Among the most common questions asked by our clients is, “So what is the total gross rent that we will be paying?” The answer to this question starts by stating that each building can be slightly different and most landlords have different definitions as to what constitutes gross rent for the space they are leasing.
The simplest approach as far as tenants are concerned, gross rent will include all real estate costs associated with renting a space ( except sales tax in Florida):
- Base Rent
- Property Taxes
- Building Insurance ( Landlord’s)
- Common Area Maintenance (CAM’s)
- Building Management
- Parking Costs
- Gas & Electric Utilities
- Trash Removal
- Tenant Insurance
- Tenant Improvements
1. Gross Rent Example Two (Modified Gross “MG”): Base Rent + Additional Rent (Utilities?) = Gross Rent Additional Rent varies from property to property, so always ask what additional rent includes. Gross Rent / 12 months = Monthly Gross Rent
- Example One (Triple Net “NNN”): Base Rent + NNN = Gross Rent NNN = Taxes + Building Insurance + CAM’s Gross Rent / 12 months = Monthly Gross Rent
- These costs are not always clearly laid out in the marketing material of various property listings and some of the costs vary broadly from property to property (i.e. taxes on office/flex space vs downtown office space). In addition, some of these costs are entirely founded in what the tenant may require and are outside of the landlord’s control. Items like data wiring or tenant specific improvements need to be assessed prior to finalizing any deal and signing a lease. We define these costs by placing them into two categories: gross rent & variable costs.
- Will you please send me a breakdown of your NNN’s or additional rent?
- Do these expenses include items like management, gas & electric utilities?
- If gas & electric utilities are not included, how are they charged? Are they seperately metered or pro-rated?
- Can you send me a 12-month average if utilities are not included? (This information can also be achieved by calling the utility provider for the building.)Variable costs are paid by the tenant, either directly, or indirectly as they are assumed in the rent as offered. Some of the costs are defined below:
2. Variable Costs
- Tenant Improvements: Some spaces are ready “turn-key”; the tenant signs the lease, grabs the keys and moves right in. Other spaces require a build-out, meaning that to prepare the space to meet the tenants needs, the landlord and tenant must negotiate who will pay for and be responsible for completing a certain amount of finish.
- Telephone/Data: Always carefully review your costs as they are associated to your connectivity. Some buildings are wired with access to high speed internet while others do not have a major service provider like Comcast or Century Link. Keep in mind data costs will vary broadly as service providers have different definitions of “high speed.” Make sure you are comparing this real cost to weigh your options when looking at various properties!
- Landlord Incentives: I find it is often overlooked that landlords may offer incentives. These discounted costs deviate from one building and it’s landlord to another, but always keep in mind to ask.
- As you can see, there is no straightforward answer regarding what gross rent does and does not include. Whether you are a tenant or a landlord, these costs should be clearly defined in your lease agreement. Sourced by the Colorado Group
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graphic by: Andre J. van Rensburg
TMC- The Mahr Company Your goals and commercial real estate needs, whatever they may be, wherever they make take us and whatever they may require are our commitment to you.
TMC-The Mahr Company understands that Commercial Real Estate Sectors and Markets are Dynamic not Static. We have learned to slide to market variances. At any snapshot in time, the picture of the market based on facts of the ground, is what it is. Our commitment to you is to know what the market is at any given time and to be proactive to it. TMC-The Mahr Company, YOUR Senior Vice President of Real Estate. Our commitment to you is Excellence……
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TMC The Mahr Company is available to assist you in positioning your business model in 2014. As we are starting the second quarter of 2014 how are you and your business model positioned to take advantage of the emerging trends in commercial real estate? We have the skill sets, market knowledge, experience, energy and determination to take a proactive approach to achieve your goals. If you are not engaged in the game, the sidelines only offer a spectator’s view.
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Top 10 Reasons to Move to Tampa Bay
Tampa Bay ranked among the top 10 large metro areas for college-educated young talent on the move. The latest Census data reveals that young people aged 25 to 29 are increasingly more mobile and willing to move to new cities, very often in new states, in search of jobs.
2. K-12 EDUCATION
Florida leads the nation in high school seniors taking Advanced Placement exams at nearly 50 percent. Florida also ranks sixth in the nation for the percentage of students who score a 3 or higher on the AP exam at 23.9 percent, compared to the national average of 18.1 percent.
