Last Document Review Date: September 25, 2014
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1 Lease Analysis Last Document Review Date: September 25, 2014 TABLE OF CONTENTS Introduction... 2 In Scope... 2 Out of Scope... 2 Executive Summary... 2 Compliance Checklist... 3 Lease Analysis... 4 Practices and Procedures... 4 Appendix A: Lease Data Verification Overview Recommended Procedures High Level of Due Diligence Required Appendix B: Detailed Glossary of Lease Terminology Lease Types (Based on Distribution of Expenses) Lease Categories (Based on Payment Terms) Lease Space Measurement Terms (All Terms from BOMA) Tenant Improvement Terms Assessment Practices and Procedures Lease Analysis 1
2 INTRODUCTION In Scope The scope of this document includes all industrial, commercial, and investment (ICI) properties that are valued through the income method. Out of Scope Procedures for requesting lease and income information from property owners (Mail Outs and Self-reporting) and administrative procedure and workflow associated with lease analysis. EXECUTIVE SUMMARY The following document applies to the analysis of lease data for the valuation of income producing properties, including preparation of the roll and roll defense: 1. Lease market data will be analyzed to a common BC Assessment (BCA) turnkey standard using the Tenant viewer. 2. Turnkey rent will: o Be based on the average rent over the lease term, including the impact of rent steps and inducements (e.g., periods of free rent, O&M caps). o Include the contributory value of tenant improvements (TIs). The purpose is to achieve consistent review and analysis of commercial lease information to a common standard: BCA Turnkey rents. Assessment Practices and Procedures Lease Analysis 2
3 COMPLIANCE CHECKLIST The following is a list of items that must be completed in order to be considered compliant with this document: 1. Lease market data for the purpose of valuation and defense of income producing properties will be consistently analyzed using a common standard based on average turnkey rent over the term of the lease, taking into account the impact of rent steps and inducements. 2. Units of measure will be based on the measure specified in the document applicable to the specific income producing property (i.e., GLA for offices based on that assessment practices and procedures document). 3. All reasonable sources of lease information should be explored. 4. Due diligence should be exercised in verifying lease information reported/used for valuation and defense of the roll. Assessment Practices and Procedures Lease Analysis 3
4 LEASE ANALYSIS Practices and Procedures The Tenant viewer will principally be used by the regional office administrative team for input of lease data from ICI mail out returns. Appraisers will use the Tenant viewer to modify or correct lease analysis details, and fill gaps in market information. 1. When completing the mandatory fields in the Tenant viewer/keypane, keep the following in mind: o Tenant Status: select Current. The current tenant record will be set to Inactive only when updated TI is obtained for a subsequent roll year and a new tenant record is created (e.g., the existing system data is superseded by up to date information). o Model Type: select appropriate option that is consistent with the model type in the IncomeDCA Model viewer. o Rent Roll Period End: select the property fiscal year end date listed on the financial statements included with the lease return data. o Owner Managed: set the flag to True if appropriate. NOTE Owner managed properties may not reflect typical property management norms for rents, vacancies, and expenses exercise care in interpreting this information. 2. When completing the mandatory fields in the Tenant viewer/details tab, keep the following in mind: o Rent Roll Effective Date: select date from landlord rent roll return. o Predominant Quality: select the predominant model quality that is related to the predominant quality from the IncomeDCA Valuation viewer/valuation tab/occupancy spreadsheet (not from the IncomeDCA Valuation viewer/keypane). o Source: select appropriate from list. Assessment Practices and Procedures Lease Analysis 4
5 NOTE Do not change the Source field from 07 Mass Mailout if correcting or adding information to a tenant record originally created during a mass mail out project. 3. When completing the mandatory fields in the Tenant viewer/apartments tab, keep the following in mind: o On the Apartment Units spreadsheet: Quality: select option consistent with quality rank of rental apartment income record (building). 4. When completing the mandatory fields in the Tenant viewer/retail General, Industrial, or Office tabs/retail General, Industrial, or Office spreadsheets, keep the following in mind: o In the Tenant Details widget: National Description: select tenant s company name from list if available. Tenant Name: key name of tenant if not available in the National Description field. Tenant Description: select option that is the same as the occupancy for that specific model type on the IncomeDCA Model viewer. Quality: select the quality of the occupancy. The tenant quality must be the same as the quality for that specific occupancy on the IncomeDCA Model viewer. - IMPORTANT: If the data is inconsistent between the Tenant and IncomeDCA Valuation viewer the IMA tool will not populate properly and will instead show empty cells. o In the Vacant/For Lease/Space Details widget: Lease Rate per SF: key only if asking rent is available. For Lease Date: select date only if the date the property was offered for lease is available. For Lease Comments: key any known incentives or issues associated with the property for lease. Assessment Practices and Procedures Lease Analysis 5
