Download Shopping Centre Finance

ICSC European Retail Property School
Shopping Centre Finance
Tuesday, July 8th 08:30 – 12:00
Scandic Berlin Potsdamer Platz, Berlin, Germany
Jan Kubíček, MRICS
Heitman Europe,
Czech Republic
Bernd Huber, Ing. Mag., MRICS
IMAG Real Estate Consultancy
Austria
INTRODUCTION
•
Who are We? Who are You?
•
What is the purpose of the finance?
•
Why you think you need need finance?
•
What would you like to learn?
Main concepts to talk about
•
Time value of money and general investment evaluation
•
Reading of Financial Statements
•
Valuation of the property
TIME VALUE OF MONEY
• Rationale
– Impact of interest payments on value of money over time
• Future value
– Definition:
A way of determining the eventual value of an investment based on the amount of
the initial investment, the reinvestment rate, and the number of years under
consideration.
– Calculated
TIME VALUE OF MONEY
TIME VALUE OF MONEY
Future Value of €1
•
How much money will you have in the future if you invest €1 today?
•
If you invest €1 today at 6% interest rate, how much will you have in 3
years if the interest is compounded?
•
Formula
P = Principal
i = Interest
n = Time
P x (1 + i ) n
€1 x 1.06 x 1.06 x 1.06 =
€1.19
TIME VALUE OF MONEY
Compute Answer
Time
(Years)
Beginning
Value
Compounded
1
€1.00
x
1.06%
=
€1.06
2
€1.06
x
1.06%
=
€1.12
3
€1.12
x
1.06%
=
€1.19
Monthly Formula P x (1+i/12) nx12
Ending Value
TIME VALUE OF MONEY
Where would you use it ?
TIME VALUE OF MONEY
• Present Value
– Definition
The projected annual net cash flows of a project are discounted to their
present value. Interest rate is either a required rate of return (e.g. 6%) or the
IRR.
– Calculated
• Discounting factor
• System for adding up cash-flow in time
TIME VALUE OF MONEY
Present Value of €1
What is the current value of €3.00 which we will get in 3 years from today
with discounting factor at 6%?
(in other words how much do I need to invest today to get to €3.00 in 3
years )?
Answer
PV = P x (1+ i)-n
PV = 3 x (1+0.6)-3
= 3 x 1.06-3
= € 2.52
P = Principal
i = Interest
n = Time
TIME VALUE OF MONEY
Time
Beginning
Value
Compounded
Ending Value
1
€2.52
x
1.06%
=
€2.67
2
€2.67
x
1.06%
=
€2.83
3
€2.83
x
1.06%
=
€3.00
TIME VALUE OF MONEY
PRESENT VALUE/FUTURE VALUE
• What is the Present value of € 102 to be received in 4 years if you reinvest and earn 2%
• What is the Future value of € 94.23 in 4 years if you re-invest the money
and earn 2.0%
1
2
3
1
100.00
102.00
2
98.04
100.00
102.00
3
96.12
98.04
100.00
102.00
4
94.23
96.12
98.04
100.00
4
102.00
TIME VALUE OF MONEY
• Annuity
– Definition
An annuity is a terminating "stream" of fixed payments, i.e., a
collection of payments to be periodically received over a specified
period of time.
– Types of annuities
• Variable Annuity
• Level Annuity
• Ordinary Annuity
• Annuity Due
– Future value of an annuity calculated
TIME VALUE OF MONEY
Example : FV of an annuity
If I invest €1,000 per year for 5 years at an interest of 12% annual
percentage rate, how much money will I have if it is an ordinary
annuity or an annuity due?
Annuity Due
P = (1.12)6-1
.12
Answer: €7,115.18
Ordinary Annuity
P = (1.12)5-1
.12
Answer: €6,352.84
TIME VALUE OF MONEY
Answers computed
ORDINARY ANNUITY
Time
Beginning value
Compounded
Total invested
Investment
Ending value
1
€0
x 1.12%
€0
€1,000 =
€1,000
2
€1,000
x 1.12%
€1,120
€1,000 =
€2,120
3
€2,120
x 1.12%
€2,374
€1,000 =
€3,374
4
€3,374
x 1.12%
€3,778
€1,000 =
€4,778
5
€4,778
x 1.12%
€5,351
€1,000 =
€6,353
ANNUITY DUE
Time
Beginning value
Investment
Total invested
Compounded
Ending value
1
€0
€1,000
€1,000
x 1.12%
€1,120
2
€1,120
€1,000
€2,120
x 1.12%
€2,374
3
€2,374
€1,000
€3,374
x 1.12%
€3,779
4
€3,779
€1,000
€4,779
x 1.12%
€5,352
5
€5,352
€1,000
€6,352
x 1.12%
€7,115
TIME VALUE OF MONEY
Where would you use it ?
