Comparable Lease Rate Analysis
In a 400,000 square foot shopping mall, clothing retailer Abercrombie & Fitch signs a lease to occupy 8,000 square feet of space. If the mall has the following expenses:
- Annual insurance policy of $600,000
- An assessed property tax value of $80 million tax and the county charges a millage rate of 250 BP with no discount for early prepayment
- And the annual Common area maintenance for the building is $7 per square foot
At what gross rent amount year one is the mall indifferent to signing a triple net lease at $25 per foot annually?
2. Analysis without Depreciation – single tenant office building
If you buy a 20,000 square foot, single tenant office building that has a triple net lease tenant for $5,000,000, and rents for the next 12 months are set at $18 annually per square foot (increasing 4% in year 2), and get a 70% LTV loan at 6.75% (amortizing over 30 year, 10 year term, and pay $0 closing costs).
After year 2 the tenant’s lease expires and you successfully negotiate for them to renew at a flat rate of $25 per foot NNN for 10 more years, but have to pay a commission to the original leasing broker of 5% of the next year’s rent, plus you agree to pay the tenant $10 per square foot toward tenant improvements to remodel the space.
A.What is your Cash on Cash Return year 1?
B.What is your Cash on Cash Return year 4?
C.What is your IRR if you sell the building for $6 million at the end of year 5, paying a 2% brokerage commission on the sale price?
3. Analysis with Taxes and Depreciation
An apartment building is bought for $20 million utilizing a 75% LTV mortgage at 5.5% interest (amortizing over 30 Years). In the first year of operations after the purchase it has a Net Operating Income of $1.5 million. (for tax purposes 20% of the purchase price is applied to land value and the rest to the building) Corporate income tax rates are 25%
What is the building owner’s:
- Corporate income tax bill the first year accounting for the benefits of depreciation?
- After tax cash flow
- Cash on cash % return after tax?
- Had the owner not utilized depreciation to lower their tax bill, what return percentage be would their annual cash on cash after tax be?
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