$18.00

$16.50

$12.00

$11.00

Property Tax

$2.20

Property Ins.

$0.85

CAM

$1.95

Utilities

$2.25

$2.60

$2.50

Janitorial

$2.10

Total RentSlide43

Lease Structure ActivityAngel Computers is considering four buildings; two office, one flex, and one retail. Office Building A is Full Service, Office B is net of Electricity, Flex C is Modified Gross with Taxes, Insurance, and CAM included in Base Rent, and Retail D is NNN. Below are the respective sizes, rates, and expense estimates. Angel wants you to compare apples-to-apples and tell them what their total annual rent will be for each choice in the first year.

Clifford J. Bogart Copyright 2011

43

Office

A

Office B

Flex C

Retail

D

Size

(SF)

6,500

6,300

7,200

6,750

Per

SF

$

Per SF

$

Per SF

$

Per SF

$

Base Rent

$18.00

117,000

$16.50

103,950

$12.00

86,400

$11.00

74,250

Property Tax

$2.20

14,850

Property Ins.

$0.85

5,738

CAM

$1.95

13,163

Utilities

$2.25

14,175

$2.60

18,720

$2.50

16,875

Janitorial

$2.10

15,120

Fill in

Fill in

Total Rent

$117,000

$118,125

$120,240

$124,876Slide44

Percentage Rent

BreakpointFixed or “Natural” BreakpointBase Rent / % Rent = Natural Break (NB)

Sales above NB x % rent = Percentage Rental (PR)Example: Percentage Rent = 6% above Natural Breakpoint$12,000/yr BR / 6% = $200,000 NB

$300,000 Sales - $200,000 NB = $100,000 sales subject to % Rent

$100,000 x 6% = $6,000 percentage rent (paid in addition to Base Rent)

Clifford J. Bogart Copyright 201144In some retail leases the tenant is required to pay, as additional rental above Base Rent, a percentage of their retail sales, usually above an agreed level, the Breakpoint.Slide45

Clifford J. Bogart Copyright 2011

Percentage Rent

$ Rent

$ Sales

Base Rent

% x Sales

Natural Breakpoint

$

$

$ of % Rent

45Slide46

Other Leasing Economic Factors

Planning

Efficient planning can reduce costs for both Tenant and LandlordFor Tenant: Size, layout, workflow, construction costsFor Landlord: Construction costs

Planning can help sell deal to Tenant

Construction

Construction issues can help make a deal but more often will negatively impact a transactionCosts: Exceed allowances, CM fees; Bidding

Timing: Unable to commence and complete within Tenant’s timetableMisunderstandings regarding costs and what is included

Clifford J. Bogart Copyright 2011

46Slide47

Planning and ConstructionAs-Built

Clifford J. Bogart Copyright 201147Slide48

Planning and ConstructionSpace Plan (with furniture)

Clifford J. Bogart Copyright 201148Slide49

Planning and ConstructionPricing Notes

Clifford J. Bogart Copyright 201149Slide50

Other Factors Affecting Lease Economics

Term

Affect due to Market Expectations on rate / occupancyMarket trending upLL – shorter Term

Tenant – longer Term

Market trending down: opposite

Affect on rate due to amortization of up front costs: construction, planning, commission Market

Direct impact on rate and terms based on comparable properties & deals

Overall Market

SubMarket

Direct Competitors

Market ConcessionsDeal Structures in MarketFlat RentStepped Rent

Free Rent

Clifford J. Bogart Copyright 2011

50Slide51

Measurement and Comparison

Monthly Rent: Especially important for small tenants. Often valuable to remind Tenants that they pay monthly rent and not monthly rateAggregate (Gross) Cost: Total cost of lease over term

Net Present Value: Net Present Value, using a discount rate provided by Tenant, of projected rental payments. This can be computed on a simple or escalated basis as aboveEffective (Average) Rate: Total scheduled rent averaged over term. Can be expressed on a Rentable or Usable basis.

