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The Backbone of Commercial Real Estate

                                       Leigh Jahnig
              University of Chicago Real Estate Club
                   What is Leasing?
 Finding tenants to rent space in
a building
 Finding building space to rent
 Different types:
     Office
     Retail
     Industrial
     Residential – a special case
     Hotels usually not leased
      What is Leasing?
 What kind of leasing jobs are there?
   Tenant representation
   Landlord representation
   Company lease manager
 Skills for leasing
   Negotiation: getting the best
  deal for your client
   “Selling” the building
Owning vs. Leasing
 Commercial buildings rarely have sole owner
 Most owners of buildings need to rent the space
 A lot of integrated concerns about owning a building
   Property management
   Debt service payments
 We’ll focus on the process of leasing, but these other
  factors are important for landlords too
  Owning vs. Leasing
 Why do tenants choose to
  lease space rather than build
  their own space they can stay
  in forever?
 Flexibility and responsiveness
  to market conditions
 Access to capital
 More difficult to liquidate
What goes into a lease?
 Square footage
 Rent
 Operating Expenses
 Term of lease
 Renewal options
 Tenant improvement allowance
 Sublease options
 Concessions
 Usually in $/square foot (RSF)
 Types of rent:
   Full service
   Triple net (NNN)
   Other types (net electric)
 May allow for changes over time (%
Operating Expenses (Op Ex)
 Included in full service rent
 Not included in triple net rent
   Expense stop = maximum
    amount of operating expenses
    the owner will pay per year
   Remaining expenses passed
    through to tenant (Recovered or
    Recaptured expenses)
Term of Lease and Renewal
 Commencement and expiration
 Terms usually in multiples of five
   Length relates to usage and risk
    tolerance – where is the market
 Renewal options
   Length of term
   Changes in rent or lease
 Right of first offer – the landlord must give the tenant the
  option of negotiating to renew the lease before offering it to
  another tenant
 Right of first refusal – if the landlord wants to lease the space
  to another tenant, the landlord must first give the tenant the
  option to renew the lease under the same terms
Tenant Improvement Allowance
  Allocation to tenant by landlord for one-time improvement
   of space
  Usually in $/square foot
 Works just like it does for all those UChicago student
 Why do tenants need to sublease space?
   Downsizing, office relocation, mergers
 Space not being subleased is called direct space
       What other factors are important when
       choosing space to lease?
 Location and amenities
 Building class (A, B, and C)
 Environmental certification
 Future plans
 Security and access
 Special space types
Leasing Process
1.   Look for properties and tenants
        Tenants: check advertisements, databases
        Landlords: lots of phone calls and mailings
2. Property visits
3. Initial terms
4. Redlining
5. Signing
     Day-to-Day Leasing
 So what can you expect in a typical leasing job?
 Lots of phone calls/getting information
 Valuations: finding the present value of leases
 Property visits
 Negotiation
  Investing in Stocks
             Tiffany Taylor
University of Chicago Real Estate Club
  What’s the Market Doing?
 Why does a company sell stocks?
   Stocks represent ownership in
    a company
   Companies issue stock to raise
      They do this by offering to
       sell shares of the company,
       called stocks, to the general
       public (you and me).
      This is called going PUBLIC
      The first time a company
       goes PUBLIC, it is called an
       initial public offering
Primary and Secondary Markets for Stocks
 Going Public Happens in 2 Ways:
   The first is via Primary Market
     Investment bankers buy large chunks of this primary stock issued directly from
      the company. This is how the company receives its money.
     Investment bankers then resell smaller pieces of the shares to their clients, who
      then trade those shares with other investors (again, the general public) –
          o In the United States, almost all of the secondary market consists of three
            entities, or exchanges
          o The New York Stock Exchange (NYSE)
          o The American Stock Exchange ( the AMEX)
          o The National Association of Securities Dealers Automated Quotations (the
      Exchanges! Exchanges!
 The bigger and more
  mature the company
  (General Electric, Coca
  Cola) the more likely its
  stock is listed on the most
  prestigious of the
  exchanges: The Big Board
 The smaller and newer the
    company the more likely it is to be
    listed on the NASDAQ
   The National Association of
    Securities Dealers Automated
    Quotations (the NASDAQ)
   Many growth stocks (technology
    companies) on NASDAQ
   Began February 5, 1971 with a
    base of 100.
   The stocks are weighted by
    capitalized value (price per share
    multiplied by the number of shares
    outstanding) similar to the S&P
    Bull Vs. Bear Markets!
 Regardless of the exchange on
  which stocks are traded, stock
  markets are generally classified
  as either bullish or bearish.
 Bull Market: refers to a period
  of sustained rising sock prices
 Bear Market: is the direct
  opposite, namely, when stock
  prices display a downward
 Bull markets have dominated
  bear markets.
Common Stock: An Uncommon Investment
 • Common stock represents ownership interest
 •They may vote on numerous decisions affecting it, including a decision
 to sell or merge with another corporation.
 • They elect a board of directors, whose members, in turn, hire
 managers to run business.
 • A majority shareholder is one who owns more than 50% of the
 outstanding shares in a corporation (i.e,. The shares that have been
 “issued” or sold to the public) and thus, can call the shots).
     Common Stock
 Dividends: a distribution of the
                                          Companies can issue more than
  firm’s earnings may be paid on
                                             one class of common stock.
  common stock at the option of the
  board of directors.                       Each class carries a different
                                             set of privileges.
 If dividends are important to you,
  be aware of the ex-dividend date,         The classes are usually noted as
  which begins two days before the           Class A, Class B, and Class C.
  holder-of-record date when buying         Class A common stock may
  shares.                                    include voting privileges
 Dividend Reinvestment Plans, or           Class B stock is issued by the
  DRIPs, as they are commonly                same company and permits
  called allow stockholders to use the       dividend payments but not
  dividends to automatically buy             voting privileges
  more of the company’s stock
Common Stocks Cont.
