WELCOME

A Presentation on
Income-Producing Properties :Leases, Rents,
and the Market for Space

Group : 5
 TEAM MEMBERS

Name: Rokibul Islam Name: Md Sabbir Ahmed Name: Mst. Shuely Khatun Name: Md. Jahid Hasan
Id: 1920014 Id: 1920034 Id: 1920019 Id: 1920026

Name: Joyanta Das

Id: 1920060
Name: Md. Liton Mia Name: Mst. Monalisa Akter Mim Name: Md. Mehedi Hasan Name: Pallob
Id: 1920040 Id: 1920039 Id: 1920028 Chandra
Id: 1920046
What we are going to discuss :
 Property Types.
 Supply and Demand Analysis .
 Implications for Risk.
 Local Market Studies of Supply and Demand.
 Location and User-Tenants.
 The Business of Real Estate.
 Real Estate Income.
 Underwriting Tenants.
 General Contents of Leases.
 Leases and Rental Income
 Effective Rent
 Pro-From Cash Flow Statements
PROPERTY TYPES
Major classifications used to identify and group different
types of real estate. The two major categories used to
classify property are:
• Residential and

• Nonresidential.
SUPPLY AND DEMAND ANALYSIS
 Equilibrium Market Rental Rate .
* Supply and Demand
* Vacancy rate
Rent/unit

Market rent

Equilibrium Existing stock of space

occupancy
 Rent/unit

R'
R"
R

Smax S'max Units of space

Based on the supply curve for existing space offered for lease, the market
rent would rise from R to R'. The increase in demand is likely to result in
an increase in the construction of new space.
IMPLICATIONS FOR RISK

 Expected changes in the supply of space .

 Expected changes in the demand of space.

 Expected and unexpected changes in market rental rates

over the entire economic life .
 Changes in the market rental rate due to changes in
supply and demand.
LOCAL MARKET STUDIES OF SUPPLY
AND DEMAND

 The level of vacancies.

 Rents

 The amount of new construction under way, When the

property will be ready for occupancy

many of the variables that must be considered when

undertaking a market study.
LOCATION AND USER-TENANTS

 increasing sales revenue .

 reducing the cost of operations.

 some combination of both.

    Locations in Big City, Rangpur  

(1) (2) (3)

User A:      
Revenue $120 $100 $ 90

Less: Expenses 80 80 80
Profit $ 40 $ 20 $ 10

User B:      
Revenue $100 $100 $100

Less: Expenses 90 80 70
Profit $ 10 $ 20 $ 30
THE BUSINESS OF REAL ESTATE
 the vast majority of real estate used by business firms is
leased and not owned. There are many important
reasons:
1. Most tenants find leasing to be more cost-effective than owning.
2. Owning would reduce operating flexibility.
3. Loss of focus on its core business activities.
4. Put the user in the real estate business.
 REAL ESTATE INCOME
 Market Rent .
*Outlook for national economy
* Economic base of the area
* demand
* Supply
 Vacancy

* On account of tenant turnover, space is not

always leased even in strong market .
 UNDERWRITING TENANTS
 Financial statements/income statement–balance sheet.

 Credit ratings.

 Any analyst reports on the firm/industry.

 Bank relationships.

 Existing obligations (debt, other leases).

 GENERAL CONTENTS OF LEASES
 Parties, Dates , Length
 Base rent
 Deposits
 Condition
 Allowable uses
 Restriction on assignment or subletting
 Use of common areas and facilities
 Responsibility for maintenance and repair
 Restrictions on alteration or improvements
 Construction of any expansion in the future by the owner
 Insurance requirements
 Estoppels
 LEASES AND RENTAL INCOME
 Flatrents
 Step-up rents
 Indexed rents.
 Percentage Lease
 LEASES AND RESPONSIBILITY FOR
EXPENSES
 Gross (full-service) leases.
 Modified (full-service) leases.