Clifford J. Bogart Copyright 2011

51

(Primarily from Tenant point of view, Landlord criteria discussed in later section)Slide52

IV Understanding MarketsClifford J. Bogart Copyright 2011

52

There are many different types “Markets” that affect leasing. Understanding the various Market forces and how they interrelate will help you better represent your client, Tenant or Landlord.There are geographic Markets – large and small, Market Terms, Markets for various types of space, the Market of Direct Competitors. For Representing Tenants it is important to understand how these interrelated Markets impact Tenants of similar type, size and financial strength. For Landlords it is often understanding the “micro-market” of direct competitors, those buildings with which you most often compete. Understanding the Market of available Tenants (the Demand) is important for both short term and long term planning. Understanding Market trends – up, down, or flat – is critical in determining today’s deal structures and long term planning.Slide53

Markets

Geographic MarketsMetropolitanSubmarketsMicro-market

Market TermsRate, AllowancesConcessionsTypes of Space

Class

Direct

SubleaseOffice/Flex/IndustrialShadow / PhantomClifford J. Bogart Copyright 201153Slide54

Clifford J. Bogart Copyright 2011

54Slide55

Understanding Markets: Terms

Occupancy: Per Lease – The amount of space leased per signed lease documentsActual – The amount of space actually occupied. The difference, if not marketed as sublease space constitutes “Shadow vacancy” or Phantom space.

Vacancy:Direct – Space not currently under lease.Sublease – Leased but available. Usually vacant but may have Tenant occupying all or partAbsorption:The net increase, or decrease, in total leased space in periods compared.

Clifford J. Bogart Copyright 2011

55Slide56

Submarket Analysis ExampleClifford J. Bogart Copyright 2011

56Slide57

Clifford J. Bogart Copyright 201157

Class A Most prestigious buildings competing for premier office users with rents above average for the area. Buildings have high quality standard finishes, state of the art systems, exceptional accessibility and a definite market presence.

Class B Buildings competing for a wide range of users with rents in the average range for the area. Building finishes are fair to good for the area and systems are adequate, but the building does not compete with Class A at the same price.

Class C

Buildings competing for tenants requiring functional space at rents below the average for the area. Office Building ClassificationsDefinitions provided by BOMASlide58

Understanding Markets

Pros:Shorter Term (Tenant)Usually below market rate (Tenant)

Could provide ready, in place, Tenant when primary Term expires saving downtime and construction costs (Landlord)Cons:Shorter Term (Tenant)

Usually few construction dollars offered; take space “as-is” (Tenant)

Rights, options (if permissible), derived through primary Tenant

If Subtenant defaults: Tenant will have to resume rental paymentsLandlord may have difficult time, and little leverage, in getting Tenant to resume paymentsClifford J. Bogart Copyright 201158

Sublease SpaceSlide59

Understanding Markets

Shadow / Phantom Space: Vacant space under lease but not marketed as available for sublease. This also includes space partially occupied, or “underutilized.” Example would be a 10,000 sf Tenant that previously had 40 employees but now has only 8. Exact figures are difficult to track however the size of this “bubble” will affect recovery time for a down market. As the primary terms of these spaces come to an end excess space is added to the available inventory.

Clifford J. Bogart Copyright 201159Slide60

Understanding Markets

Concessions:Lower Rates; Stair-stepped RentsFree Rent

Above Standard Construction AllowancesOther:Free ParkingMoving AllowanceMemberships

Problems with reporting: For those who gather market information it is very difficult to obtain accurate and consistent information on concessions.

Clifford J. Bogart Copyright 2011

60Slide61

Understanding Markets

Market Dynamics & Trends:SupplyVacant Space

Sublease SpaceNew ConstructionDemolition or conversion of existing buildingsDemandGrowth or consolidation of existing Tenant base

New businesses

In-migration of companies into the area

The Real Estate CycleClifford J. Bogart Copyright 201161Slide62

Absorption

Of Supply

High

Vacancies

Dropping

Rents

Over

Supply

Low

Vacancies

More

Construction

Increasing

Rents

Real Estate CycleSlide63

V. Tenant Representation

Tenant Representation, done properly, involves representing your client’s best interests, fiduciary and otherwise, from the beginning of the Leasing Process, Needs Analysis, through commencement of the lease and beyond. Ongoing client service continues with follow-ups during the term of the lease, addressing problems or other needs that may arise. In the first portion of this Section we will discuss the Tenant needs, concerns, objectives, and leasing economics from the Tenants point of view. In the second portion of this Section we will work through the Leasing Process from Needs Analysis to Lease Commencement.

Clifford J. Bogart Copyright 201163Slide64

Tenant Representation: Part One

Tenant’s Objectives / Concerns: Needs AnalysisPhysical: Facilities to accommodate the smooth operation of their businessLayout

Quantities: Does it, or will it, have the proper number and size of offices, open area, conference rooms, storage, support areas, docks, clear height, etc.Configuration: Will the configuration of the space allow for the efficient operation of the business. (Adjacencies, interior flow, etc.)

