To explain social media, the tools and how it is used to a large group, I assembled a Prezi, an innovative way to enhance the standard PowerPoint presentation.  The presentation and medium brought a lot to the table, both the content and the medium used.  While Social Media is still sporadically used within Childress Klein, I’ve helped develop a few other Prezis for high-profile presentations.

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I wrote previously about Café Nirvana, the new Indian restaurant that is under construction at Three Wells Fargo Center and interpreting the work letter that is a part of the tenant’s lease. One of the many steps involved in this process is the landlord’s review and commenting of the construction plans. Having done this with a few other construction projects:

• 100,000 SF, four floor office space build out in 2010
• 6,500 SF retail space build out for the new Wells Fargo History Museum in Charlotte
• 20,000 SF office space build out for a law firm in 2008

we have developed a list of notes for the mechanical, electrical, plumbing (MEP) subs as well as general construction notes. There can be a tremendous amount of complexity building out space in a high-rise office tower with post-tension cables in the concrete slabs and on-going tenant occupancy requirements. These notes/rules have been established to protect the property owner’s interests and not hinder the on-going maintenance of the newly constructed space post-construction.

This is a living list and frankly, continues to grow, but this is what has been compiled thus far:

Mechanical:

• Test and balance all affected zones and provide a copy of the report to the landlord
• Please coordinate t-stat locations with landlord
• Building Management System graphics should be updated at the conclusion of the project
• All new equipment should be added to the Building Management System graphics
• All dampers, mechanical equipment, shutoff valves, water source heat pumps, etc. need to be accessible via access panels or similar for maintenance

 Electrical:

• Electrical Metallic Tubing (EMT) should be used in the electrical rooms
• All panel schedules should be updated, with spare circuits labeled such and left in the off position
• All existing wire and conduit that is being removed should be taken back to the main panel
• No battery backup fixtures
• Tie all emergency fixtures into emergency generator power
• Please do not store materials in the electrical room during construction
• Please label all receptacles with circuit and panel information
• Any new circuits being added require engineered drawings

Plumbing:

• Any existing piping that is being abandoned should be removed back to a main line
• All coffee machines, ice makers or water dispensers need to be connected with copper piping
• Water heaters should be installed in accordance with the accompanying water heater installation requirements

General Construction

• All core drills need to be x-rayed, marked in the field and the location needs to be approved by a building approved structural engineer prior to drilling.

Did I miss anything? Add it to the comments if I did.

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• Unemployment
• Consumer Spending
• Home Prices
• Confidence Indices

The demand for real estate is very closely correlated with overall employment trends.  The more people who are working, the more:

• demand you have for space – to house these employees (office and industrial space)
• cash in consumers hands – e.g. consumer spending, which impacts the need for retail space and residential demand

Looking back, prior to the recession being recognized (which officially started December 2007, but wasn’t acknowledged until December 2008 by the National Bureau of Economic Statistics), in March 2008 the national unemployment level was 5.1%.  This was the first time unemployment rose above 5.0 since 2005.  Currently, the national unemployment levels are off their 2009 peaks, but have increased each of the past four months to 9.2%.

So, how does this relate to consumer spending?

It’s pretty straight forward: the less people working, the less money to be spent.  Gallup has an interesting self-reporting pull showing average daily spending in stores, restaurants, gas stations and online.  March 2008 vs. March 2011 numbers don’t differ as drastically as June’s numbers from the same time period.  In March 2008, average consumer spending was $81 per day versus the $64 per day in March 2011 ($17 per day delta).  June however, shows a 2008 average daily spending of $104 versus $69 per day in 2011 ($35 per day delta).  You will see in the graph pulled from Gallup’s website, the new norm for average daily spending.

And the impact to home prices?

Obviously, with lower employment levels and consumers watching their bottom line impacts demand for housing.  This is in addition to the increase in distressed properties (foreclosures, short sales, strategic defaults, etc.), has property prices in Charlotte falling back to June 2003 levels according to the Case-Shiller Home Price Index Levels (2002 levels in San Francisco and 2001 levels in Chicago).  Ouch.

Finally, the confidence indices…

These indices are specific to the Charlotte region and are compiled by the University of North Carolina at Charlotte.  From the quarterly report: “a six question survey asking business leaders their opinions about expectations for the upcoming quarter as it pertains to the national and local economy, as well as company sales, profits, hiring plans and capital expenditures.”  The questions are equally weighted and based on a scale of 0 to 100.  A number above 50 indicates expansion, while below 50 indicates contraction.  The third quarter outlook is as follows:

The table shows that overall confidence from business leaders has declined since the previous quarter, but there is still some, slight, optimism for the local economy.