6 o In the Lease Details widget: NOTE Space/Unit Status: select appropriate (Shell, Turnkey, As Is). It will be necessary to understand the local market definitions for degree of finish of shell and turnkey space for consistency of analysis. Space that is leased on as-is basis may be considered as turnkey if no further TIs are required. Lease Type: select appropriate (Gross, Net, Triple Net, Absolute). Refer to Appendix B. Since the definition of lease type will vary somewhat between market area, appraisers must understand local market norms for leasing terminology for consistency of analysis (refer to Office). Unit of Measure: select appropriate (GLA, NLA, GBA). Since the space associated with the unit of measure will vary somewhat between market area, appraisers must understand local market norms for leasing terminology for consistency of analysis. The Office standard is GLA units of measure, it will be necessary to adjust NLA or GBA leases to a GLA standard. Similar rules apply for retail and industrial properties. Date Lease Signed: select date the offer to lease was signed by the tenant. In some cases there may be a considerable time delay between this date and the lease contract date. This will be important in determining whether the lease reflects market conditions as of the roll valuation date. Lease Start Date: select date from which the tenant is normally liable for rent. However, in some cases rent may be applied by the landlord from the date of tenant occupation. For example, in the case where fixturing is required prior to the tenants business. See Fixturing Period Start field. Lease End Date: select the end of term for the lease contract date. If the tenant is over-holding, a note should be made in the Notes tab since the overholding rent will likely be subject to specific lease clause (e.g., an escalation formula). Assessment Practices and Procedures Lease Analysis 6
7 Last Rent Adjustment: select the most recent rent review date if the lease contain rental steps or review dates. This date will be normally be equivalent to the lease start date for a new or renewal lease. Fixturing Period Start: select date at which the tenant was granted access to the premises for fixturing (e.g., TIs). The fixturing period start date may be equivalent to the lease start date or an earlier date. If the fixturing start date precedes the lease start date, the tenant is considered to be occupying the premises and is receiving free rent for the fixturing period. Step-Up: set the flag to True if the lease contains provisions for rental steps. Rent steps are keyed to the Tenant viewer/retail General, Industrial, or Office tabs/rental Summary widget for each tenant entry. Percent Rent Clause: do not set this flag to True for office property tenant records. Number of Parking Stalls: key the number of parking spaces that are included in the rent for tenant or charged as additional rent. o In the Tenant Improvement widget, TI costs borne by the landlord and/or tenant may be recorded. In some cases the tenant may expend funds in excess of the landlord TI allowance. Appraisers should review the declared amounts in relation to industry norms for various types of office occupancies. o In the Tenant Inducements widget: Operating Costs and Taxes Free Months: refer to Table 1 in Appendix B for operating costs and taxes. Consider whether the inducements reflect industry market conditions at the time the lease was negotiated. If necessary, record notes on inducements in the Tenant viewer/notes tab/category field: 30 Tenant. Landlord Paid Moving Expense: key amount of landlords paid moving expenses, which is a form of free rent and will be a deduction from the overall base rent. Assessment Practices and Procedures Lease Analysis 7