Clifford J. Bogart Copyright 2011

64Slide65

Tenant Representation

LocationEmployees Decision maker

Existing employeesAttract new employeesClients: Existing and PotentialCompetitorsTransportation Accessibility

Visibility

Telecommunications Access

Economics (next sectionClifford J. Bogart Copyright 201165Slide66

Tenant Representation

ImageIngress / EgressSecurity

ParkingNumber of available spaces for employeesVisitor ParkingType: Structured or surfaceSignage

Growth Potential / Flexibility

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Tenant Representation

Tenant Economics Tenant Economics: The following factors have an impact on the economics of the lease you negotiate on behalf of your tenant. It is important to educate your client about these factors and to try to determine the relative importance of each. This is especially important since several of the factors have a direct impact on each other. Example: A desire for above standard construction or up front concessions will have an impact on their desire for the lowest possible Rent.

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Tenant Representation

Size of Space (Rent versus Rate)Lease Structure (Composition of Base Rent)Full Service

Net of ElectricModified GrossNNNOperating ExpensesBase Year

Caps

History for the building or Landlord

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Tenant Representation

Parking CostsConcessionsFree Rent

ABS ConstructionOtherRelocation CostsHard Costs

Movers

Telephone & Data Relocation

Printing and StationaryNew furniture or equipment bought to accommodate the new space.Soft Costs: Lost productivity during the time leading up to and immediately after the moveClifford J. Bogart Copyright 2011

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Tenant Representation: Part TwoThe Leasing Process

In this Section we will cover the Leasing Process from the Tenant’s perspective. We do this primarily because the Leasing Process begins with the Tenant several weeks, if not months, before involving the Landlord. During our coverage of this Section we will also discuss the Landlord’s role and the Landlord’s point of view. A more thorough coverage of Landlord Representation and the Landlord’s Leasing Process (more aptly described as the Marketing and Leasing Process) will be covered in a later section.

Clifford J. Bogart Copyright 201170Slide71

Needs AnalysisDevelop Needs Criteria, Location, Size, Layout, Economics

Research Market

Database, Survey calls, Internal Library, Drive; Terms, Floorplans,

Present Alternatives

Present Client with all qualifying alternatives in comprehensive, clear, consistent format. Narrow Selection

AnalysisPresent Comparison of Terms, Financial Analysis, and non-economic factorsTour Properties

Inspect selected properties. Narrow Selection

Proposals

Prepare and present detailed RFP’s to Selected Properties

Select Finalist(s)

Determine Preferred Building. Maintain Back-up Alternatives)

Lease Document

Review Lease Document for Terms, Problems, Changes

Planning / Construction

Develop Space Plan(s) to determine functionality on preferred building(s). Pricing Plan.

Final Negotiations

Negotiate Final Terms on Economics, Construction Pricing, Lease Document

Construction Pricing

Pricing Plan to Contractor(s). “Value Engineering”

Execute Lease Document

Construction

Monitor Permitting and Construction Process

Move Into New Space

Implementation

Assist in analyzing bids, select vendors, coordinate deliveries, etc.

Relocation Assistance

Assist in finding Vendors and obtaining bids for Movers, Telecom,

Furniture, etc.

Leasing Process

Copyright 2003 Clifford Bogart CCIM

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Clifford J. Bogart Copyright 2011

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The Leasing Process

Needs Analysis PhysicalLocation

EconomicsTimingMarket SurveyAvailable Data SourcesSurvey for all potential qualifying alternatives

Market Knowledge

Contact Landlords (“Missing” buildings)

Include current buildingPresent AlternativesComprehensive, clear, consistentQuoted TermsFloorplans

PictureMapOrder: Present in order from most likely to least likely

Narrow Selection

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The Leasing Process

TourPreferably 3 – 8 short listEfficient: Set up in geographic order. Best use of your client’s time

Meet Building Agent or representative at each building to answer questionsNarrow SelectionRFP / Proposals

Prepare individual RFP for each building. Address specific issues pertaining to differences in each building / space.

Economic Terms

Layout / ConstructionParkingOtherProposals: Follow-up with agents to answer questions, get proposals in timely mannerClifford J. Bogart Copyright 2011

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The Leasing Process

Analyze ProposalsApples-to-Apples: Make adjustments as necessary

Lease Structure Full ServiceNet of ElectricIndustrial Gross

CAF

Construction

MovingFinancial AnalysisAggregate CostsPresent ValueAnnual Effective Rate

Monthly RentNarrow Selection

Planning

Plan primary choice, and sometimes back-up(s)

Add finish notes for pricing; Pricing Plan

Construction Pricing:

Most often when a deal falls apart in late stages it’s because of Construction Pricing

Submit for Bid(s)