Data, data, data…

There is a slew of economic data available to review, often updated monthly and sometimes more frequently than that.  Here are a number of links to use to review this and similar data:

• Bureau of Labor Statistics (released monthly)
• Employment Security Commission of North Carolina (state unemployment rates are released monthly)
• S&P/Case-Shiller Home Price Index (released monthly)
• Gallup Economic Surveys
• Charlotte Business Confidence Reports (released quarterly)

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Located in the Ballantyne area (South Charlotte), Café Nirvana’s first restaurant boasts primarily positive reviews on sites like Yelp and UrbanSpoon.  Their second restaurant, at Three Wells Fargo Center, will be a satellite operation of the Ballantyne restaurant that serves the uptown crowd.

That’s the background of the recent deal. What I have is the executed Lease and Work Letter for the construction activity of the newly leased retail space.

The Task at Hand:

1. Determine landlord’s required work prior to delivering the premises to tenant
2. Perform a detailed review of the following sections of the Lease to understand implications and impact to property:
   1. Determine the commencement date
   2. Review the lease term, base rent, CAM or OPEX charges and rent escalations
   3. Note the percentage rent triggers
   4. Review the Maintenance by Landlord and Maintenance by Tenant sections to determine any on-going maintenance obligations for the landlord and any renovation requirements prior to turning the space over to the tenant for construction
   5. Review Utilities and understand who pays for what (water, electric, sewer, etc.)
   6. Understand the tenant’s operating requirements (minimum operating hours)
   7. Review, in detail, the Work Letter and determine the deadlines for drawing review,  drawing creation, construction and certificate of occupancy

The Work Letter:

Each Work Letter varies depending on the space and type of tenant.  Further, the relevance of the Work Letter depends on a tenant’s plans for the space, tenant’s investment and landlord’s contribution towards construction.

A colleague developed a great tool to track Work Letter requirements and deadlines.  The retail construction dashboard highlights the key milestones of the process:

• Lease Signed
• Premises Delivered and Handoff Meeting
• Design Drawings Reviewed by Landlord
• Construction Drawings Reviewed by Landlord
• Pre-construction Meeting
• Construction Commencement
• Temporary Certificate of Occupancy Received
• Opening Day
• Rent Commencement

Each key milestone has predecessor task that should be completed before the milestone is met.  For example, the Construction Drawings Reviewed milestone requires the Design Drawings to be reviewed with comments sent to the tenant and tenant’s architect for incorporation into the design.  The Pre-construction Meeting includes predecessor tasks such as reviewing the Construction Drawings, providing additional comments (if necessary), approving the General Contractor (GC) and reviewing the GC contract.  Additionally, the Pre-construction Meeting has successor tasks like issuing access badges to contractors, holding subcontractor meetings, receiving and verifying the Certificate of Insurance for the GC, etc.

The Work Letter is an interesting part of a lease.  It is very popular immediately after the lease is signed, but quickly looses tracking as the tenant begins operating.  With 60 tasks in the construction dashboard to check off, we have completed about a quarter of them for the future Café Nirvana space at Three Wells Fargo Center.

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• Step Rent
• Porters’ Wage
• Miscellaneous
• CPI Rent and
• Parking

Step Rent

Step Rent is an easy way to insert rent changes in accordance with the lease terms. In the above example, $1 bumps each year would be entered by clicking the detail button of the Step Rent drop down and adding a new category:

Adding a new category brings up the screen you have probably seen in the past. These are the details of the category. Annual $1 per square foot per year bumps have been setup in the below screenshot. You will notice that the bumps do not stack automatically, therefore in year 5 we have to setup the increase based on the base year.

To ensure step rent is entered correctly, run the calculation on the appropriate tenant, requesting the Tenant Cash Flow information. From the report you see that in year 2 Base Rental Step Revenue increases by $10,000 and $20,000 in year 3.

Pretty straight forward and easy.  Step rents provide a simple way to capture changes to the base rents.

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A blank field in the Start Date, has the space/lease default to the start of the analysis.

A fixed date in the Start Date field, defines when the lease starts.  As you would expect, fixed dates are defined as month / year.  Dates by default are done in whole months, but Argus Valuation allows beginning and end dates to fall on specific dates (daily rent) rather than whole months.  Setting up specific dates is done through Options->Input and selecting Allow lease to start and end on specific dates as seen in the below screen shot.  Space absorption is not affected by daily rent calculations.