8 Lease Takeover/Byout Amount: key amount if available. - A lease with a lease takeover/buyout clause or space reduction clause, although rare, generally favours the tenant. Lease buyout clauses are common with large government tenants who require flexibility for space planning and have sufficient negotiating leverage in the local market to obtain buy-out lease terms. In some cases, government tenants will negotiate a space reduction clause to allow reduction of the demised space by a fixed percentage (also known as a Put Option) to account for government downsizing or reorganization. These are atypical lease clauses and must be carefully examined to ensure comparability with other conventional lease agreements. Cash Payment to Tenant Amount: key amount of the payment made by the landlord to the tenant to cover the cost of fixturing by the tenant. - This scenario is not common since it is in the landlord s interest to maintain control over the fixturing process to maintain building standards and avoid disruption to other tenants. Other Tenant Inducements Amount: key amount of the payment made by the landlord to the tenant for additional inducements, not already included above (e.g., moving allowance, fixturing allowance, buy-out clause). - Examples of additional clauses which can be considered costs to the landlord and hence, tenant inducements, include mandatory tenant space take-up obligations (vacant period of takeup space is cost to landlord), tenant relocation costs within the building or elsewhere, and caps or limited recovery of operating costs. o In the Parking Inducements/Turnkey widget: Number of Parking Stalls: key number of stalls allocated to the tenant that are included in the monthly. Assessment Practices and Procedures Lease Analysis 8
9 Monthly Rent per Stall Amount: key portion amount of monthly rent that is attributable to parking stalls identified above. Other Turnkey Adjustment Amount: use this field only for conversion of gross or net rents to a common NNN or Absolute Rent standard. 5. When completing the mandatory fields in the Tenant viewer/retail General, Industrial, or Office tabs/space Area spreadsheet, keep the following in mind: o Space Type: select appropriate. o Space Area (Square Foot): key the amount of area rented by the tenant as reported by the landlord. It is important to understand the basis for the reported space (e.g., BOMA or other) for consistency of analysis. It may necessary to adjust rent to the norm for the market area if the reported space standard is not typical. o Override Space Area (Square Foot): do not use this field. Exception for use will be confirmed errors in landlord reported space or need to adjust reported space to reflect space standards for local market (rent adjustment will also be required in this case). o Space Use: select based on predominant use. o Primary Access: select appropriate. Primary access does not include internal stairs between adjoining floors of a tenancy. o Multi Floor: set flag to True only if tenancy is spread over one or more adjoining floors. 6. When completing the mandatory fields in the Tenant viewer/retail General, Industrial, or Office tabs/rental Summary spreadsheet, keep the following in mind: o Step Number: key appropriate step number. If there are no rent steps in the lease, record step one only. o Step Start Date: select lease date as the start date for step one. o Step End Date: select lease end date if there are no rent steps in the lease. o Free Rent Months: key number of months free rent applicable to only this rent step. Assessment Practices and Procedures Lease Analysis 9
10 o Free Rent Amount Override: do not use. EXCEPTION: in the rare case where a free rent amount override is necessary, the rationale for the amount will be documented in the Notes tab. Assessment Practices and Procedures Lease Analysis 10
11 APPENDIX A: LEASE DATA VERIFICATION Overview Appraisers should ensure all reasonable sources of information and lease leads are examined while building a database of lease information for review or filling gaps in existing lease information. Decisions will be required on the level of due diligence required to verify reported lease information and eliminate information gaps. Factors to consider will be: o volume of information available for the competitive market set o complexity of the local market o complexity and unique nature of the property type o likelihood lease data will be introduced as evidence in an assessment appeal For example, in class B or A office market with limited volume of lease transactions, relatively complex-sophisticated market participants, and higher percent of property appeals, a high standard of due diligence will be required. Recommended Procedures High Level of Due Diligence Required Step 1 Identify Information Gaps Identify properties for centralized ICI mail outs (requests for rent rolls and financial statements, etc.). Confirm returns and fill gaps by investigating alternative data sources: o Realnet listings and sales o Industry web sites: Space for Lease, Colliers, JJ Barnicke, Cushman-Wakefield-LePage, etc. o Real Estate Periodicals: Business in Vancouver, Western Investor o Brokers, realtors, appraisers Assessment Practices and Procedures Lease Analysis 11