3. PROGRESSIVE TRAINING
An independent analysis of the CareerEdge Funders Collaborative by Urban Market Ventures found that the investments made by the nonprofit workforce-development program is producing millions of dollars in new wages and economic impact for the Tampa Bay region.
4. MILITARY INVESTMENT
Tampa Bay is home to MacDill Air Force Base, the only military installation that hosts two, four-star Combatant Commands, the U.S. Central Command and U.S. Special Operations Command. MacDill contributes $5 billion annually to the greater Tampa Bay economy.
5. AMAZING PARKS AND RECREATION
Tampa’s Curtis Hixon Park was named among America’s Best New Parks by The Atlantic Cities. Completed in 2011, the waterfront park serves as a more natural connection between the water, downtown, and the new Children’s Museum and Tampa Art Museum. Tampa Bay’s beloved public spaces spread throughout the region provide gathering places for families, friends, colleagues, and events from small to large scale.
6. PROMISING AND ADMIRED COMPANIES
Some of America’s most promising companies are located in Tampa Bay. Sarasota-based Internet communication systems and service provider, Star2Star Communications was named among America’s 100 Most Promising Companies by Forbes. The company also made the 2011 Inc. 500 list of fastest growing private companies.
7. INNOVATIVE UNIVERSITIES
The University of South Florida is ranked 50th in the nation for research expenditures by the National Science Foundation among all U.S. universities, public or private, joining the ranks of Johns Hopkins, Stanford, Yale and Harvard.
8. EXPANSIVE MEDIA REACH
The Tampa Bay region is the 14th largest television media market in the country, with 1.79 million TV households, according to Nielsen Media Research. That means Tampa Bay has 1.6 percent of all television households in the United States. It is the largest market in Florida – surpassing Miami. If you’re looking for media exposure, you’ve found it.
9. LOW COST OF DOING BUSINESS
According to a KPMG business cost study, the Tampa Bay market is the nation’s lowest cost large market for Corporate Services, International Financial Services and Shared Services – a testament to strong business, financial and data services sector in Tampa Bay. KPMG’s 2012 Competitive Alternatives study measured 26 significant cost components over a 10 year planning horizon. Bottom line – Tampa Bay is a great place for business.
10. HOT ENTREPRENEURIAL ENVIRONMENT
According to FastCompany Magazine, Florida’s start-up environment is soaring high. From the HuB in Sarasota to Tampa Bay WaVE’s First WaVE program to large events such as Start-Up Weekend and initiatives like the Tampa Bay 6/20 Plan, Tampa Bay’s entrepreneurial environment is setting up for start-up success.
What You Should Know About The Cap Rate
The capitalization rate is a fundamental concept in the commercial real estate industry. Yet, it is often misunderstood and sometimes incorrectly used. This post will take a deep dive into the concept of the cap rate, and also clear up some common misconceptions.
Cap Rate Definition
What is a cap rate? The capitalization rate, often just called the cap rate, is the ratio of Net Operating Income (NOI) to property asset value. So, for example, if a property was listed for $1,000,000 and generated an NOI of $100,000, then the cap rate would be $100,000/$1,000,000, or 10%.
Cap Rate Example
Let’s take an example of how a cap rate is commonly used. Suppose we are researching the recent sale of a Class A office building with a stabilized Net Operating Income (NOI) of $1,000,000, and a sale price of $17,000,000. In the commercial real estate industry, it is common to say that this property sold at a 5.8% cap rate.
Intuition Behind the Cap Rate
What is the cap rate actually telling you? One way to think about the cap rate intuitively is that it represents the percentage return an investor would receive on an all cash purchase. In the above example, assuming the real estate proforma is accurate, an all cash investment of $17,000,000 would produce an annual return on investment of 5.8%. Another way to think about the cap rate is that it’s just the inverse of the price/earnings multiple. Consider the following chart:
As shown above, cap rates and price/earnings multiples are inversely related. In other words, as the cap rate goes up, the valuation multiple goes down.
When, and When Not, to Use a Cap Rate
The cap rate is a very common and useful ratio in the commercial real estate industry and it can be helpful in several scenarios. For example, it can and often is used to quickly size up an acquisition relative to other potential investment properties. A 5% cap rate acquisition versus a 10% cap rate acquisition for a similar property in a similar location should immediately tell you that one property has a higher risk premium than the other.