TIME VALUE OF MONEY
Example: PV of an ordinary annuity
At acquisition, how much should I pay for additional rent (over-rented
situation or tenant improvement financing) in amount of €200,000
per year (flat without indexation) for 3 years and then it will expire
(no possibility to renew) to obtain a 16% rate of return.
1-(1.16)-3 = €449,177.90
€200.000 x 0.16
TIME VALUE OF MONEY
Answer computed
Time
Beginning
Value
Compounded
Adjusted Value
Less: Withdrawal
(€200,000 per year)
Ending Value
1
€449,178 x
1.16%
€521,046
(€200,000)
€321,046
2
€321,046 x
1.16%
€372,413
(€200,000)
€172,413
3
€172,413 x
1.16%
€200,000
(€200,000)
€0
TIME VALUE OF MONEY
• Amortization
– Definition
Gradual paying off of a debt by periodic installments, generally in
equal payments, at regular intervals, over a specific period of time.
– Calculated
• Mortgage calculation
TIME VALUE OF MONEY
AMORTIZATION EXAMPLE
Example 1
Year 0
Year 1
Year 2
Year 3
Total
Repaid
(€ 100.00)
€ 10.00
€ 10.00
€ 110
€ 130
Year 0
Year 1
Year 2
Year 3
Total
Repaid
(€100.00)
€40.21
€40.21
€40.21
€ 120.64
Interest payments
€10.00
€6.98
€3.66
Principal payments
€30.21 +
€33.23 +
€36.55
Loan Balance
€ 69.79
€ 36.56
0
€100 interest-only
loan at 10.0%
Example 2
3-year amortizing
loan interest
€ 20.64
= €100.00
TIME VALUE OF MONEY
Where would you use it ?
TIME VALUE OF MONEY
• Net Present Value
– Definition:
The net present value (NPV) of a series of cash flows, both incoming and
outgoing, is defined as the sum of the present values (PVs) of the
individual cash flows of the same entity.
– Calculated
• General investment evaluation principle
TIME VALUE OF MONEY
Net present value example
What is the value today using a 10.0% discount rate of an investment that
pays € 100 at the end of year 1, € 200 at the end of year 2 and € 3700 at the
end of year 3?
Answer computed
The flow of funds would be
Today
Year 1
Year 2
Year 3
NOI
€ 100
€ 200
€ 3,700
PV Year 1
100
1.10
PV Year 2 =
200 =
1.10
181.82
1.10
PV Year 3 =
3,700
1.10
3,363.64 =
1.10
=€
90.90
= € 165.29
3,057.85
1.10
= € 2,779.86
Total = € 3,036.05
TIME VALUE OF MONEY
• Internal Rate of Return (IRR)
– Defined
– Calculated
• Major investment criterion
TIME VALUE OF MONEY
INTERNAL RATE OF RETURN EXAMPLE:
An investor is willing to spend € 2,800 to obtain the following cash flows:
Year 1 € 100
Year 2 € 200
Year 3 € 3,700
What is the IRR?
Answer computed
The flow of funds would be
Year 0
Year 1
Cash Flow (€ 2800)
€ 100
Year 2
€ 200
Year 3
€ 3,700
When doing the calculation make sure the sign of each reflects whether the payment is an inflow or
out flow. Since the mathematical formula to compute the internal rate of return (IRR) is
complex, a financial calculator with IRR capability should be used.
