Leasing Commercial Property Exam #2

Leasing process Step 0

Set-up; decide how property management and leasing will be handled such as in-house versus outside management.

Leasing process Step 1

Marketing the property.

Leasing process Step 2

Screening tenants.

Leasing process Step 3

Negotiating lease terms.

Leasing process Step 4

Signing the lease and move-in.

Leasing process Step 5

Managing the lease and tenant relations.

Purpose of a leasing plan

Attract the right tenant for the right property at the right rent by understanding the market; competitors; and target tenants.

Three components of market analysis

Market overview; market study; marketability study.

Market overview

Big-picture trends that affect the real estate industry; especially economic and product megatrends.

Market study

Demand and supply for a property type in a specific market area; including current and future demand and supply and competition.

Marketability study

How a specific property is expected to perform while competing for available demand in a specific market.

Five market analysis considerations

Economic or product megatrends; forecasting future demand and supply; segmenting demand and differentiating supply; attractiveness of site or location; sensitivity or SWOT analysis.

Four levels of market analysis

Macroeconomic; region or city; submarket; property.

Macroeconomic analysis

The big picture; economy and megatrends such as interest rates; employment; e-commerce; remote work; AI; or broad industry changes.

Macroeconomic information sources

Newspapers; trade journals; industry reports; government reports; networking.

Region or city analysis

Examines the specific region; city; or metropolitan area and how local economic and demographic conditions affect real estate demand.

Region or city considerations

Key attributes and unique features; major industries and employers; amenities and quality of life; demographics and psychographics; urban form and centers of activity.

Regional supply-side factors

Workforce characteristics; public or private leadership; industry economies of scale; agglomeration economies; quality of life and amenities.

Submarket definition

A distinct smaller part of a larger market; often a neighborhood or smaller area inside a city or MSA; boundaries are usually unofficial and can change.

Submarket analysis

Compares the subject property with its competitive set using factors such as proximity; age; condition; size; tenants; vacancy; rents; concessions; and TICAM expense.

Property-level analysis

Examines the subject building itself and whether its characteristics allow it to compete with nearby properties.

Property analysis segmentation questions

Who is the target market? What does the target market care about? How does the subject property satisfy those needs?

Physical property attributes

Unit size; unit configuration; visibility; ingress and egress; parking; finishes; amenities; common areas; landscaping; signage; IT infrastructure; sustainability.

Locational property attributes

Transportation; infrastructure; public services; supportive services; workforce profile; housing options; entertainment; aesthetics; safety.

Symbolic property attributes

Prestigious; trendy; artsy; green.

Financial property attributes

Price point; value.

SWOT

Strengths and weaknesses are about the subject property; opportunities and threats are about the market.

Key SWOT issues

Differentiation and competitive advantage.

Market or marketability study questions

What attributes does the property offer? Who will use them? Is the use needed? What is the competition? What is the market condition? How much demand can the property capture?

Average PSF rental rate formula

Add the comparable PSF rental rates and divide by the number of comparable properties unless the problem specifies weighting.

Average rent example from Class 4

$22 + $19 + $18 + $17.50 + $21 + $18 + $18 + $17 = $150.50; divided by 8 = $18.81 PSF.

Free rent PSF formula

Annual rent PSF divided by 12 equals monthly rent PSF; multiply by free months to get the PSF value of free rent.

Total concession value formula

TI allowance PSF plus the PSF value of free rent and any other listed concessions.

Class 4 concession example

$18 PSF annual rent gives $1.50 PSF per month; two free months = $3.00 PSF; plus $10 TI = $13.00 PSF total concessions.

Business plan definition

A formal statement of business goals; reasons those goals are attainable; and plans for reaching them.

Reasons to prepare a business plan

New assignment; acquisition or development; property or market changes; hold versus sell recommendations; budgeting and reporting; financing or refinancing.

Business plan components part 1

Title page; table of contents; letter of transmittal; executive summary; client or owner identification; purpose; timeframe; assumptions or limiting conditions.

Business plan components part 2

General environment; property identification; land or leasehold description; improvements description; economic or fiscal conditions; management description; statement of problems; methodology.

Business plan components part 3

Supply and demand analysis; market rent levels; range of solutions; analysis of solutions; recommended solution; supporting material; certifications and disclosures; analyst qualifications.

Core investment

Least risky; stabilized and fully leased; predictable cash flow from creditworthy long-term tenants; typically Class A with little or no improvements needed.

Core Plus investment

Light improvements and active management; less predictable cash flow than Core.

Value Add investment

Has in-place cash flow but seeks to increase it through improvements or repositioning; higher return and higher risk than Core.