Another way cap rates can be helpful is when they form a trend. If you’re looking at cap rate trends over the past few years in a particular sub-market then the trend can give you an indication of where that market is headed. For instance, if cap rates are compressing that means values are being bid up and a market is heating up. Where are values likely to go next year? Looking at historical cap rate data can quickly give you insight into the direction of valuations.
While cap rates are useful for quick back of the envelope calculations, it is important to note when cap rates should not be used. When properly applied to a stabilized Net Operating Income (NOI) projection, the simple cap rate can produce a valuation approximately equal to what could be generated using a more complex discounted cash flow (DCF) analysis. However, if the property’s net operating income stream is complex and irregular, with substantial variations in cash flow, only a full discounted cash flow analysis will yield a credible and reliable valuation.
Components of the Cap Rate
What are the components of the cap rate and how can they be determined? One way to think about the cap rate is that it’s a function of the risk free rate of return plus some risk premium. In finance, the risk free rate is the theoretical rate of return of an investment with no risk of financial loss. Of course in practice all investments carry even a small amount of risk. However, because U.S. bonds are considered to be very safe, the interest rate on a U.S. treasury bond is normally used as the risk-free rate. How can we use this concept to determine cap rates?
Suppose you have $10,000,000 to invest and 10-year treasury bonds are yielding 3% annually. This means you could invest all $10,000,000 into treasuries, considered a very safe investment, and spend your days at the beach collecting checks. What if you were presented with an opportunity to sell your treasuries and instead invest in a Class A office building with multiple tenants? A quick way to evaluate this potential investment property relative to your safe treasury investment is to compare the cap rate to the yield on the treasury bonds.
Suppose the acquisition cap rate on the investment property was 5%. This means that the risk premium over the risk free rate is 2%. This 2% risk premium reflects all of the additional risk you assume over and above the risk free treasuries, which takes into account factors such as:
- Age of the property.
- Credit worthiness of the tenants.
- Diversity of the tenants.
- Length of tenant leases in place.
- Broader supply and demand fundamentals in the market for this particular asset class.
- Underlying economic fundamentals of the region including population growth, employment growth, and inventory of comparable space on the market.
When you take all of these items and break them out, it’s easy to see their relationship to the risk free rate and the overall cap rate. It’s important to note that the actual percentages of each risk factor of a cap rate and ultimately the cap rate itself are subjective and depend on your own business judgement and experience.
Is cashing in your treasuries and investing in an office building at a 5% acquisition cap rate a good decision? This of course depends on how risk averse you are. An extra 2% yield on your investment may or may not be worth the additional risk inherent in the property. Perhaps you are able to secure favorable financing terms and using this leverage you could increase your return from 5% to 8%. If you a more aggressive investor this might be appealing to you. On the other hand, you might want the safety and security that treasuries provide, and a 3% yield is adequate compensation in exchange for this downside protection.
Band of Investment Method
The above risk free rate approach is not the only way to think about cap rates. Another popular alternative approach to calculating the cap rate is to use the band of investment method. This approach takes into account the return to both the lender and the equity investors in a deal. The band of investment formula is simply a weighted average of the return on debt and the required return on equity. For example, suppose we can secure a loan at an 80% Loan to Value (LTV), amortized over 20 years at 6%. This results in a mortgage constant of 0.0859. Further suppose that the required return on equity is 15%. This would result in a weighted average cap rate calculation of 9.87% (80%*8.59% + 20%*15%).
The Gordon Model
One other approach to calculating the cap rate worth mentioning is the Gordon Model. If you expect NOI to grow each year at some constant rate, then the Gordon Model can turn this constantly growing stream of cash flows into a simple cap rate approximation. The Gordon Model is a concept traditionally used in finance to value a stock with dividend growth:
This formula solves for Value, given cash flow (CF), the discount rate (k), and a constant growth rate (g). From the definition of the cap rate we know that Value = NOI/Cap. This means that the cap rate can be broken down into two components, k-g. That is, the cap rate is simply the discount rate minus the growth rate.
How can we use this? Suppose we are looking at a building with an NOI of $100,000 and in our analysis we expect that the NOI will increase by 1% annually. How can we determine the appropriate cap rate to use? Using the Gordon Model, we can simply take our discount rate and subtract out the annual growth rate. If our discount rate (usually the investor’s required rate of return) is 10%, then the appropriate cap rate to use in this example would be 9%, resulting in a valuation of $1,111,111.
