Answer the following questions:

1) a. What is the difference between rent escalation and percentage rent?
b. How does a rental agreement that includes percentage rent benefits the tenant?

2) What are the two main advantages (from the landlord perspective) of increasing the TI allowance rather than offering lower base rent?

3) Why anchor tenants pay lower rent per sqft compared with inline tenants?

4) Calculate the load factor for a building with 85,000 sqft of rentable area and 20,000 sqft of common area.

5) Assuming that you plan to sell your property in 2 years and about to sign a 10-year contract with a high quality tenant. Should you pay much attention to the rent escalations and overage past the first two years of the contract? Why?

6) Should a lease with a renewal option be associated with a higher or lower monthly rent compared with a lease without a renewal option? Why?

7) What is the “multiple” of a property that is selling for a CAP of 7.5%?

8) What is the total risk premium demanded by an investor that agrees to purchase a particular property for a CAP of 9% if the investor expect inflation to be 2% at a time that the treasury rates are 6%?

9) What is the general relation between the total risk premium and prices of investment real estate properties?

10) Under what conditions the average CAP rate in the market will likely be below the rate of 10-year treasuries?

11) What are the main advantages of investing in REITs vs. investing in real estate directly? List and very briefly explain 5 of these advantages.

12) Assume that after a careful analysis of the real estate market in your area you are indifferent between owning and renting the space needed for the operation of your firm. Then, one of the factors you previously considered in your analysis suddenly changes.Please circle in the table below whether after the change in this factor you would prefer owning or renting (assuming all other factors remain the same).

The Factor                                                                                                                Owning or renting (circle one).

You expect your firm to earn higher return on the new investment                                 Owning    Renting

You expect your firm to have a longer depreciation schedule on new investments.       Owning    Renting

You expect the salvage value of new investments to be lower
than you originally anticipated                                                                                                 Owning    Renting

You believe that the gap in real estate operating efficiencies between your firm
and the average landlord is larger than you initially estimated.                                           Owning    Renting

You expect the growth in the rate of rent to be faster than you initially anticipated.       Owning    Renting

You now believe that your firm needs greater flexibility in terms of space
and location of its operation.                                                                                                 Owning    Renting

You expect market CAPs to decline in the medium term more than
you originally anticipated.                                                                                                       Owning    Renting

13. BER is a publicly traded REIT that is currently traded at $90/share. BER has 11M shares outstanding and $500M in total debt. This year BER is expected to generate total revenue of $150M and have total expenses of $110M including interest expense and depreciation. Interest expense is expected to be $26M and depreciation is expected to be $31M. Similar properties to the properties held by BER are selling in the private market for prices associated with a CAP of 6.25%. Additionally, BER has a few on-going apartment development projects valued at $120M.
a. If you were to purchase a company similar to BER in the private market in cash (with no debt), how much would you be likely to pay?
b. Assuming that you want to invest in real estate, should you buy shares of BER or purchase similar properties directly in the private market? Show your work and Explain.
c. How much should you pay for a share of BER if you require their unleveraged return to yield 8.5% and expect the company’s unleveraged cash flow to grow 2% a year, on average?

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a. Rent escalation means that the rent charged by landlord would change to reflect the changing situations in terms of cost of living and other economic factors. As an example, if inflation is high in the economy, the rents paid by tenants would be adjusted to reflect the high inflation. This is more commonly seen in residential properties. On the other hand, percentage rent clause means that the rent would be charged based on the income which the tenant makes on the property. This is applicable for commercial properties and the value of rent is calculated as a fixed percentage of the profits of the tenant.
b. The rental agreement with the percentage rent is generally not beneficial for the tenant since with increasing profits, their rent costs also increase while the base rent is fixed. If the base rent (i.e. rent that has to be paid irrespective of the profits of the tenant) is small in order to add the percentage rent clause, the tenant would benefit...
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