 Leases with operating expense recoveries

 EFFECTIVE RENT
It is useful to calculate a single measure or effective rent
that can be used for comparison of individual leasing
alternatives. To calculate the effective rent we will use the
following procedure:

 Calculate the present value of the expected net rental

stream.
 Calculate an equivalent level annuity over the term of
the lease
The effective rent will be calculated for the following six
alternatives for a five-year lease on l,000 square feet of
rentable space:
 Net lease with steps. Rent will be $10 per rentable square foot the first year and will increase by $1
per square foot each year until the end of the lease. All operating expenses will be paid by the
tenant.
 Net lease with one year of free rent (concession). No rental payment will be required during the
first year. Rent the second year will be $14.50 per rentable square foot and increase by $1 per square
foot each year. All operating expenses will be paid by the tenant.
 Net lease with CPI adjustments. The rent will be $11 per square foot the first year. After the first
year, the rent will be increased by the amount of any increase in the CPI, in other words, a 100
percent CPI adjustment. The CPI is expected to be 2 percent during the second year, 3 percent the
third year, 4 percent the fourth year, and 5 percent the fifth year.
 Gross lease. Rent will be $17.50 per rentable square foot each year with the lessor responsible for
payment of all operating expenses. Expenses are estimated to be $4 during the first year and
increase by 50 cents per year thereafter.
 Gross lease with expense stop. Rent will be $15.50 per rentable square foot the first year with the
lessor responsible for payment of recoverable operating expenses as identified in the lease, up to an
expense stop of $4 per square foot. Expenses are estimated to be $4 during the first year and
increase by 50 cents per year thereafter.

 Gross lease with expense stop and CPI adjustment. Rent will be $14.50 per rentable square foot
the first year and increase by the full amount of any change in the CPI after the first year with an
expense stop at $4 per square foot. The CPI and operating expenses are assumed to change by the
same amount as outlined above.
1. Net Lease with Steps
Year 1 2 3 4 5
Net rent $10.00 $11.00 $12.00 $13.00 $14.00
Average rent $12.00
Present value 44.77
Effective rent 11.81
2. Net Lease with Free Rent (concessions)
Year 1 2 3 4 5
Net rent $0 $14.50 $15.50 $16.50 $17.50
Average rent 12.80
Present value 45.76
Effective rent 12.07
3. Net Lease with 100% CPI Adjustment
Year 1 2 3 4 5
Expected CPI NA 2.00% 3.00% 4.00% 5.00%
Net rent $11.00 $11.22 $11.56 $12.02 $12.62
Average rent $11.68
Present value 44.00
Effective rent 11.61
4. Gross Lease Year
Year 1 2 3 4 5
Gross rent 17.50 17.50 17.50 17.50 17.50
Less expenses 4.00 4.50 5.00 5.50 6.00
Net rent 13.50 13.00 12.50 12.00 11.50
Average rent $12.50
Present value 47.74
Effective rent 12.59
5. Gross Lease with Expense Stop at $4.00
Year 1 2 3 4 5
Gross rent 15.50 15.50 15.50 15.50 15.50
Less expenses 4.00 4.50 5.00 5.50 6.00
Plus recoveries 0 0.50 1.00 1.50 2.00
Net rent 11.50 11.50 11.50 11.50 11.50
Average rent $11.50
Present value 43.59
Effective rent 11.50

6. Gross Lease with Expense Stop at $4.00 and CPI Adjustment

Year 1 2 3 4 5
Expected CPI NA 2.00% 3.00% 4.00% 5.00%
Gross rent 14.50 14.79 15.23 15.84 16.64
Less expenses 4.00 4.50 5.00 5.00 6.00
Plus recoveries 0.00 0.50 1.00 1.50 2.00
Net rent 10.50 10.79 11.23 11.84 12.64
Average rent $11.40
Present value 42.84
Effective rent 11.30
PRO-FROM CASH FLOW STATEMENTS
Rental Income
+ Other Income
+ Recoveries
- Vacancy and Collection Losses
-Concessions
= Effective Gross Income
- Operating Expenses

=NOI (Net Cash Flow)

Pro Forma Statement of Cash Flow—Base
Year Estimate
 Conclusion

The purpose of this chapter has been to familiarize the reader

with lease provisions and operating characteristics generally
representative of major property types.