**Jan Kubíček, MRICS**

Heitman Europe, Czech Republic

**Bernd Huber, Ing. Mag., MRICS**

IMAG Real Estate Consultancy Austria

### ICSC European Retail Property School

**Shopping Centre Finance**

**Tuesday, July 8th 08:30 – 12:00**

### INTRODUCTION

### •

### Who are We? Who are You?

### •

### What is the purpose of the finance?

### •

### Why you think you need need finance?

### Main concepts to talk about

### •

### Time value of money and general investment evaluation

### •

### Reading of Financial Statements

### 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.

### 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 x (1 + i )

n### €1 x 1.06 x 1.06 x 1.06 =

### €1.19

P = Principal i = Interest n = Time### TIME VALUE OF MONEY

Time (Years)

Beginning Value

Compounded Ending Value

### 1

### €1.00

### x

### 1.06%

### =

### €1.06

### 2

### €1.06

### x

### 1.06%

### =

### €1.12

### 3

### €1.12

### x

### 1.06%

### =

### €1.19

**Compute Answer**

### TIME VALUE OF MONEY

### 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

### 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

### TIME VALUE OF MONEY

### 1

### 2

### 3

### 4

### 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

### 102.00

**PRESENT VALUE/FUTURE VALUE**

### •

**What is the Present value of € 102 to be received in 4 years if you **

**re-invest and earn 2%**

### •

**What is the Future value of € 94.23 in 4 years if you re-invest the money **

### 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

### 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

### Ordinary Annuity

### P = (1.12)

6_{-1 }

_{P = (1.12)}

5_{-1 }

### .12

### .12

### TIME VALUE OF MONEY

**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

**Answers computed**

### TIME VALUE OF MONEY

### 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

### 0.16

### TIME VALUE OF MONEY

**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

**Answer computed**

### 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

### TIME VALUE OF MONEY

### AMORTIZATION EXAMPLE

Year 0 Year 1 Year 2 Year 3 Total Repaid

### €100 interest-only

### loan at 10.0%

(€ 100.00) € 10.00 € 10.00 € 110 € 130

**Year 0** **Year 1** **Year 2** **Year 3** **Total **
**Repaid**

### 3-year amortizing

### loan interest

(€100.00) €40.21 €40.21 €40.21 € 120.64### Interest payments

€10.00 €6.98 €3.66 € 20.64### Principal payments

**€30.21 +**

**€33.23 +**

**€36.55**

**= €100.00**

### Loan Balance

€ 69.79 € 36.56 0**Example 2**

**Example 1**

### TIME VALUE OF MONEY

### 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

### 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
= € 90.90
PV Year 2 = 200 =
1.10
181.82
1.10
= € 165.29
PV Year 3 = 3,700
1.10
3,363.64 =
1.10
3,057.85
1.10
= € 2,779.86
**Total = € 3,036.05**

### • Internal Rate of Return (IRR)

### – Defined

### – Calculated

### • Major investment criterion

### 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 Year 2 Year 3 Cash Flow (€ 2800) € 100 € 200 € 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%

### • 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

### 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.

### BALANCE SHEET AT 31.12.12

**THE BELGIUM CENTRE**

**ASSETS** **LIABILITIES**

Cash 2,000,000 Accounts Payable 200,000

Land 4,000,000 Mortgages 12,100,000

Buildings 16,000,000 **Total Liabilities** **€ 12,300,000**

Furniture & Equipment 1,000,000

Tenant Allowances 1,000,000 **Equity**

Leasing Commissions 200,000 Shareholders Equity 11,000,000

Accounts Receivable 100,000 Retained Earnings 1,000,000

**Total Assets** **€ 24,300,000** **Total Liabilities + Equity ** **€ 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.

### INCOME STATEMENT AT 1.1.13 – 31.12.13

**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** **1,920,000**

PRE TAX PROFIT (NET INCOME) 280,000

Tax (112,000)

**After Tax Profit** **€ 168,000**

**THE BELGIUM CENTRE**

### 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.

### CASH FLOW STATEMENT

### 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

### 200,000

**Net Cash**

**€ 1,000,000**

**THE BELGIUM CENTRE 1.1.13 – 31.12.13**

### FINANCIAL STATEMENTS

### • Purpose

### • Types

### – Current ratio

### – Debt to equity

### – Return on equity

### – Operating margin

### – Return on investment

### – Loan to value

### – Debt coverage

### – Cash on cash

**FINANCIAL RATIOS**

### FINANCIAL STATEMENTS

### • 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

### 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

### 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

### VALUING PROPERTY

### • Yields

### – Initial yield

### – Reversionary yield

### – Equivalent yield

### – “Broker yield”

### VALUING PROPERTY

### • Basic assumptions

### – Perpetuity principle !

### – Willing seller willing buyer

### – The best available option

### – Transparent and market and comparables

### 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.

### 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

### 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

### PROSPECTUS OR OFFERING MEMORANDUM (CONT.)

### •

### Tenant Rent Rolls

### •

### Property and Lease Plans

### •

### Tenant Sales History

### •

### Schedule of Assets

### •

### Financial Value Analysis

### •

### Pitfalls, Opportunities

### 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

### income-producing 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.

### RETAILER 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.

**CHECKLIST FOR REVIEWING RETAILERS FINANCIAL **

**STATEMENTS**

• 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 = Total Liabilities Total Equity

• Liquidity Test: Answers the question: can this retailer meet its short term obligations and debts

• Current Ratio = Current Assets • Current Liabilities

• Quick Ratio = Current Assets – inventory • Current Liabilities

**TATER TOT 2013—CAFÉ BALANCE SHEET**

**ASSETS** **LIABILITIES**

Cash 4,000 Accounts Payable 2,000

Furniture & Equipment 25,000 Bank loan 30,000
Inventory 5,000 **Total Liabilities** **32,000**

**Total Assets** **34,000** **Equity**

Shareholder Equity 2,000 Total Liabilities and Equity 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** **179,000**
PRE-TAX PROFIT 8,500
Tax (2,100)

**TATER TOT CAFÉ 2013**

**CASH FLOW STATEMENT**

### Operating Profit

### 8,500

### Depreciation

### 5,000

### Loan principal repaid

### 3,000

### Net Cash

### € 16,500

### “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.

### •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

**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 Bill To Be Sent Rent Due Bill Sent Bill Paid Mo. Rent # Of Days

Luigi Men’s Wear

02/15/07 03/01/07 04/15/07 05/01/07 €12,000 91

Answer Computed No. of Days @ 8%

1-Mar €12,000 61 €160.44

1-Apr 30 €78.90

1-May 0 0

### 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% compounded monthly would be €152,010

**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

**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**

Mall GLA 20,000 SQUARE METRES (A) Sales per square meter €6000 (B) Market rent per sq. Meter €600 (C) Rent to sales ratio

Market rent €600 = 0.10 (D) 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**

**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

**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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