Landlord Contractor

Third Party Contractors

On Subcontractor level

Value Engineer

Negotiate higher allowance if necessary

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The Leasing Process

Lease DocumentReview Landlord’s lease documentConfirm all terms match negotiated dealOther “Market” negotiable clauses

Suggest (in writing) that client have their attorney review documentFinal NegotiationsFinalize economic terms, especially as they relate to construction issuesFinalize / confirm plan and construction pricing

Insure all agreed terms, clauses, language, etc., is correctly represented in Final Lease Document

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The Leasing Process

Execute Lease DocumentsAuthorized person with client company should sign and initial per Landlord’s requirementsChecks: Typically First Month’s rent and Security Deposit

Financial Information: Detailed financial info presented at this time (usually sooner).ConstructionMaintain contact with client and building Construction representative throughout processEmphasis on preventing problems or delays

before

they occur

Visit space periodically during construction phaseClient Moves into SpaceClifford J. Bogart Copyright 201177Slide78

Marketing For Tenant Representation

Cold CallingWarm CallingNetworking

PersonalBusinessReferralsElectronic MarketingFaxes

Email

Web: Keyword, Blog

Personal RelationshipsClifford J. Bogart Copyright 201178There are many unique advantages to generating income through Tenant Representation; large commissions, high closing rate once a client is secured. The most difficult part of TR is securing Clients.Slide79

VI. Landlord Representation

In this Section we will cover the Leasing Process from the Landlord’s point of view. For Landlords this process is more aptly called the Marketing and Leasing Process. The Marketing process includes evaluating and positioning your property competitively in relation to the Market and your specific competition. It includes making prospective Tenants and Brokers aware of your property and your ability and willingness to competitively bid for their business. Once a prospective Tenant or Broker shows interest in your property the process involves attention, follow-through and in general providing a “path of least resistance” to getting the deal done in your building versus the competition.

Clifford J. Bogart Copyright 201179Slide80

Landlord Representation

Landlord Concerns and ObjectivesPreservation / Security of AssetInsurance / LiabilitySecurity / Safety / Structural Integrity

MaintenanceReturn on Investment: Cash FlowLeasingMaintain High OccupancyMaintain highest rent market will bear

Quality Tenants

Quality Leases

Return of InvestmentDispositionAppreciationEquity build-up through Principal reductionClifford J. Bogart Copyright 201180Slide81

Landlord Representation

REITsPortfolio Value of AssetCash Flow for Shareholders

Pension Fund / Insurance / InstitutionalPortfolio Value of AssetCashflow

Developer

Quality Leases / Rents

Disposition ValuePrivate Investment GroupObjectives Vary Typically more flexible than InstitutionsPrivate Investor

Varies, often Cash Flow most importantTypically most flexible in Lease terms

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Different types of LandlordsSlide82

Landlord Representation

Rents (Lease Structure)Tenanting CostsTenant Improvements

Planning CostsSpace PlanningCD/MEPCommissions

Expenses

Operating Expenses

Base Rent ExpensesEscalationsNon-RecoverableMarketing CostsLegalCapital: Non-recoverableClifford J. Bogart Copyright 2011

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Landlord EconomicsSlide83

Landlord RepresentationClifford J. Bogart Copyright 2011

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Marketing“He who has a thing to sell and goes and whispers in a well is not as apt to get the dollar as he who climbs a tree and hollers.”

A Landlord may have terrific space in a great building competitively priced but if no one knows about it, it won’t lease. But Marketing is more than just letting people, Tenants and/or Brokers, know about your property. Once a prospect sees your property it will take a combination of factors, personal attention, follow-through, overcoming objections, etc., to successfully complete the transaction.Slide84

Landlord RepresentationPositioning your Building

EconomicsRateTenant Improvements

ExpensesConcessionsCommissionsPhysical

Location

Visibility

Ingress / EgressProximity to Restaurants, Retail, Amenities, etc.InteriorsCommon Areas, LobbiesLevel of Tenant FinishesClifford J. Bogart Copyright 2011

84

In order to effectively Market you property to achieve the highest potential rents, the most suitable Tenants and the quickest possible lease-up you must first understand how your building compares to the Market and your direct competition in several aspects.Slide85

Landlord Representation

MiscellaneousTelecomTo Building

Shared or available servicesAmenitiesRestaurant / DeliOther retailExercise

Common Conference

Physical (cont’d)

ParkingTypeQuantityVisitorCharges

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Landlord RepresentationMarketing to Brokers

Direct MarketingPersonal contact

Person-to-personBroker EventsMail

Snail Mail: Expensive

Brochures / Flyers

Inventory ListsEmail: Easy, cheap, quickly deletedDirectServices: NTCAR, CIB, Web-Real-Estate

Indirect Marketing

Data Services

CoStar

LoopNet

CMLSRegional DB’sBlack’s Guide / Reference

Advertising in Real Estate publicationsTrade Shows

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Landlord RepresentationMarketing to Tenants

Marketing directly to Tenants creates awareness of your property. This awareness may result in a direct deal or expression of interest to Tenant’s Broker.