The last option is a relative start date.  Relative start date is based on the analysis start date of the Argus file.  Entering a relative start date, select the number of months from the analysis start date.  For example, a lease that starts 14 months after the analysis start date, would require 14 in the Start Date field.  This means the lease would start 14 months after the analysis start date.

Fixed vs. Relative Start Date

The difference between fixed and relative start date isn’t just a semantic issue.  A fixed start date tells Argus that the space was not available for lease prior to the start date of the lease.

A relative start date tells Argus that the space was available and has been vacant up until the relative start date.  The potential revenue for the space is subtracted from the potential rent as turnover vacancy.

What Does This Mean?

For space that is vacant and cannot be leased immediately, use the fixed start date.  Using a relative start date in this scenario would overstate the potential revenue from the property and the vacancy loss.

For space that can be leased immediately, use the relative start date in the Start Date field.

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The image above shows the window in Argus Valuation DCF to enter the retail sales information for a tenant.  This window is available through the Tenant Rent Roll page, by right clicking or getting the details on the retail sales column.  The first option, volume, can be broken down further into different levels (i.e. higher percentages as revenues increase).

What you will notice in both of these windows is the reference to a breakpoint.  The option of adding categories, allows you to specify multiple breakpoints for a lease.  What is a breakpoint?  It is simply the point at which percentage rent kicks in.  The breakpoint will be specified in the tenants lease and will usually be something specified on a per square foot basis or as gross revenue volume ($50/SqFt or $500,000 in revenue per year).  If your tenant has two breakpoints, say 2% of revenues after $500,000 and 1% of revenues after $1MM, you capture this by setting up separate categories for each breakpoint.

Natural Breakpoint Calculation

When the breakpoint column is left blank, Argus Valuation DCF will calculate the natural breakpoint for the tenant.  Say for example, the percentage rent is 3% of gross sales.  If the base rent is $100,000 per year, simply divide the rent by the percentage rent to get your natural breakpoint:

Natural Breakpoint = Annual Rent / Percentage Rent
$100,000 Annual Rent / 3% Percentage Rent = $3,333,333

Any sales over $3,333,333 the tenant will pay 3% in rent.

Other Breakpoints

The natural breakpoint is not always used as the default for percentage rent.  The lease could specify the breakpoint is $3,000,000.  Or, as mentioned earlier, a breakpoint could be defined for different levels:

3% over $3,000,000

2% over $4,000,000

1% over $5,000,000

When reviewing this, it’s easy to see how retail sales align both the retailers and the owners goals to making the shopping complex succeed.  The more revenue the retailers generate, the more cash the shopping center will generate in percentage rent and in turn Net Operating Income.

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Building GregsStats.com was fun.  But priorities have changed over time.  The site still gets some hits, without any marketing, but now it’s more about concentrating my energy on items that will be great versus focusing on multiple products that are just mediocre. Looking back at the result of Greg’s Stats and what could have been, there are some lessons there for future startups.

Lesson #1: Build a site that appeals to the ego

The surprising thing about GregsStats.com is people found the site, without marketing on my part.  How?  Google (or Bing or Yahoo or Ask – are people still using Ask.com?).  But it’s not new cutting edge Search Engine Optimization (SEO) tactics, it’s participants searching the internet for their name.  Recent analytics for the site are to the right.  Not a ton of visitors, but look at the traffic sources.  90% of the traffic was from search engines.

Lesson #2: Find a niche, but a niche that doesn’t hurt the ego

The ego attracted users, but nothing catered to the ego when it arrived.  A user could view their results, they could view others results, but nothing allowed a user to share, download, or promote their results.  On top of that, only a small segment of the users would be interested in sharing their triathlon results (the pros, not the recreational triathletes).  The niche is great, but it’s only great if you have good results.  Do you really want to analyze your race stats if you had a crappy race?  I don’t think so.

Lesson #3: Create a purpose for frequent revisits

I’m a triathlete.  I do a race, I check the results, I analyze the results on GregsStats.com.  Now what?  What keeps me coming back?  I can make a comment about the race, I can check out my friends results and analysis, but I don’t have a reason to visit GregsStats.com again until I (or my friend) do(es) another race.

These three lessons are key.  There are others: make it social,  have a marketing plan, churn out updates frequently, let it be sexy, and more… but without the three above a site will struggle.  The key with this is learning to leverage these lessons and others into future projects.  How does the saying go? Insanity is trying the same thing over and over hoping for a different outcome.

Do I miss something?  Tell me about it in the comments.