Answer: IRR = 13.13%
TIME VALUE OF MONEY
• Equity Multiple
– Total proceeds divided by equity invested
– Secondary but important investment criterion
– Usually combined with time frame (eg max. 5 years)
• Range
• 2.0 and above – high value added / opportunistic –
development projects
• Bellow 1.5-2.0 – value added projects (lower risk)
FINANCIAL STATEMENTS
• Purpose
– Relate Income and Expenses
– Means of Analysis for Investors and Management
FINANCIAL STATEMENTS
• Balance Sheet
– Defined
A balance sheet or statement of financial position is a summary of the
financial balances of an economic unit. Assets, liabilities and ownership
equity are listed as of a specific date, such as the end of its financial year.
A balance sheet is often described as a "snapshot of a company’s financial
condition". It discloses, at a given point in time, the assets of the economic
unit, the depreciated costs or other indicated values, the liabilities and the
ownership equity.
The companies financial position is shown in form of a scorecard.
On a Balance sheet the assets equal liabilities plus equity. In other words
equity equal assets minus liabilities.
FINANCIAL STATEMENTS
BALANCE SHEET AT 31.12.12
THE BELGIUM CENTRE
LIABILITIES
ASSETS
Cash
2,000,000
Accounts Payable
Land
4,000,000
Mortgages
Buildings
16,000,000
Furniture & Equipment
1,000,000
Tenant Allowances
1,000,000
Total Liabilities
200,000
Shareholders Equity
Accounts Receivable
100,000
Retained Earnings
€ 24,300,000
12,100,000
€ 12,300,000
Equity
Leasing Commissions
Total Assets
200,000
Total Liabilities + Equity
11,000,000
1,000,000
€ 24,300,000
FINANCIAL STATEMENTS
• Profit and Loss (P & L)
– Definition
A profit and loss statement shows the company's revenues and expenses
during a particular period. It indicates how the revenues are transformed into
the net income. The result after all revenues and expenses have been
accounted for, also known as "net profit". It displays the revenues recognized
for a specific period, and the cost and expenses charged against these
revenues, including write-offs (e.g., depreciation and amortization of various
assets) and taxes.
– Net operating income (NOI)
Is the gross income of a property after deduction of all operational expenses,
property tax, insurance, utilities, management fees, heating/cooling, repair and
maintenance and replacement of equipment.
FINANCIAL STATEMENTS
– Funds from operations (FFO)
A measurement favored by REITS that approximate the cash generating power of
a company. FFO highlights the amount of cash generated by a companies Real
Estate portfolio relative to its total operating cash flow. It consists of net income,
excluding gains/losses from debt restructuring and sales of property, plus
depreciation and amortization after adjustments for unconsolidated partnership
and JVs.
– Earnings before interest, taxes, depreciation and amortization
(EBITDA)
It is an attempt by analysts to measure a company operation by eliminating
certain charges (such as depreciation) and focus on the result from operations
without either interest revenue or expense.
FINANCIAL STATEMENTS
INCOME STATEMENT AT 1.1.13 – 31.12.13
THE BELGIUM CENTRE
INCOME
Rental Income
1,600,000
Payments by Tenants to Cancel Leases
100,000
Sale of 1 Hectare Out Parcel
500,000
Total Income
€ 2,200,000
EXPENSES
Management Salaries
250,000
Promotion (short fall)
100,000
CAM (short fall)
50,000
Mortgage Interest
600,000
Depreciation
920,000
Total Expenses
PRE TAX PROFIT (NET INCOME)
1,920,000
280,000
Tax
(112,000)
After Tax Profit
€ 168,000
FINANCIAL STATEMENTS0
INCOME STATEMENT (CONT.)
•
NOI = net income – payments by tenants to cancel leases – proceeds from the
sale of property – earned interest + depreciation + amortization of tenant
improvements and tenant allowances + mortgage interest.
•
That is ordinary income produced from operating the property minus
expenses incurred from operating the property.
•
The NOI for the Belgium center for calendar year 2013= € 280,000 - € 100,000
- € 500,000 + € 920,000 + €600,000 = € 1,200,000
•
FFO for the Belgium Center for calendar year 2013 is Net Income – gain from
the sale of property - cancellation of leases + depreciation + amortization.
•
FFO does not reflect capital expenditures, tenant improvements or leasing
commissions.
EBITDA = Net Income excluding interest, income taxes, depreciation and
amortization.
= € 280,000 + € 600,000 + € 920,000 = € 1,800,000
•
FINANCIAL STATEMENTS
• Cash Flow Statement
– Definition
Is a financial picture for a determined period of time. It provides an
overview of assets and liabilities and any variance between them.
