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

INDIVIDUAL ASSIGNMENTS

Intended Learning Outcomes for these individual exercises

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

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   Develop understanding of how leases are structured from an operating expense recovery perspective.
  

  
  


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   Develop understanding of risks and opportunities with various real estate investment types.
  

  
  


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   Define business plans taking into consideration operating cash flows (return ON investment)
  

  
  

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

  
  

1. 
   

   1.) What is an expense stop and provide a simple example.
   

   
   


2. 
   

   2.) What is meant by useable versus rentable space?
   

   
   


3. 
   

   3.) What are: a) pass through expenses (b)recoverable expenses and (c) common area expenses.
   

   
   


4. 
   

   4.) Your leasing agent presents the following options for a space for your building for a 5 year
   

   
   

   term:
   

   
   
   
   
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      NET LEASE WITH STEPS: Rent is $15 PSF for year 1 and increases by $1.50 PSF each
     

     
     

     year. Assume tenant pays for OPEX.
     

     
     
   
   
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      NET LEASE WITH CPI Adjustments: Rent is $16 PSF in year 1. After year 1, rent will
     

     
     

     increase by the CPI, which is forecasted at 3% per year.
     

     
     
   
   
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      GROSS LEASE: Rent is $30 PSF with the lessor paying OPEX. OPEX is $9 in year 1 and will
     

     
     

     increase by $1 per year thereafter.
     

     
     
   
   
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      GROSS LEASE WITH expense stop and CPI adjustment: Rent will be $22 in year 1 and
     

     
     

     increase by the full amount of any change in the CPI after year 1 with an expense stop
     

     
     

     at $9 PSF. The CPI and OPEX are assumed to change by the same amount as above. REQUIRED: Calculate the effective rent to the owner after expenses for each lease alternative using a 10% discount rate. How do you rank these alternatives?
     

     
     
   
   
   
   


5. 
   

   5.) A 3-floor office building features the following leases (each floor has a single tenant):
   

   
   
   
   
   1. 
      

      1st FL: 20,000 RSF at $15 PSF with 3 years remaining on the lease with an expense stop
      

      
      

      of $4 PSF.
      

      
      
   
   
   2. 
      

      2nd FL: 15,000 RSF and leasing for $15.50 PSF and has four years remaining on the lease
      

      
      

      with an expense stop of $4.50 PSF.
      

      
      
   
   
   3. 
      

      3rd FL: 15,000 RSF with a new lease of $17 PSF for five years (market rate). The expense
      

      
      

      stop is $5.00 PSF which is what expenses are expected to be during the next year.
      

      
      
   
   
   4. 
      

      Management expenses = 5% of Effective Gross Income (EGI) and not included in
      

      
      

      expense stop.
      

      
      
   
   
   5. 
      

      Each lease has a CPI adjustment that provides for base rent to increase by half the rate
      

      
      

      of increase of CPI. CPI is projected at 3% increase per year.
      

      
      
   
   
   6. 
      

      Estimated OPEX for next year:
      

      
      
      
      
      1. 
         

         Property Taxes $100,000
         

         
         
      
      
      2. 
         

         Insurance $10,000
         

         
         
      
      
      3. 
         

         Utilities $75,000
         

         
         
      
      
      4. 
         

         Janitorial $25,000
         

         
         
      
      
      5. 
         

         Maintenance $40,000
         

         
         
      
      
      
      
   
   
   7. 
      

      All expenses are projected to increase at 3% per year.
      

      
      
   
   
   
   

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

6|Page

8. 
   

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

   
   


9. 
   

   Vacancy is estimated to be 10% of EGI in years 4 and 5.
   

   
   

Required:

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

Brueggeman Text Chapter 13

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

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

in the text.

Student Input

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   What areas you might need help in understanding the content?
  

  
  


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   What is one major learning takeaway for this week?
  

  
  


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   What areas you might need help in understanding the content?