12 Step 2 Property File Review Generate a Tenant viewer report (if source data available) or other Property Summary Reports to verify and fill gaps in BCA property records. Step 3 Landlord/Property Manager Follow-up If relevant information is missing, contact either the owner/landlord/management company/tenant or both and obtain missing information. In general, when requesting additional information, the appraiser should not contact the owner until steps one through three are complete, to ensure the appraiser is well informed and viewed as credible. Step 4 Inspect the Subject Property Inspect the property if it is under appeal. o An inspection of the subject property may also be required to verify the rent roll, parking, level of tenant improvements or building features and quality. Always coordinate the inspection with the building manager/owner to avoid potential issues with tenantlandlord relations. Factors influencing the level of inspection (e.g., detailed floor by floor review, cursory walk-through, or drive-by inspection) will be: o appraiser s familiarity with the property and neighbourhood o age and confidence of BCA inventory o level of property security o sensitivity of landlord tenant relations, etc. While the main goal of the inspection will be confirmation of lease data and quality of TIs, an inspection provides an opportunity to verify other building inventory as well as neighbourhood attributes (e.g., traffic circulation, egress to site, adverse influences). Assessment Practices and Procedures Lease Analysis 12
13 TIP A quick review of the building directory (for office-retail properties) can identify discrepancies in tenant mix and levels of vacancies. Step 5 Determine Turnkey Rent valuebc Add new lease information or updated lease data to the Tenant viewer and determine the new or updated turnkey rents. NOTE It may be necessary to review individual lease documents in some cases to verify information or fill data gaps. A typical table of contents found in commercial leases (REALPAC National Standard Office Lease ) is listed below. Article 1 Basic Terms Article 2 Special Provisions Article 3 Definitions and Interpretation Article 4 Grant and Term Article 5 Rent Article 6 Operating Costs and Taxes Article 7 HVAC, Utilities and other Landlord Services Article 8 Operation, Control and Maintenance by Landlord Article 9 Maintenance and Alteration by Tenant Article 10 Use of Premises Article 11 Insurance, Liability and Indemnity Article 12 Assignment, Subletting and Other transfers Article 13 Landlord Financing and Status Certificates Article 14 Damage and Destruction Article 15 Default Remedies Article 16 Miscellaneous Schedules Assessment Practices and Procedures Lease Analysis 13
14 APPENDIX B: DETAILED GLOSSARY OF LEASE TERMINOLOGY Lease Types Lease Categories Lease Space Measurement Terms Tenant Improvement Terms Lease Types (Based on Distribution of Expenses) NOTE The following definitions reflect the extent to which the tenant and landlord share in the operating, management, and maintenance expenditures. Industry participants commonly give these terms different interpretations from market to market. Refer to table 1 below for a summary of the expense obligations for each lease type and additional information on lease sub-types. Gross Lease The lessee (tenant) pays the rent and the lessor (owner) pays all expenses. Semi-Gross or Modified Gross Lease The lessee (tenant) and lessor (owner) share the expenses. Fully Net Lease (Absolute Net), (Carefree) The lessee (tenant) pays the rent and all expenses. Net Lease (Single Net) The lessor (owner) is responsible for structural repairs and property maintenance. The lessee (tenant) is responsible for utilities. Net, Net Lease (Double Net) The lessor (owner) is responsible for structural repairs and property maintenance. Lessee (tenant) is responsible for property taxes, insurance and utilities on their demised premises. Assessment Practices and Procedures Lease Analysis 14
15 Net, Net, Net Lease (Triple Net) The lessor (owner) is responsible for structural repairs. Lessee (tenant) is responsible for property taxes, utilities, insurance and property maintenance on their demised premises. This is the most common form of commercial lease. Percentage Lease Some or all of the rent charged is based on a specified percentage of the volume of business, productivity, or use achieved by the tenant. A straight percentage lease may have no minimum rent, but most specify a guaranteed minimum rent and an overage rent and insurance may be paid by either the owner or the tenant. In many cases a base year is established with the tenant picking up the costs on their demised premises above the base year. Table 1 BCA Leasing Definitions Type of Lease Gross Net Net- Net Triple Net Absolute Expense Category L T L T L T L T L T Rent X X X X X Property Tax X X X Base Year X X Property Tax Escalating X X Property Tax Operating Costs X X X X Base Year X X Operating Costs Escalating X Operating Costs Structural X X X Maintenance Building X X X Insurance Management X X X Taxes/CAM for vacant space X X Leasing/Marketing Assessment Practices and Procedures Lease Analysis 15