It is a way of recognizing the timing of receipts and payments.
The positive or negative Cash Flows allows for any necessary adjustments
throughout the year.
FINANCIAL STATEMENTS
CASH FLOW STATEMENT
THE BELGIUM CENTRE 1.1.13 – 31.12.13
Net Income (Pre Tax Profit)
280,000
Depreciation
920,000
Accounts Receivable
(100,000)
Leasing Commissions
(40,000)
Tenant Allowances
(160,000)
Furniture and Equipment
(100,000)
Accounts Payable
Net Cash
200,000
€ 1,000,000
FINANCIAL STATEMENTS
FINANCIAL RATIOS
• Purpose
• Types
– Current ratio
– Debt to equity
– Return on equity
– Operating margin
– Return on investment
– Loan to value
– Debt coverage
– Cash on cash
FINANCIAL STATEMENTS
ACCOUNTING BASICS
• Generally Accepted Accounting Principles (GAAP)
– Importance
• Accrual Basis and Cash Accounting
– Defined
– Importance
PROJECTONS & BUDGETING
•
•
•
•
•
Key to oversee and manage property
Motivation tool
Management & structuring tool
Learning of the unknown
Connection between accounting and reality
PROJECTONS & BUDGETING
• Annual budget approval– PM to AM to leadership
• Monthly management meetings – clear explanations
of variances
• Budget lines needs to be mirrored to accounting
• Cash-flow & accrual principle to be applied to get
most accurate picture
• Projections on quarterly basis (e.g. Q1 3+9)
VALUING PROPERTY
• Replacement Value
– Defined
– Use
• Comparable Value
– Defined
– Use
– Conditions that should be compared
•
•
•
•
•
•
Sale price
Financing terms
Market conditions
Location
Physical characteristics
Quality of income
VALUING PROPERTY
• Income approach to value a property
– Defined
– Rationale
– Formula components
• Value
=
NOI
CAP Rate
• CAP Rate
=
NOI
Value
• NOI
=
CAP Rate x Value
VALUING PROPERTY
• Yields
– Initial yield
– Reversionary yield
– Equivalent yield
– “Broker yield”
• Yields vs. Cap Rate
VALUING PROPERTY
• Basic assumptions
– Perpetuity principle !
– Willing seller willing buyer
– The best available option
– Transparent and market and comparables
– Specific approach for built-to-suit
VALUING PROPERTY
• What affects the value?
– Net Income (revenues vs. costs)
– Perpetuity of the net income
– Risk (yield)
• Real value is not the cash what property
produces but it´s capacity to produce
VALUING PROPERTY
• What we need to be careful about:
– Income
• Over-rented/Under-rented situations
• Covenant strength (operation sustainability)
• Market trends
• Demographic developments
• Indexation clauses
VALUING PROPERTY
• What we need to be careful about:
– Costs
• Service Charge leakages (caped service charges)
• 10 years maintenance plan
• Property taxes (danger of increase)
• Other fixed payments – e.g. parking land lease
• Existing financing terms – e.g. break penalties etc.
VALUING PROPERTY
What we need to be careful about: Yields
•
Risk
•
Management effort
•
Liquidity
•
Cost of Capital
•
Number of available properties
•
CAP Rate of similar properties
•
Competing investment opportunities
VALUING PROPERTY
THE PROSPECTUS OR OFFERING MEMORANDUM FOR THE SALE OF A
PROPERTY SHOULD CONTAIN
•
Investment Summary and Highlights
•
Property Overview
•
Economic Overview
•
Retail Environment
•
Strengths/Weaknesses of Property
•
P+L’s and Balance Sheets for previous 5 fiscal or calendar years
VALUING PROPERTY
PROSPECTUS OR OFFERING MEMORANDUM (CONT.)
•
Tenant Rent Rolls
•
Property and Lease Plans
•
Tenant Sales History
•
Schedule of Assets
•
Financial Value Analysis
•
Pitfalls, Opportunities
VALUING PROPERTY
PROPERTY EXIT STRATEGIES
•
Reasons for exiting
– Need cash
– Change risk/reward profile
– Grow the business
•
Methods to exit
– Sale
– Hold/sell analysis
– Refinancing
• Sources
• Objectives
•
Like kind exchange
CENTRE FINANCING
•
Types of Financing
– Equity (return, avaiability, risk profile)
– Debt (intrest, LTV, …)
– Mezzanine (intrest, avaiability,..)