• Class C stock is issued for specific purposes, such as financing a
segment of the business or paying a special dividend, or is reserved
for a special group of investors.
Preferred Stock: What is your preference?
                                  Second, in the unfortunate event
                                   that the company goes out of
PREFERRED STOCK!                   business, preferred shareholders
 Preferred stock differs          get earlier access to the
  from common stock in             company’s assets
  four ways:                      Third, preferred stockholders
   First, (as the name            usually do not have voting rights.
    suggests), preferred           The reason is that preferred
    stockholders are first in
                                   stockholders receive dividends;
    line to receive dividends,
                                   therefore, the thinking is that
    and in greater amounts
    than their common-stock        they should have no voice in the
    counterparts                   management of the company.
                                    If the company goes bankrupt,
                                     preferred stockholders are paid
                                     before common stockholders
 Fourth, because of the large
  dividend payout stock prices PREFERRED   STOCKS
  tend to fluctuate less than
  common-stock prices, implying
  that the dividend yield is also
  unlikely to fluctuate much.
 Preferred stock is really a
  combination of a stock and bond
  (bond promises interest and
  principal payments).
 Its price can fluctuate like that of
  common stock, but not as much
  and the dividend payment is
  fixed, just like the interest
  payment on the bond.
    Profits of Preferred Stocks
• Your profit is called a capital gain.
•It is the difference between the price
you paid for an asset (e.g., stock,
bond, home, etc.) and the price you
sold it for.
•Any realized capital gain in excess of
one year is considered longer, with a
current maximum tax rate of 20%
       UPS and DOWNS of Stock Prices!!
 Changes in national economic
    activity (such as in the case of
    recession or inflation)
   Changes in interest rates
   Changes in forecasts by respected
   Major political action in some
    parts of the work
   An anomaly such as the so-called
    January effect, a well-documented
    tendency for stock prices to rise in
Assessing the Value of a Stock
 Price- Earnings Ratio, or          For example, if the closing
  P/E Ratio                           price for a stock is $40 per
   One of the most carefully         share, and the earnings per
    watched variables, the P/E        share for the past 12
    ratio is a common measure         months are reported to be
    of a stock’s value. A stock’s     $4, then the P/E ratio is 10
    P/E ratio is the price of         (i.e,. $40 divided by $4). If
    the stock at closing on a         the earnings per share were
    specific day, divided by the
                                      $2, then the P/E ratio
    stock’s earnings (also called
                                      would be 20 (i.e., $40
    net income or profit per
    share of stock for the            divided by $2).
    previous 12 months
 Price- Book Ratio:
   Similar to the P/E Ratio, this is
                                          Value of Stocks….
    the price per share relative to the
    book value per share. The book         However, if its stock price is
    value is the value that the             not much different from its
    company’s accountants have              book value price, the stock
    placed in the company’s financial       could well be a bargain.
    records (ex. books)                    The same logic applies to the
   The lower its share price is            price-sales ratio, or the price
    compared to its book value, the         per share of stock relative to
    less expensive the stock is             the sales per share.
    considered to be.
   This also makes sense, because
    financially solid, well-performing
    companies should have relatively
    high book values per share.
Factors That Affect the Price of a Stock
       Factors affecting stock price
 The Decision to Pay Dividends       Second, rising dividends tend to
   Higher dividends, of course,       counter some of the effects of
    appeal to income-oriented,         inflation. For example, utility
    risk-averse investors. When a      companies have been known to
    board announces a higher           raise their dividends every year for
    dividend, the stock price may      20, 25, 30, or more years, usually
    rise for any or all of three
                                       in the range of 3% to 6% each year.
                                      Third, and perhaps most important,
   First, the higher dividend is
    worth more, and a pattern of       a rising dividend is a signal from the
    increasing dividends attracts      company’s board of directors that
    long-term investors who may        the future looks bright. The board is
    be retired and living off this     not going to commit funds that it
    income stream.                     feels will not likely be forthcoming
STOCK BUYBACKS!                       Corporate Mergers and
 In recent years, the boards of
                                        Whenever a board of
  many cash-rich companies have
                                         directors approves its
  chosen to buy back shares from         company’s bid for another
  its investors, called a stock          company, you can expect
  buyback, instead of paying             the target company’s stock
  dividends                              price to rise, sometimes
 Buying back stock not only             very significantly
  increases the demand for the          This is because the buyout
  stock, but also reduces the            bid, called the tender offer,
  supply of it.                          is usually state in terms of a
                                         share price that is currently
 The overall result tends to be a
                                         above the target company’s
  higher stock price, which keeps        current share price.
  shareholders happy.
       STOCK SPLITS            In such a situation, it’s
                                board of directors may
 Occasionally a company’s
                                decide to divide the
  stock prices rises to a
                                existing shares into more
  level that seems almost
                                shares, called a stock split.
  unmanageable for many
                                Stock splits typically are
  investors interested in a
                                issued in either two-for one
  round lot order, or an
                                or three-for-two ratios.
  order consisting of 100
  shares, as opposed to an
  odd lot, an order
  consisting of fewer than
 The long-term rate of return       The price gains on stock
  on stocks is among the highest      (called capital gains) are
  of all investments                  not taxed until you “realize”
 The high return has made            the gains; that is, until you
  stocks a better hedge against       sell your stock
  inflation than most alternative    Capital gains are taxed at
  investments                         favorable rates – that is,
 Preferred stocks provide            lower than those earned on
  attractive dividend yields that     ordinary income, such as
  sometimes compare favorably         wages and salaries – and
  with bonds.                         there is pressure on
                                      Congress to lower them