A Practitioner's Guide to Occupancy Cost, Turnover Rent, Tenant Mix and the Only Asset Class Whose Tenants Report Their Sales
Julian R. Sterling
A grocery-anchored shopping centre is offered at €66.0 million on a 7.23 per cent net initial yield.
Retail is the only asset class in which the tenant reports what it sells — and run unit by
unit, 16.2 per cent of that rent roll, €904 826 a year, is rent no occupier of those units can sustain. A retail
rent is not negotiated. It is revealed.
These are the workbooks the book was written from. Every figure the book prints is reproduced by
a live formula, and each model workbook ends with a sheet that compares the two line by line.
The files
Chapters 3 and 4
Occupancy cost and rent at risk
The tape, unit by unit: area, rent, service charge, rates, reported sales, occupancy cost ratio, the ceiling for that trade, the sustainable rent and the gap. On the centre in the book it finds 16.2 per cent of the rent roll — €904 826 a year — that no occupier of those units can sustain. Paste your own tape in and the answer takes twenty minutes.
Rent capacity is a residual: the ceiling times sales, less service charge and rates. This sheet projects it forward by trade and computes the sales growth each one needs merely to stand still — 1.81 per cent a year for a value operator against 0.37 per cent for a jeweller — plus the charge level at which capacity reaches zero.
Every lease, quarter by quarter: expiry, landlord's works, void, incentive and re-letting at the rent the incoming trade can sustain rather than at a comparable rent. Every cell is a formula. It is the model behind the €44.6 million valuation and the 2.93 per cent internal rate of return at the asking price.
The_Ten_Year_Cash_Flow.xlsx · XLSX · 107 KB
Chapters 17 and 18
Right-size, convert or hold
The test that finds floorspace with a negative value as retail — on this centre 5 950 m² of it, worth −€1.03 million as shops in steady state — the alternative-use rent at which conversion overtakes it, €48/m², and a fourth sheet that prices the right-sizing decision properly, by rebuilding the cash flow rather than by adding a perpetuity gain to it. On this centre that is worth €0.70 million.
Right_Size_Convert_or_Hold.xlsx · XLSX · 11 KB
Appendix A
Eighty questions for a retail acquisition
The eighty questions of Appendix A as a live checklist, in the same order, from the same source file as the chapter. It opens with the sales line, because that is what the leases are worth. The status column marks any question answered without a source as unsourced.
Blue on pale blue is an input you may edit. A yellow fill is the carrying assumption of
the sheet — the one to argue about first. Black is a formula. Nothing is locked,
protected or watermarked. There are no macros and no external links.
Each model workbook ends with a sheet called Checks: the figure as the book prints it,
the figure the workbook computes, the variance and a status. If a line ever reads
“to check”, the workbook and the book have drifted apart — and the workbook is
right.
Three numbers to compute on your own centre
The occupancy cost ratio of every unit, then the rent at risk. Here, 16.2 per cent of
the rent roll.
The sales growth each trade needs merely to hold its rent capacity flat. Where
it exceeds what the trade can achieve, that rent is falling whatever the lease says.
The net income of your worst floorspace after one full cycle. If it is
negative, that space is subtracting — and the rent roll will not tell you.
Closing the DealTwo defensible bridges 20.70 million apart, a peg worth 7.00 million, and the six choices that remove 6.60 of a 12.00 earn-out.
CMBS and CRE CLOsWhere the loss actually lands, from appraisal reduction to realised severity, and what the B-piece is really being paid for.
How to Read a Commercial LeaseThe three refinements chapter 19 names and never performs, and the renewal rate below which the mark-to-market is worth nothing.
How to Read a Credit AgreementWhere the default actually comes from, the cure that costs 5.5 times the other, and the capacity nobody adds up.
How to Read a Real Estate Loan AgreementThe cure ratio in closed form, the four-point window in which the cheap cure works, and the cure sized to the wrong threshold.
Office Real EstateA six per cent yield that returns 3.2 per cent once the re-letting cycle is paid for, and the headline-to-net-effective rent arithmetic.
Private Equity Real EstateBoth worked waterfalls to the dollar, the two capital stacks, and the arithmetic of the promote made changeable.
Private Markets PerformanceThirty-one of the thirty-three figures chapter 19 publishes reproduce exactly — and the two that do not are named rather than quietly adopted.
Raising a Real Estate FundThe chapter 17 funnel run on a calendar — when the first close actually lands, and why more travel does not help.
Real Estate Financial ModelingProperty, development and fund models built line by line, and the modelling test worked end to end.
Real Estate Fund ManagementThe waterfall of 6.11, the build-to-core of 8.7 and the proceeds gap, reproduced as live formulas rather than asserted.
The Fund Finance ProfessionalChapter 8 builds the reported-to-eligible NAV bridge; chapter 9 computes every ratio without it. Two points at every state — and what a subscription line does to the IRR.
The Growth Equity InvestorWhat a pro rata cheque really costs, and the band where defending your ownership loses money.
The Private Credit InvestorThe two coverage ratios are not measured on the same thing: the erosion is 47.7 per cent, not the 28.7 the headline implies.
The Private Equity Fund Controller PlaybookThe book defines IRR, DPI, RVPI and TVPI, tells you to update them at the exit, and prints not one value. Computed: a 1.833× deal inside a fund at 0.892 TVPI.
The Venture Capital AssociateWhat defending a position costs, and how many companies a reserve pool actually defends.
Real Estate FinanceFour people look at one building and reach four numbers; the lender is whole only above 105,109,489, twelve per cent below today’s value rather than forty.
Financial Risk ManagementA fund inside every limit that cannot meet a redemption — and the number that decides it is the one with no currency attached.
Business ValuationThree advisers land 26.8 per cent apart on one company, and the whole gap turns out to be 1.96 points of perpetual growth.
Quantitative FinanceThree models agree to a quarter of one per cent about a number that one unobservable input moves a hundred and three times as much.
Asset ManagementFour people quote four returns for one mandate, all correct and 2.7017 points apart — forty-eight times the manager’s net skill.
Alternative InvestmentsA manager reports 13.29 per cent and the endowment earns 6.26 — both correct, and only a third of the advertised advantage arrives.
Credit AnalysisFour defensible EBITDAs on one borrower give leverage from 3.19x to 6.47x — and the add-back argument is fifty times the covenant headroom.
Venture CapitalOne company out of twenty-eight returns 56.7 per cent of the fund, and half the capital goes in after the decision — at half the return.
Machine Learning for FinanceFive people quote the accuracy of one credit model, all five are right, and the number that decides how much money it makes is none of them.
Commercial Real Estate InvestingThe equity earned 8.6647 per cent and the investor received exactly 8.0000 - the preferred return, and nothing above it.
Mergers and AcquisitionsThe board paper says the deal creates 13,436,667 of value. The arithmetic says it destroys 17,530,855. Nobody is lying.
DerivativesThe treasury report says the hedge cost 1,233,698. That is the interest differential, not a cost. The number that mattered appears in no report at all.
Treasury ManagementFive cash balances for one company, all correct and 145,600,000 apart — and the revolver that is two-thirds of the liquidity leaves at a revenue fall of 8.4127 per cent.
Financial Planning and AnalysisRevenue 3.0190 per cent above budget and operating profit 16.3209 per cent below it, in the same quarter, with every figure correctly stated.
Energy TradingA position report that is 91.7031 per cent hedged and correctly computed, on a book that is short 2,542,000 MWh — and a margin call of 198,400,000 the next morning.
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