Fin 445 Lecture Notes - 2/5/2025

Expense Reimbursements

• Year One Expenses: $165,000

  • Tenant reimburses this amount to the landlord.

• Year Two Expenses: $169,500

  • Increase of 3% due to expense inflation.

  • Tenant reimburses the entire year two expenses.

• Difference: $4,950

  • Represents the increase in expenses from Year One to Year Two.

Rental Calculation

• Calculation steps involve:

  • Determine base rent times 12 plus adjustments for vacant units.

  • Example Calculation:

    • Market rent = $750

    • Total units = 100, Occupied units = 95

    • Revenue = (Total Units - Vacant Units) * Market Rent * 12

• Adjust for vacancies and add other revenue to determine total global revenue.

Future Projection and Escalation

• Projection through 2025 to estimate 2026 gross potential rent.

• Use escalator rates and lease anniversary dates to forecast rent amounts.

• Example scenario includes:

  • Starting rent: $20

  • Annual escalation: 3%

  • Leasing commission: 6% of total base rent over lease duration.

Market Research and Due Diligence

• Before property acquisition or securing a loan:

  • Assess physical condition of the property (occupancy, accessibility, visibility).

  • Review market characteristics (supply and demand, construction trends).

  • Gather demographic information to determine potential rents and returns.

Financial Analysis Elements

• Valuation involves:

  • Third party leverage analysis (calculate returns like IRR).

  • Assessment of environmental issues (e.g., contamination from former gas stations).

  • Importance of clean property assessments before investment.

Property Characteristics Assessment

• Assess:

  • Location:

    • Impact of surroundings (e.g. high-rises near lower-tier businesses).

  • Access and visibility important for retail properties.

  • Zoning regulations affecting property use.

• Importance of interviewing tenants for insights into property management and attractiveness.

Example Analysis: Wolf Point Apartments

• Location: High demand area in Downtown Chicago.

• Market Conditions:

  • Vacancy rate currently at 4.5%.

  • Positive net absorption in 2023 and forecasts of favorable rent trends.

  • Consideration of rent growth rates over the year.

Parking and Tenant Affluence Assessment

• Analyze the quality and quantity of parked vehicles:

  • Indicates tenant demographics and their potential to absorb rent increases or luxury offerings.

  • Lower-affluence tenants may resist rent increases and affect investment desirability.

Concluding Financial Observations

• Insights into the amount of new space under construction indicates market strength.

• Historical financial analysis available for further exploration in study materials.