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A key component of Argus Valuation DCF: Tenant Rent Roll. A lot of the fields in the Tenant Rent Roll screen are self-explanatory.  Some fields require further explanation.  Upon Expiration is one field that requires a bit of elaboration.  Immediately following the Market Leasing Assumptions field, the Upon Expiration field allows for defining the likelihood of the tenant to renew, vacate or go in a different direction.

The Options

So, what are the options?  Market, Renew, Vacate, Option, ReAbsorb and Non-Contiguous. What do each of these options do?

• Market - selecting Market in the Upon Expiration field denotes that the space will be released based on the weighting of the market leasing assumptions defined.  In the image above, there are two different Market Leasing Assumptions (MLA) setup:  Greater than 20,000 Square Feet (> 20K SqFt) and Less than 20,000 Square Feet (< 20K SqFt).  The second row shows the tenant term following the tenants expiration should be based on the Market Leasing Assumptions defined in < 20K SqFt.  If Market is selected, you can override the Renewal Probability of the MLA with the next column, Rnwl Prob.
• Renew - Selecting renewal means the tenants probability of renewal is 100%.  Using the MLA defined, the New Tenant column will be ignored and data from the Renew Tenant column will be used.
• Vacate - Vacate is basically the opposite of selecting Renew.  In this instance, the tenant will vacate and the renew probability is 0%.  All items in the MLA associated with Renew Tenant are ignored and figures from the New Tenant column are used.
• Option - Option leases are a continuation of an original lease. Selection option puts Option in the Lease Type field of the Rent Roll.  Use option when the tenant has a renewal option for the space.  Under this setting, the start date of the option lease will begin at the expiration of the original lease.
• ReAbsorb - When this option is selected, it means the space will be reabsorbed into the property – essentially taken off the market.  One approach to using this option is when a number of small spaces are expiring soon and the goal is to combine them into a larger space.
• Non-Contiguous - This allows you to link multiple leases into one lease.  For example, if you have an office tenant that occupies floors 20 and 22, you can use this selection to have both spaces occupied under one lease.

The Upon Expiration field and different options are important to know when taking the Argus Certification Exam.  Be sure to understand the impact of each of the options as described above.

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Creating a market leasing assumption in Argus Valuation DCF allows you to quickly assign assumptions for a tenant at the end of their current term.  In the Tenant Rent Roll there is a column for Market Leasing.  Right click this cell to create a new Market Leasing Assumption or edit an existing (alternatively, go to Market->Market Leasing Assumptions).

The above image shows two columns, Renewal Market and New Market.  Pretty self-explanatory columns.  The row headers on the left list the different sections that can be customized based on the type of assumption being made.  The first cell that impacts the calculations of the entire assumption is the Renewal Probability cell.  Understanding its impact on the weighted items in the above screen shot can be found in the Market Leasing Assumptions example below.

After entering the renewal probability, step through the different rows specifying the details for each.

• Market Rent – how much in rent if a new tenant signed up vs. renewing with the existing tenant.  In the above screen shot it’s $20 SqFt/Yr vs. $18 SqFt/Yr respectively.
• Months Vacant – if renewing the existing tenant, zero months are vacant.  If signing on a new tenant, there will likely be downtime between the existing tenant moving out and the new tenant moving in.  In the above example it’s 3 months.
• Tenant Improvements – what will the landlords contribution be towards Tenant Improvement dollars?  The dollars committed by the landlord in a renewal are less than with a new tenant.
• Leasing Commissions – what are the leasing commissions in a new market vs. a renewal market
• Rent Abatements – Will tenants receive any free months rent?
• Is a security deposit required?

Following the setup of the weighted categories, are the non-weighted categories:

• Rent Changes – is there step rent, CPI, Porters wages or other things that might increase the rent annually?
• Retail Sales – is there a percentage rent clause for retail tenants?
• Reimbursements – how are reimbursements setup?
• Term Lengths – what is the term for the renewal or new tenant?

Once the leasing assumption is set up, future projections use the figures provided for the new and renewal market and the renewal probability to determine cash flow for the tenants space.  The above image is the office leasing assumption for a basic property.  Smoot Jones, an accounting firm, lease expires at the end of the year.  What will Argus use as the rent, vacancy, tenant improvement dollars for the cash flow reports next year and going forward?

Market Leasing Assumptions – Running the Calculations

($18 renewal rate * 50% renewal probability) + ($20 new tenant rate * 50% probability) = $19 SqFt/Yr.

(0 months vacant if renewed * 50% renewal prob) + (3 months vacant for new tenant * 50% probability) = 2 months vacant (rounded up)

The examples above demonstrate how to calculate the blended figures for Market Leasing Assumptions.  Be sure to know the math behind this prior to taking the Argus Certification Exam.

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