16 Source: BCA Glossary of Terms Lease Analysis NOTE Tenant pays rent on demised premises and pro-rata share of property taxes, operating costs and escalations. Absolute net refers to the lease of an entire building. Lease Categories (Based on Payment Terms) A lease can be drawn to fit any situation with most leases falling into one of several broad classifications: Annual Increase Lease Rent will increase annually by a specified dollar amount. Flat Rental Lease Rent will continue at same rate throughout the duration of the lease. Ground Lease A lease of land only, (either vacant or exclusive of any buildings on it). Usually a net lease on a long-term basis (30+ years). Ground rent should not be charged back to the tenant as an operating expense. Step-up or Step-down Rental Lease Also called graduated or escalating leases, this lease provides for specified changes in the amount of rent at one or more points during the lease term. Revaluation Leases This lease provides for periodic rent adjustments based on revaluation of market rent under prevailing market conditions. Variable Rental Lease Often called index leases. The lease may specify a periodic percentage change or be tied into a specific index such as the consumer price index. Assessment Practices and Procedures Lease Analysis 16
17 Lease Space Measurement Terms (All Terms from BOMA) Building Common Area The areas of the building that provide services to building tenants but which are not included in the office area or store area of any specific tenant. These areas may include, but shall not be limited to, main and auxiliary lobbies, atrium spaces at the level of the finished floor, concierge areas, conference rooms, lounges or vending areas, food service facilities, health or fitness centers, daycares, lockers or showers, mail rooms, building core and service areas (e.g., control rooms, mechanical or equipment rooms), specifically excluded from building common area are floor common areas, parking space, and major vertical penetrations. Floor Common Area All areas on a floor, such as washrooms, janitorial closets, electrical rooms, telephone rooms, mechanical rooms, elevator lobbies, and public corridors that are available primarily for the tenant on that floor. Gross Building Area (GBA) The total constructed area of a building. This area is computed by measuring to the outside finished surface of permanent outer building walls. It includes all enclosed floor areas of the building (including basements, mechanical rooms etc.). GBA is only quoted by landlords and property managers when an entire building is leased to a single tenant. Gross Leasable Area (GLA) The total floor area designed for tenant occupancy and exclusive use, including basements, mezzanines, and upper floors, if any, expressed in square feet measured from the centre line of joint partitions and from outside wall faces. It is the area used for rent calculations and has been adopted by the industry as its standard for statistical comparisons. See individual property type documents for exceptions to this definition. Assessment Practices and Procedures Lease Analysis 17
18 Major Vertical Penetrations All stairs, elevators shafts, flues, pipe shafts, vertical ducts, and the like, and their enclosing walls. Office Area The area where the tenant normally houses personnel and/or furniture, for which a measurement is computed. Rentable Area The useable area of an office area or store area with its associated share of floor common areas and building common areas. Store Area The area of an office building suitable for retail occupancy. Store areas are included in floor rentable area and rentable area. Useable Area The area of an office area, store area, or building common area on a floor. The total of all useable areas for a floor shall equal the floor useable area of that floor. Tenant Improvement Terms Above-Standard Tenant Improvements May include items such as upgraded carpet, wallpaper instead of standard paint, side-glass next to office doors, special light fixtures, etc., that go above and beyond the typical buildingstandard tenant improvements specified. Allowance (Tenant Improvement Allowance) A set dollar amount provided by the landlord under a lease to be used by the tenant for a specific purpose (examples include allowances for tenant improvements, moving expenses, design fees, etc.). If the expense exceeds the allowance amount, such excess is the tenant's responsibility. If the expense is less than the allowance, the savings are retained by the landlord unless their agreement specifies otherwise. Assessment Practices and Procedures Lease Analysis 18
19 Amortization May be used in a lease where the landlord incurs costs for additional tenant improvements that are effectively treated as a debt and repaid by tenant over the term of the lease. For example, to amortize 12 dollars per square foot of tenant improvements at 10 percent interest, monthly payments over a 60-month period would result in a rent adjustment of $0.225 per square foot. Base Building or Building Shell This can mean different things to different people, but usually refers to a partially completed building with roof, walls, foundation, and may or may not include restroom cores, HVAC. Usually does not include any tenant improvements such as floor or wall coverings, drop t-bar ceilings, interior walls, or partitioning. Fixturing Period A period of time prior to the commencement/start date of the lease where no rent is payable. The purpose of this period is to give the tenant time to complete their tenant improvements. Assessment Practices and Procedures Lease Analysis 19
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