Chapter 23
Commercial Brokerage and
Leasing
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner
Major Topics
 Commercial Brokerage Functions
 Lease analysis from the tenants perspective
 Lease analysis from the landlords
perspective
 Influences on effective rent
 Cash flow analysis and buyer/seller
perspectives on proforma assumptions
 Cap Rate influences
 Before and after tax cash flow and resale
analysis
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner
Introduction and Overview
 Commercial brokers on average have far
more training than residential brokers and
tend to earn far higher earnings
 Good commercial agents will have a great
deal of general business knowledge and
tend to specialize by property type within a
given market region
 Specializations may include office, retail,
multifamily, industrial, agricultural or even
recreational property
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner
The Building Block of Investment
Value Begins With the Tenant and
Lease
 While in residential brokerage the
qualitative factors may dominate value, but
within the commercial brokerage industry it
is the financial terms that dominate views
on value
 The value of a building is primarily the
summed value of the net productivity of
leased space, as now constrained by lease
contracts and as affected by operating
expenses, market trends and longer term
prospects
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner
Investment Value (Contd.)
 LPV = Lease Present Value
 For the landlord, the appropriate discount
rate, k, is based on the potential yield for
similar risk investments in the capital
market and for a similar term or time
horizon
 Thus, k could be derived from the credit
worthiness of the tenant as revealed
through the tenants borrowing rate
 In any scenario k is derived from
opportunities in the market adjusted for
risk and timing
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner
Types of Lease Analysis
1. The net present value of the lease for the
entire period of the lease
2. The effective rent or lease costs per period
on a level basis
3. The total dollar outflow or to be received
4. The net present value of the lease per
square foot
5. The effective level rent payment or receipt
per square foot.
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner
Key Terms
 Sector or Submarket
 Peer Group Analysis
 Discount Rate
 Tenant Improvements
 Landlord Concessions
 CAM
 CAM Proration Formula
 Caps on expenses or Expense Stops
 Effective Annualized Rent
 Effective Monthly Rent
 Effective Annualized or Monthly Rent Per
Square Foot
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner
Computing the "Effective Rent" of a
Lease
 Simply comparing the initial or average
base rent charged in two leases could be
very misleading
 The effective rent is a way of expressing
the net present value of the rental
payments of the lease in an equivalent
annual level payment (or "annuity") form
 The "effective rent" controls to some
extent for factors such as expenses and
different lease duration, and is therefore a
measure that allows different types of
leases to be compared
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner
Effective Rent Calculation Procedure
Step 1) Calculate the Lease Present
Value, LPV, as described earlier
Step 2) Calculate the Annualized Value
("Level Annuity Payment") of the LPV
where "k" is the same discount rate as
above, and "T" is again the term of the lease
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner
Numerical Example of Effective Rent
Calculation
Lease "A":
Term: 5 years
Rent: $20/SF, net
Concessions: 1 year free rent, up front
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner
Effective Rent Calculation (Contd.)
Lease “B":
Term: 6 years
Rent: $25/SF, net
Concessions: 2 years free rent, up front
Landlord would prefer Lease A over Lease B,
even though lease B has a higher "nominal
rent" ($25/SF vs. $20/SF)
Similarly, the tenant would prefer Lease B
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner
More In-depth and Detailed Lease
Comparison and Submarket Analysis
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner
Revisiting the Proforma, and Cap Rates for a
Specific Building Value Estimation
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner
Proforma (Contd.)
 Notice that in the next three years the
projected NOI will decrease before it increases
 This is simply the result of flat leases that
become below market over time (prior to turning
over) and later on being adjusted towards
market rent
 It is also the result of some assumed longer
term vacancy rate of 5% which is not expected
to occur for at least one year
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner
Recap of Calculating Before and After
Tax Cash Flow
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner
Resale Proceeds
Step 1: Estimate the resale price
Step 2: Subtract expected selling costs and
other transaction costs to derive Net Selling
Price
Step 3: Subtract the mortgage balance
remaining at the projected time of sale and
any prepayment penalties due on the
mortgage, to derive the before tax resale
proceeds. This is where the analysis would
stop if the investor is not a taxable entity
Step 4: Subtract the taxes due on sale to
derive the projected after tax proceeds from
resale
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner
Sample Proforma
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner
Tax Law Trends Matter to Investors
and Commercial Real Estate Firms
 General income tax rates
 Capital gains tax rates
 Depreciation rules and economic life
 Passive loss limitations
 Tax Credits
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner
Commercial Leasing and
Brokerage Fees
 Like residential brokerage most commercial
brokers or agents make their income mostly
based on contingent commission fees
 Contingent fees are paid only if a lease is
signed or a property is bought or sold
 These fees must include sufficient margins
to subsidize the deals that don’t close and
be large enough to cover overhead, research
and support staff cost
 Fees vary significantly but typical fees for a
lease might run 6% of the base rent
calculated over the initial term of the lease
for a newly signed lease, and 3 to 5 % for a
renewal lease
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner
Research Is Becoming More Valuable
to Commercial Brokerage Firms
 CB Richard Ellis
 Colliers International
 Cushman & Wakefield
 DTZ
 Grubb & Ellis
 Jones Lang LaSalle
 Prudential
 Staubach Company
 Stiles & Riabokobylko
 Strutt & Parker
 Studley, Julien J. Inc
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner
END
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner