Multi Tenant Office Model - Looking for some help/advice
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[{"id": "gb5pxv1", "text": "I'm just curious with the glut of office space, the pandemic work from home model, why you want to do this? What do you see that everyone else is missing or how unique is your area?", "replies": [{"id": "gb6bgxh", "text": "I think the OP is doing a case study for educational purposes.", "replies": [], "depth": 2}, {"id": "gb6d6xa", "text": "Hypothetical and a stupid one at that with that random lease structure. Gotta love professors.", "replies": [], "depth": 2}], "depth": 1}, {"id": "gb5rcng", "text": "Don't have a model but happy to try and help if you want to elaborate on where you are lost? Not sure what you question is...", "replies": [{"id": "gb5sndr", "text": "Sure, so I am working on a case study where I am given the lease summary report. The there are 5 occupied space out of 6 total  I wasn't given credit ratings or any information about the occupants. Not sure how to model renewal percentage and what assumption I should be making about vacancy. \n\nI am also given reimbursement details and the base year. For modified gross recovery, how should I approach modeling Real estate tax reimbursement. \n\nI'll start there .I also sent you a private message I appreciate your help!", "replies": [{"id": "gb60hkk", "text": "Hi, hope the following helps:\n\n**Renewal probability:** the renewal probability is the probability that an expiring tenant will renew their lease. It is used to calculate the new base rent that a tenant new to the building would be expected to pay by using a blended value.\n\n1. *Pre-pandemic assumptions*: 75% renewal probability. $20.00/sf/yr for RENEWING leases and $22.00/sf/yr for NEW leases\n2. *Calculation:*\n   1. $20.00/sf/yr for renewing leases x 75% chance of renewal = $15.00/sf/yr\n   2. $22.00/sf/yr for new leases x 25% chance of new tenant = $5.50/sf/yr\n   3. New base rent: $15.00/sf/yr + $5.50/sf/yr = **$20.50/sf/yr**\n\n**General vacancy:** represents the minimum vacancy loss for the property on a monthly or annual basis. It can be calculated a number of different ways but to keep it simple, here is the calculation most commonly used. It is calculated on an annual basis.\n\n1. *Pre-pandemic assumptions*: 5.0% general vacancy. Assume annual year 1 potential gross revenue is $100,000.\n2. *Calculation:* % of potential gross revenue (PGR = total tenant revenue + total other income)\n   1. $100,000 (PGR) x 5.0% (general vacancy)\n   2. General vacancy loss: $100,000 x 5.0% = -**$5,000**\n\n**Assumptions related to lease up of vacant suite:** not sure if your comment above relates to general vacancy or the lease up of the vacant tenant but many of these assumptions will require market research to determine market rental rates, vacancy, demand, etc. and will vary based on the amount of space you are trying to lease up, what companies are currently in the market and what companies might be moving into or out of the market (supply and demand).\n\n1. *Pre-pandemic assumptions:*\n   1. Term: 5-10yrs depending on size of space and use. If you are accounting for the pandemic, you will need strategize a lease up strategy that relates to the case being analyzed. Maybe think shorter term leases, subleases, etc.\n   2. Renewal: 75% is pretty standard. Accounting for the pandemic, you may want to drop this to 60-70% for different tenants.\n   3. Months vacant: 6-9 months depending on size. Accounting for the pandemic and what your market research tells you, this may be closer to 15-18 months.\n   4. Base rent assumptions: varies by market. Refer to market research.\n   5. Rent abatement (free rent): varies by market and type of tenant you are attracting and size. Typically abatement for new leases are 2-3 months and renewing leases 0 months. Accounting for the pandemic, you will need to factor in increased concessions to try and attract tenants so you may be assuming closer to 4+ months for new leases and 2-3 months for renewing leases to incentivize them to stay.\n   6. Recoveries: base year stop.\n   7. Tenant improvements: varies by market. I've underwritten class A and class B office in primary and secondary markets that range anywhere from $15.00/area to $45+/area.\n   8. Leasing commissions: standard assumptions are 6.0% for new leases and 3.0% on renewing leases calculated on the TOTAL value of the lease.\n\n**Expense recoveries:** office properties typically reimburse operating expenses using a base year stop recovery structure. This means that all recoverable expenses are paid by the tenant based on the proportionate share of the building area over a stop amount, which is the amount of annual recoverable expenses in the base year (or first year), of the lease. The landlord agrees to pay the full amount of the recoverable expenses for the first year, and in future years the tenant will pay any increase over that base.\n\n1. Let's say operating expenses for the entire building are $50,000 in year 1. Tenant A's prorata share is 20%. Under a NNN structure, Tenant A reimburses $10,000 ($50,000 of opex x 20% prorata share). Under a base year stop, the landlord will pay $10,000 of the opex in year 1 which becomes the base year. Expenses exceeding $10,000 in future years will be paid by Tenant A.\n\n**Modified gross lease structure**: CAM, utilities, and janitorial. Real estate taxes will typically be excluded.\n\nHere's a great thread discussing impacts of the pandemic on CRE with lots of assumptions and predictions from brokers, developers, and landlords: [Coronavirus Megathread Discussion](https://www.reddit.com/r/CommercialRealEstate/comments/fj6m71/coronavirus_megathread_discussion_of_the_current/?utm_source=share&amp;utm_medium=web2x&amp;context=3)\n\nFeel free to message me. Happy to go further into detail.", "replies": [{"id": "gb6c0nq", "text": "Very nice of you to give such detailed help. \n\nOP, as someone who returned to school after many years of work experience, I found such assignments confusing because you typically aren\u2019t given either enough assumptions or enough data to do meaningful research to perform the assignments as you would in the real world. Simply state the assumptions you are making and do the analysis to the best of your abilities modeled after any textbook or lecture examples and you will likely get an A. In the real world, you\u2019d have to really know your market already or do a lot of research.", "replies": [{"id": "gb6d9ho", "text": "This is great advice. During my undergrad, I was on a CRE case competition team. In this context, I couldn't agree more than what was mentioned above. Analyze the deal and build the model using textbook and/or lecture examples. From there, you can then tweak assumptions or functionality as needed. I'd also recommend downloading market research reports from CBRE or C&amp;W for market-specific information. This will also help strengthen your assumptions if you are questioned about them.", "replies": [], "depth": 5}], "depth": 4}, {"id": "gb86c8b", "text": "Great response here!", "replies": [], "depth": 4}], "depth": 3}, {"id": "gb8u56m", "text": "Ya not much more to add beyond spaloosh's analysis. On vacancy I would go higher than 5%, especially with COVID. I usually based mine on market vacancy rates. If there is no market data provided in the scenario, I would probably go with at least 10% seeing as a single vacancy puts you at 17%. I would normally only factor in a rate as low as 5% if I was at 100% occupancy with small, numerous tenants. As was stated below, lay out and explain all of your assumptions in the report. You do the same thing in the real world, at least if you are competent.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "gbbc13z", "text": "Adventures in CRE has a free office model and guides on how to use it.", "replies": [], "depth": 1}, {"id": "gbym4aj", "text": "If you are in commercial real estate and have other properties then an Argus subscription is a great solution.  It will also help at disposition since sophisticated buyers like to use Argus.  If the \\~$1,500 subscription doesn't make sense for just the one off deal, I think you can find a consultant to run the report with inputs you provide.", "replies": [], "depth": 1}]