SignsMailingsAdvertisingPR: News articles

To existing Tenant base

Tenant Relations; Events

Create awareness of available space and other properties Clifford J. Bogart Copyright 201187Slide88

Landlord Marketing & Leasing Process

Marketing (described above)Survey:

Provide Info requested; Floorplans, Building Info, Quoted Terms, Picture(s). Prompt & Complete responseDeliveryWebsite or emailFax, mail, delivery

Tour

Prompt

Prepare SpaceCollateral materialsEasy In / Easy OutCellphone #’sClifford J. Bogart Copyright 2011

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Landlord Marketing & Leasing Process

ProposalPrompt and Complete response; address all items in RFP even if answer is noLeave some negotiating room in initial proposal to address unknowns, but too much may eliminate you in first round

Quote realistic TI Allowance for Tenant’s needs (support / qualify your quote); lowballing may cause problems laterRequest Financial Information on TenantNegotiations: Friendly but FirmStay involved, solicit Feedback

Keep door open

Explain: Provide support for your positions

Never stop selling Clifford J. Bogart Copyright 201189Slide90

Landlord Marketing & Leasing Process

Planning & Construction Pricing: Often the key element in the selection of your building from the short-listed propertiesEfficient plan helps sell prospect on your buildingGet finish notes in the planning process

Have reliable source for accurate, timely preliminary pricingLease DocumentShould never get in the way of making dealKeep Negotiations Non-confrontational

Explain reasons behind your positions. Look for creative ways to address both party’s concerns

Have Tenant begin document review as early as possible when focus turns to your property. The more time, effort, money Tenant has in your building the less likely he is to turn to another building

Clifford J. Bogart Copyright 201190Slide91

Landlord Marketing & Leasing Process

Final NegotiationsEconomic TermsLease Document Issues

Plan, Finishes, Construction PricingLease Execution: Make sure you are clear to Tenant / Broker of exact requirements to avoid delays and duplicationsConstructionConstruction kick-off meeting with Tenant, planner, Contractor and CM (or equivalent) to sign off on final plans

Move-In

Provide Tenant with move-in procedures soon after Lease Execution

Assist Tenant with approved vendor alternativesClifford J. Bogart Copyright 201191Slide92

VII. The Lease Document

In it’s simplest form the Lease document lays out the basic agreement between the two parties. In addition it provides protections for both parties interests (Insurance, Liability, Indemnification, Lender protections, Quiet Enjoyment, etc.). Although the two parties have seemingly opposing interests rarely does a deal fail to make strictly due to Lease document issues. If there is a common desire to complete the transaction usually compromises in the document will be worked out.

Clifford J. Bogart Copyright 201192Slide93

Bundle of Rights

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Owned

Leased

Owner hasLeased Fee Interest

Tenant hasLeasehold EstateSlide94

Lease - Definitions

A transfer of an interest in and possession of real property for a specific time in exchange for rent as agreed upon consideration.Not purely a “Contract” but also a conveyance of interest independent of Contract

Principal difference between Lease and Contract is Independence of CovenantsIf for a period greater than a year, must be in writing to be enforceableClifford J. Bogart Copyright 2011

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The Lease Document

Landlord’s Key Issues

Secured, uninterrupted Rental StreamOperating Expenses: Protection from the diminution of the Rental StreamLiability / Insurance

Preservation / Security of Asset

Safety / Structural Integrity

MaintenanceClifford J. Bogart Copyright 201195Slide96

The Lease Document

Tenant’s Key IssuesSuitability

Operating Expenses: Protection from unknown or unforeseen chargesProtection from significant increases

Services

Lender’s Key Issues

Secured, uninterrupted Rental StreamLiability / InsurancePreservation / Security of Asset

Clifford J. Bogart Copyright 2011

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Clifford J. Bogart Copyright 201197

The Lease Document

Key Sections Commencement / Termination

Operating Expenses

Services

Fire & Casualty Indemnification / Insurance / Liability / Subrogation Default Provisions: Tenant; Landlord Subletting & Assignment; Change of Control ADA / Hazardous Waste

Options: Renewal; Expansion

AmendmentsSlide98

Commercial Leasing:Tenant and Landlord Representation

THE ENDGo forth and lease

Clifford J. Bogart Copyright 201198