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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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
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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
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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
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Clifford J. Bogart Copyright 2011Slide5
TopicsIntroduction
AgencyLeasing EconomicsUnderstanding MarketsTenant Representation
Landlord RepresentationThe Lease DocumentClifford J. Bogart Copyright 2011
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I. Introduction
Commercial Leasing:Tenant and Landlord Representation
Clifford J. Bogart Copyright 2011
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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
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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
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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
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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
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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
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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
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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
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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
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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
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NPV: Determining Investment Value Using Target Yield
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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
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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
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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
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Operating Expense Recovery Clifford J. Bogart Copyright 2011
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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
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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
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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
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Lease StructuresClifford J. Bogart Copyright 2011
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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(Primarily from Tenant point of view, Landlord criteria discussed in later section)Slide52
IV Understanding MarketsClifford J. Bogart Copyright 2011
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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
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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
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Submarket Analysis ExampleClifford J. Bogart Copyright 2011
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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.
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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.)
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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
Clifford J. Bogart Copyright 2011
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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
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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
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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.
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Bundle of Rights
Clifford J. Bogart Copyright 2011
93Owner hasFee Simple Interest
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
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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