•
Evaluating Financing Alternatives
•
Determining Long – Term Prospects of Shopping Centre
– ownership structure, open vs closed ended funds, management vs
ownership participation
REAL ESTATE INVESTMENT
TRUSTS (REITs)
A REITs is a company that owns, and in most cases, operates incomeproducing real estate such as apartments, shopping centres, offices,
hotels and warehouses. Some REITs also engage in financing real estate.
•Purpose
•Requirements
•Characteristics
SYNTHETIC LEASES
•
Defined
An operating lease that is structured in a way so that it is not recorded as a liability on
the balance sheet. Instead, it is considered to be an expense on the income statement.
Synthetic leases are designed under current accounting rules to achieve off-balance
sheet treatment. When structured as intended, neither the asset nor the liability
appear on the lessee’s balance sheet and lease payments are classified as operating
expenses. Return on assets (ROA), return on equity (ROE), interest-coverage ratios and
leveraging ratios (debt to equity) are improved relative to the on-balance sheet
alternative.
•
Purpose
Some companies use it as a financial instrument that gives it the tax benefits of
ownership without the accounting burdens of ownership.
Basically, a synthetic lease allows a company to control real estate without being
required to show the real estate as an asset on the financial statements.
What will you take back?
WORKBOOK
RETAILER STATEMENTS
CHECKLIST FOR REVIEWING RETAILERS FINANCIAL
STATEMENTS
•
THE FINANCIAL STATEMENT PACKAGE should include a balance sheet and income
statement. A statement of changes in financial position may also be included.
•
The statements should report a period of at least a full calendar year, unless the store in
question has been operating for less than a year.
•
It’s desirable that the statements present reports for the prior year, for comparison.
•
The statements should be audited – preferably – which means there will be a cover letter
from an independent auditor.
•
If audited financials are not available, an income tax return can back up the accuracy of the
financial statement provided.
•
If you’re reviewing a rent relief request, the statements should be for only the store in
question. If a national tenant, whoever handles the request may ask for individual store
results.
•
If you’re assessing the financial performance of a prospective tenant, a national tenant will
provide an annual report. A local tenant should provide a balance sheet and an income
statement for a comparable business operation or a business plan for a new venture.
•
ON THE BALANCE SHEET, check the cash accounts in Assets. Cash should be adequate to cover
•
•
recurring expenses. Do you believe the tenant has enough cash to pay the landlord, utilities and
vendors for merchandise? For how many months?
Check the net worth (equity). The business should be capitalized adequately to withstand some
bad times. Is the equity so small the tenant has nothing to fall back on? Is equity so large that the
tenant has enough of its own to weather a rough period without looking to the landlord?
Calculate some balance sheet ratios: coverage and liquidity.
•
ON THE INCOME STATEMENT, check occupancy costs against your records.
•
•
•
•
•
Check sales revenue against sales reported on your records.
Check the costs of goods sole for reasonableness.
Review the expenses as if you were the store manager and needed to cut costs.
If the expenses include advertising, confirm that you have seen or heard the advertising.
Call a local insurance agent and get a quote for insurance premiums at the tenant’s lease required
limits.
Challenge general and administrative expenses if they exceed 1% of sales.
Determine how expenses, such as telephone, postage and office supplies compare against the
expenses in the mall office.
Remember to add back depreciation/ amortization in order to approximate cash flow.
Calculate some income statement ratios: profitability.