Opportunistic investment

Riskiest strategy; significant rehabilitation or development is typical.

Investment risk order

Core; Core Plus; Value Add; Opportunistic from lowest to highest risk.

Maintenance management objectives

Enhance marketability; reduce costs; manage risk.

Four maintenance types

Routine; preventative; corrective; deferred.

Routine maintenance

Regular day-to-day recurring upkeep. This concise distinction is standard property-management wording; the class slide lists the category but does not define it.

Preventative maintenance

Planned maintenance intended to prevent breakdowns or larger repairs. This concise distinction is standard property-management wording; the class slide lists the category but does not define it.

Corrective maintenance

Work performed to fix a problem after a defect or failure is identified. This concise distinction is standard property-management wording; the class slide lists the category but does not define it.

Deferred maintenance

Necessary maintenance that is postponed to a later time. This concise distinction is standard property-management wording; the class slide lists the category but does not define it.

Maintenance work-order cycle

Problem identification; work order preparation; allocation of responsibility; project completion.

Four types of property risk

Safety; legal; financial; reputational.

Tenant underwriting

The process asset managers and property managers use to assess a tenant financial health and ability to meet lease obligations; especially paying rent on time.

Purpose of tenant underwriting

Decide whether to enter a lease and how much risk the landlord would take by understanding tenant creditworthiness and profitability.

Tenant underwriting credit review

Review credit sources such as a D&B report; audited financial or credit ratings; and recommendations from other landlords.

D&B Report

Dun & Bradstreet business credit report; provides a company financial snapshot and a score from 1 to 100 with 100 being best in the class material.

Other credit rating organizations

Standard & Poor’s; Moody’s; Fitch.

Profit

Income remaining after all expenses are paid.

Revenue

Total income generated by the company before expenses are subtracted.

Profit versus revenue

Revenue is total income generated; profit is what remains after expenses.

Core financial documents for underwriting

Profit and Loss statement; Balance Sheet; Cash Flow Statement.

P&L statement

Summarizes revenues; costs; and expenses over a period such as a fiscal quarter or year.

Balance Sheet

Financial statement of assets and liabilities.

Cash Flow Statement

Financial statement of cash inflows and outflows.

How many years of financials to review

Previous 2 to 3 years of P&L statements; balance sheets; and public filings if applicable.

Where to obtain public company financials

Public filings such as SEC filings; the class example links to an SEC filing.

Three primary factors that drive real estate value

Occupancy; lease term; tenant creditworthiness.

Occupancy and value

Low occupancy means more risk because a buyer must consider how long it will take to lease vacant space.

Lease term and value

Lease expiration timing; renewal likelihood; and future rental rates affect future cash flow and asset value.

Tenant creditworthiness and value

Even a fully occupied property can be risky if the tenants are financially weak; tenant credit quality affects asset value.

Ways to manage tenant risk

Underwriting; audit rights; security deposits.

Underwriting risk-management steps

Complete before lease execution; review credit report; P&L; balance sheet; cash flow; and landlord references.

Audit rights

Lease language can require a tenant to provide updated financials; class slide says requests are typically limited to once per year.

Three security types

Cash security deposit; letter of credit; personal guarantee.

Cash security deposit

Amount should correlate to credit risk; higher risk means a higher required deposit.

Letter of Credit or LOC

Bank-issued guarantee used in addition to or instead of cash; protects landlord if the tenant defaults.

Personal guarantee

Used for higher-risk or low-credit tenants such as start-ups; makes the signer personally responsible for lease payments if the tenant stops paying.

Foot Locker 2023 sales versus 2022

Sales fell from $8.747 billion in 2022 to $8.154 billion in 2023; a 6.8 percent decline according to the provided answer key.

Foot Locker sales per square foot

Lower in 2023; $510 versus $548 in 2022 according to the provided answer key.

Foot Locker long-term debt

$442 million as of February 3 2024 according to the provided answer key.

Foot Locker credit ratings

S&P BB and Moody’s Ba2; both below investment grade according to the provided answer key.

Foot Locker business risks

Strong competition; dependence on major suppliers such as Nike; supply-chain disruptions; inflation and downturns; reduced discretionary spending; consumer preference changes; declining mall traffic.

Foot Locker security protection

A landlord could require a letter of credit instead of a traditional cash security deposit.

Build-to-Suit

Property developed and designed specifically for the needs of a particular tenant.

Cap Rate

Capitalization rate; NOI divided by property value. Property value equals NOI divided by cap rate.

Punch List

Final checklist of work that must be completed before construction is finished.

Second Generation Space

Space that had a prior tenant; typically already built out with items such as carpet; ceiling; partitions; and rooms.