Posted: June 8th, 2015

property investment

The assignment relates to lease interpretation and risk analysis associated with the due diligence process when contemplating the purchase a commercial office investment property.
You will assume the role of a junior investment officer at Sydney Investments Pty. Ltd., which is performing a due diligence inspection on the potential purchase of a commercial office property with an existing tenant that has just signed a new lease contract. Your boss has tasked you with producing a short report addressing three key aspects of the existing tenant’s lease contract of interest to the firm. These are described in detail below.
The lease you will study is an actual commercial lease for an office tenancy in Sydney, and is provided to you for the purposes of this course only.
The objective of this part of the assignment is to assess how well students conceptually understand and know how to apply the lessons learned in risk analysis (Weeks 6 through 8) and lease evaluation (Weeks 9 and 10). This task of lease evaluation is a common responsibility for new property professionals in commercial valuation and investment firms, so there is a strong practical element to this exercise.

Detailed Instructions

Answer the following three questions posed by your boss within the structure of a 1,000 to 1,500 word essay that will serve as a due diligence report to your boss. Your task is described as follows:

1. In regard to the terms and conditions in the lease, explain:

a. when rent is reviewed
b. how the rent will be set at the rent reviews, and
c. your opinion, as the prospective landlord, on the value of the rent review to your prospective investment’s cash flow.

Remember that ratchet clauses are legal in New South Wales. (Approx. 200-300 words)

2. Calculate the net effective rent.

First, identify specific information in the lease that is relevant to a calculation of effective rent.

Assume:
(i) your firm will acquire the property on the same date as the commencement date of the lease (yes, we’re time travelling back a few years)
(ii) that this lease is the only tenancy in this prospective investment property.
(iii) your firm’s required rate of return is 7.8%.

Note that in practice not all cash flows are stated on a summary page (particularly concessions), so you will have to skim the entire document for all relevant information. At the end of this section, calculate the net effective rent. (Approx. 500-800 words)

(Tip: use of a cash flow diagram is likely to help you explain your method and is something you can produce before the weeks on lease evaluation)

3. Discuss idiosyncratic risk associated with this lease by identifying:

a. one financial risk you – as the potential landlord – face that is specific to this lease
b. an action your firm could take to minimise this risk.

Note: Your firm is only going to be investing in the Sydney CBD [central business district], so it is looking for very specific idiosyncratic risks at the building level. Systemic risks in this case are defined as any risk associated with Sydney CBD market in general, such as “tenant default”, a “market downturn”, or “natural disaster” and, thus, these are not acceptable answers. Another way of understanding this requirement is that you must assume the tenant is reliable, Sydney CBD office market outlooks are stable, and that no natural or economic disasters are predicted for Sydney. (Approx. 300-500 words)

(Tip: Referencing a lease clause is a good idea to ensure you are identifying something specific to the lease)

Your answers are required to be written in essay style and you must make appropriate professional reference to relevant literature on leases that has been provided as part of this assessment and discussed in the course, or any source external to the course that you consult.

Grading criteria:

20 marks – Question 1, assessing the accuracy of your rent review discussion in respect to the subject lease and whether you explain it clearly and concisely

40 marks – Question 2, assessing the accuracy of your effective rent calculation method, identification of the correct components with reference to the subject lease, and how clearly and concisely you explain the process.

30 marks – Question 3, assessing whether your identified risk is specific to the lease, relevant to an investor, and how well you apply (not simply cite) the course material/external sources on managing investment risk in your discussion.

Provided full or partial marks are awarded for all three questions above, the final 10 marks are based on your presentation and writing skills:

10 marks – Writing and Report Professionalism. Excellent writing skills and presentation are required to be awarded the final 10 marks.

Total: 100 marks, counting for 12.5% of your final grade in the course.

Warning: Failure to reference external sources and ideas that you incorporate into your report (i.e. your textbook, course website, articles provided as supplementary reading, or other external sources) is grounds for academic misconduct and may result in zero marks overall.

Note :

Document Surnames A through C: For this lease (248-268 George st) operating expenses are estimated at $168/sqm/year

Document Surnames D through H: For this lease (1 Market st) operating expenses are estimated at $145/sqm/year

Document Surnames I through M: For this lease (10 Bond st), operating expenses are estimated at $140/sqm/year

Document Surnames N through Z: For this lease (19-29 Martin Place), assume operating expenses are $130/sqm/yr

Additional information for N-Z lease

To: Property Investment students analysing a lease of 19-29 Martin Place
From: Sydney Lease Valuers Pty. Ltd.
Subject: Comparable Leases for Market Rent Reviews of US Consulate tenancy
On 1 September 2010, a comparable lease for L63 of the same building let in an open market transaction for a Semi-Gross face rent of $905/m2/year. It is our professional opinion that the subject tenancy, being on a lower floor, would let for 5% less than this comparable. We also obtained information from the Lessor that the Base Year operating expense liability for the Lessor in the L63 lease is $150/m2/year. All tenants pay the same operating expenses per square metre, so there is no need to adjust operating expense payments for the level of the building.
On 12 October 2012, a comparable lease for L55 of the same property let in an open market transaction for a Semi-Gross face rent of $950/m2/year. We see no difference in face rents between the 55th and 59th floor. The Lessor reports that the Base Year operating expense liability for this comparable lease was $175/m2/year.
These comparable leases have annual market reviews and provided no incentives to the tenant.
Yours faithfully
Alfred R. Valuer

* Leases can be found in all the pdf attachment

* Additional reading document are given for more understanding the concept of course and might be useful for the assignment