•
•
•
•
RETAILERS FINANCIAL RATIOS (PART1)
Profitability Test : Answers the question is the retailer making money
Gross Margin %
= Net Sales – cost of Goods Sold
Net Sales
Return on Assets
= Net income before Interest Expense
Total Assets
Net Sales to Net Worth
= Total net sales
Equity
Tenancy
= Minimum Rent + Turnover Rent + CAM+ Real
Estate Tax + Landlord Marketing Fund
RETAILERS FINANCIAL RATIOS (PART 2)
•
Coverage Test : Answers the question:
•
Does the retailer have staying power
• Are they sufficiently capitalized to meet their obligations
• Do they have protests
•
Debt to Equity
•
Liquidity Test: Answers the question: can this retailer meet its short term
obligations and debts
•
Current Ratio
•
•
•
= Total Liabilities
Total Equity
= Current Assets
Current Liabilities
Quick Ratio
= Current Assets – inventory
Current Liabilities
TATER TOT 2013—CAFÉ BALANCE SHEET
ASSETS
Cash
Furniture & Equipment
Inventory
Total Assets
LIABILITIES
4,000
25,000
5,000
34,000
Accounts Payable
2,000
Bank loan
30,000
Total Liabilities
32,000
Equity
Shareholder Equity
Total Liabilities and Equity
2,000
34,000
TATER TOT CAFÉ 2013—INCOME STATEMENT
INCOME
Sales
300,000
Cost of goods sold
112,500
Gross margin
€ 187,500
EXPENSES
Minimum rent
50,000
Overage (turnover) rent
0
CAM
5,000
Real estate tax
2,000
Tenancy (occupancy costs)
57,000
Depreciation
5,000
Utilities and repairs
5,000
Occupancy
67,000
Salaries (including Manager)
100,000
Loan amortization (principal €3000.00 and interest
€3,000)
6,000
Other
3,000
Total Expenses
PRE-TAX PROFIT
179,000
8,500
Tax
(2,100)
After Tax Profit
€ 6,400
TATER TOT CAFÉ 2013
CASH FLOW STATEMENT
Operating Profit
8,500
Depreciation
5,000
Loan principal repaid
3,000
Net Cash
€ 16,500
TATER TOT CAFÉ 2013
“Underperforming Centre” is located in Vienna, Austria. The centre has
14,000 square meters of small shop GLA. It is anchored by Media Markt
and Carrefour. The third anchor location has been vacant for a year. Small
shop GLA occupancy is 78%. Sales are €2300 per square meter.
Kleinmaaster, GmbH opened Tater Tot Café in November, 2001. It occupies
100 square meters, in space number 13 located in the Carrefour wing. Tater
Tot Café has its own interior seating. The center does not have a food court.
Tater Tot Café has told you it’s going to close its restaurant because of poor
performance. You want to determine whether you should enforce the lease,
negotiate a rent reduction, or negotiate a termination.
TATER TOT CAFÉ 2013
•What are the Profitability Ratios for the tenant
– Gross Margin
– Return on Investment
•What is the coverage ratio for the tenant
− Debt to Equity
•What are the liquidity ratios for the tenant
− Current ratio
− Quick ratio
VALUE
CONGRATULATIONS!
You have just won a lump sum payment of €1,000,000 from
Publishers Family of Magazines
Now that the hoopla has settled down and your relatives and salesmen have stopped calling, you have
to decide how to invest this for the next year.
Your two options are:
1. Invest in a 5% US Treasury note, or
2. Buy €1,000,000 worth of stock in a start-up firm you read about in your dentist’s office. You think
this place has the hottest idea since NetBank and, with a €1,000,000 investment, you could walk away
at the end of a year with €2,100,000 if the article is to be believed.
What to do?
A) With the US-backed securities being a pretty sure bet, at least for now anyway, you would have a
certain €1,050,000 at the end of one year by purchasing a US Treasury note. Your original
€1,000,000 plus €50,000 in interest constitutes a 5% return.
B) Having done some research about the start-up company, you estimate their chance of success in
the next year to be 50-50. Therefore, the expected value of the stock investment after one year is:
0.50 x €2,100,000 = €1,050,000
Your original €1,000,000 plus €50,000 in interest is a 5% return.
Assume that the following tenant was billed late as noted. If we
assume an 8% interest rate and payment is be received on the first of
March, the “effective cost” of late billing would be as follows:
Tenant
Luigi Men’s
Wear
Bill To Be Sent
Rent Due
Bill Sent
Bill Paid
02/15/07
03/01/07
04/15/07
05/01/07
Answer Computed
1-Mar
# Of Days
€12,000
91
@ 8%
61
€160.44
1-Apr
30
€78.90
1-May
0
0
COST
€12,000
No. of Days
Mo. Rent
€239.34
TIME VALUE OF MONEY
Assume that Pietro Pet Store wants to terminate its lease early.