The Gordon Model is a useful concept to know when evaluating properties with growing cash flows. However, it’s not a one-size fits all solution and has several built in limitations. For example, what if the growth rate equals the discount rate? This would yield an infinite value, which of course in nonsensical. Alternatively, when the growth rate exceeds the discount rate, then the Gordon Model yields a negative valuation which is also a nonsensical result.
These built-in limitations don’t render the Gordon Model useless, but you do need to be aware of them. Always make sure you understand the assumptions you are making in an analysis and whether they are reasonable or not.
The Many Layers of Valuation
Commercial real estate valuation is a multi-layered process and usually begins with simpler tools than the discounted cash flow analysis. The cap rate is one of these simpler tools that should be in your toolkit. The cap rate can communicate a lot about a property quickly, but can also leave out many important factors in a valuation, most notably the impact of irregular cash flows.
The solution is to create a multi-period cash flow projection that takes into account these changes in cash flow, and ultimately run a discounted cash flow analysis to arrive at a more accurate valuation.
John Greathouse, Contributor 1/28/2014 @ 12:03PMn
If you want to live a personal and professional life with no regrets, follow these 43 life lessons, penned by H. Jackson Brown.
In the Fall of 1990, Mr. Brown sat at his kitchen table, pulled out a pad of paper and began writing advice to his son, who had just entered college. Mr. Brown’s aphorisms eventually evolve into twenty one books, including four New York Times bestsellers. With Life’s Little Instruction Book, Mr. Brown became the first author to simultaneously hold the number one positions on both of the NYT’s hardback and paperback lists.
Some of Mr. Brown’s quotes have become so well known that they are often mis-attributed to historical figures, including the following, which is widely credited to Mark Twain: “Twenty years from now you will be more disappointed by the things you didn’t do than by the ones you did do. So throw off the bowlines. Sail away from the safe harbor. Catch the trade winds in your sails. Explore. Dream. Discover.”
I came across a special edition of Mr. Brown’s Life’s Little Instruction Book (Volumes I – III) while waiting in line at a FedEx store. I almost never make impulse purchases, but after flipping through a few pages, the following paraphrased quote jumped off the page: “Live your life so that your epitaph boldly states, ‘No regrets.’” I promptly purchased the book as a Christmas gift for my teenage son.
As James Clear notes in The #1 Regret Of Dying Patients, far too many people spend their final stage of life regretting their youthful choices. Mr. Brown’s advice will help you to, “live a good, honorable life which you can enjoy a second time when you are old.”
When read nearly twenty-five years after they were penned, some of Mr. Brown’s musing are anachronisms (e.g., “Don’t sit while ladies are standing”), while others are banal (“Turn off the tap when brushing your teeth”). However, the vast majority of the 1,560 quotations in Volumes I – III of Life’s Little Instruction Book, are clever, relevant and inspirational.
Below are 43 quotes in bold text which are relevant to business executives who want to live a regret-free life. I categorized the quotes by: aspiration, kindness, leadership, success and happiness. In a few instances, I have slightly paraphrased Mr. Brown’s original text – my apologies to Mr. Brown and his purist fans. My brief annotations follow each quote.
1. Never give up when you truly believe. The person with big dreams is more powerful than the one with all the facts – the smartest person in the room seldom beats the one with the most passion.
2. Believe in love at first sight – be open to instant infatuation with respect to both people and business ideas.
3. Never laugh at anyone’s dreams – no one has the right to opine upon someone else’s desired future because no one can attest to the validity of an unrealized dream.
4. Find a job you like and you add five days to every week – I often tell my children), “I never worked at day at my startups because we were having too much fun.” Admittedly, not every day was a carnival, but I certainly enjoyed the majority of my startup workdays.
5. Every so often, let your spirit of adventure triumph over your good sense – good judgment arises from mistakes, mistakes arise from bad judgment. Thus, a bit of occasional bad judgment is good for you.
6. Great love and great achievements involve great risk – nothing ventured, nothing gained. Go venture.
7. Never let the odds keep you from pursuing what you know in your heart you were meant to do – entrepreneurs never calculate probabilities, even if the chances are one in a million, “one” is all you need to win.