They are paying rent of €2,750, common area maintenance of
€600 and real estate tax of €400 = €3,750 monthly and have 72
months remaining on their lease.
It is a “dog” of a space and unlikely to be leased anytime soon.
The tenant has offered €100,000 to walk away. How would you
evaluate this offer versus continuing to receive rent for the
remaining term of the lease?
Answer Computed
1. Calculate the net present value of the lease
Assume that you can invest the lost receipt of rent, CAM
and real
estate tax (€3,750) at 7%
Using a financial calculator,
n = number of payments
= 72
i = annual interest rate
= 7%
PMT = payment amount
= €3,750
The net present value of the lease is €219,954.
2. Calculate the future value of the tenant’s offer
The tenants initial payment would be €100,000
The flows would be €0 for 72 months
The future value of the tenant’s offer of € 100,000 at 7%
be €152,010
compounded monthly would
3. What other considerations should the landlord take into account?
1.
The difference between market and contract rent for the space
2.
The number of months the space will not produce income
3.
The landlord’s accelerated costs, e.g., leasing commissions, construction, tenant
inducements
4.
Effect on tenant mix
YOUR UNDERSTANDING OF BASIC RATES OF RETURN
1. Which investment is riskier and why? Which should have the higher return?
A) US Treasury bill
B) Certificate of deposit (CD) at your local savings and loan institution
2. Which investment is riskier? Which requires more managerial effort?
A) Stand-alone Carrefour fully net leased for 25 years
B) Shopping centre with 40 tenants including 20 local “mom and pop’s”?
3. What rate of return would you require for the investments described in question 2?
A) Carrefour
B) 40-tenant shopping centre
4. Looking at shopping centres with the following characteristics, would you say each one has
a “high quality” or “low quality” income stream?
A) Long term leases with credit-worthy tenants
B) Many short term leases with rent below market
C) NOI does not include management fee or reserves for deferred maintenance
D) Many high rent leases expiring next year; the retail market is weak
5. Describe the risks associated with cost in the following leases:
A) Landlord required to build a “vanilla box”
B) Landlord to build tenants standard build-out at a cost not to exceed €3 M²
C) Landlord pays the tenant a €3 M² build-out allowance after tenant opens and begins paying
rent
THE VALUE OF A 1% TURNOVER
SALES INCREASE
DATA:
Mall GLA
20,000 SQUARE METRES (A)
Sales per square meter
€6000
(B)
Market rent per sq. Meter
€600
(C)
€600 = 0.10
(D)
Rent to sales ratio
Market rent
Sales M²
€6000
FORMULA:
1.Sales per square meter x 1% = 1% sales increase per square meter
€6000 (B) x .01 = €60 (E)
2. Rent to sales ratio x 1% sales increase per square meter = Additional rent per square
meter
0.10% (D) x €60 (E) = €6 (F)
3. Additional rent psf x Mall GLA = Potential additional rent
€ 6 (F) x 20,000 (A) = €120,000 (G)
4. Additional rent divided by 10% cap rate = Increased value
€120,000 / 0.10 = €1,200,000
CENTER REFINANCING
USING MORTGAGE CONSTANTS
Using the mortgage constant, you can calculate the incremental rent necessary to pay
back the additional investment made by providing the tenant with an allowance.
Mortgage Constant = Principle + Interest
Loan Amount
If you borrow €100,000 for 10 years at 10% to provide a tenant allowance what additional
income would need to be earned to pay off the loan.
From the mortgage constant tables, the annual mortgage constant to pay off a loan over
10 years at 10% is 0.1586 and the monthly mortgage constant is 0.013217
To pay off the loan the landlord would need to increase the monthly rent by €100,000 x
0.013217 = €1,322
CENTER REFINANCING
USING MORTGAGE CONSTANTS
If the landlord leases a new store and offers a €200 per square meter
allowance and is borrowing the money for 10 years at an interest rate of 10%
what additional monthly rent will he need to obtain to pay off the loan.
From the mortgage constant tables, the annual mortgage constant to pay off a
loan over 10 years at 10% is 0.1586 and the monthly mortgage constant is
0.013217.
To pay off the loan the landlord would have to increase the monthly rent by 200
x 0.013217 = 2.64 per sq meter
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