Hogan Building 5 Year CFAW

Cash Flow Analysis:  The following are highlights from the Hogan Building's 5 Year CFAW.  The complete CFAW is available upon request.  Just leave a comment with the e-mail address where it should be sent.

Initial Equity Investment: $464,897.98

Mortgage Amount: $1,315,749

Terms: 7% interest rate / 15-yr Term & Amort / 2% Loan Fees

Potential Rental Income: $393,600 (Yr 1); $405,408 (Yr 2); $417,570 (Yr 3); $430,097 (Yr 4); $443,000 (Yr 5)

Vacancy Rate: 12% (Yr 1); 5% (Yr 2 - 5)

Operating Expenses: 49.5% of Gross Operating Income

NOI: $181,228 (Yr 1); $200,996 (Yr 2); $207,026 (Yr 3); $213,237 (Yr 4); $219,634 (Yr 5)

Sale Price EOY 5: $1,500,000

Internal Rate of Return	Before Tax IRR	After Tax IRR
Initial Investment	-$464,897.98	-$464,897.98
Cash Flow Year 1	$39,312.45	$27,566.53
Cash Flow Year 2	$59,080.48	$41,919.56
Cash Flow Year 3	$65,110.37	$45,445.06
Cash Flow Year 4	$71,321.15	$49,034.17
Cash Flow Year 5	$398,417.77	$374,637.58
Internal Rate of Return	7.8507%	3.501%

Facilities Management -- Operating Budget

     Operating the Property: Proper management of the facilities will be key in maintaing tenant satisfaction and renewing leases.  To ensure profitability, the premises will need to be managed in accordance with a budget.  The operational budget for management of the Hogan Building follows:

Hogan Building Annual Operations Budget

Janitorial                                           $10,000

Security                                            $45,000

Semi-Annual Window Cleaning      $  7,500

Trash Removal                                 $12,000

Repairs / Maintenance                     $35,000

Advertising                                      $  6,000

RE Taxes                                         $51,900

Insurance                                         $15,000

Management Fee                             $  5,000

Cap Ex Contribution                       $  7,500

Total                              $194,900

Marketing & Leasing

     Pitching the Property:  Properly structuring the marketing and leasing of the property is crucial to the timeliness and consistency of the performance of the property.  This will be especially true for the Hogan Building Project because of the existence of retail, office and residential leases.

 

     Marketing Strategy: The Hogan Building marketing plan will be to highlight its location and the opportunities and conveniences its location affords business, retail and residential tenants alike.  Being located in the central business district blocks from the Convention Center ensures consistent foot traffic for the retail tenants and provides convenient access to the business community and the seat of City and County Government for the office tenants.  Residential tenants will be drawn to the areas vibrant nightlife and world class dining, which is only blocks away.  The Hogan Building's sustainable features will allow the building to be marketed as "eco-friendly," and/or "environmentally responsible."  In short, the Hogan Building will be marketed as a great place to do business and call home. 

      Marketing Budget:  $10,000 shall be alloted for use in production of marketing brochures and materials and placement of building advertisements in the electronic medium.  The Hogan Building shall have its own web-site created that allows interactive tours of the facilities and surrounding areas. 

The building will also have its own Facebook page where tenants and prospective tenants can share information about their building experiences.  It is not anticipated that rental discounts will be necessary to lease up the Hogan Building.  Regardless, in case needed, an additional $5,000 has been included in the marketing budget for rental discounts in the first 6-months of the building's operations.  The total marketing budget leading up and to and through the first six months of building operations is $15,000.  

      Leasing Commissions: Compensation structure for the leasing agents will vary by property type.  For all leases, the agent will receive a 5% commission.  The payout for that 5% shall vary by property type. 

     Retail:  For the retail spaces, the lease commission shall be payble half at the time the lease is signed and half when the tenant moves into the space. 

     Residential: 1-year leases shall pay 40% of the lease commission when the lease is signed.  The remaining 60% shall be placed in an escrow and paid to the agent in equal shares on the first of each of the 12 months of the lease as long as the tenant remains.  Should the tenant vacate the premises prior to completion of the lease term, the agent does not receive the balance of the commission in the escrow account.  Instead it reverts to the owner to be used in filling the space with a new tenant.  This will motivate the leasing agent to complete due diligence in qualifying prospective tenants.     

      Office: 5-year leases shall pay 50% of the lease commission when the lease is signed. The remaining 50% shall be placed in an escrow and paid to the agent in equal shares on the anniversary date of the lease for each of the 5 years of the lease as long as the tenant remains. Should the tenant vacate the premises prior to completion of the lease term, the agent does not receive the balance of the commission in the escrow account. Instead it reverts to the owner to be used in filling the space with a new tenant. This will motivate the leasing agent to complete due diligence in qualifying prospective tenants.

Lease Highlights: All leases shall be of the base rent variety.  Highlights for each of the lease types follow:

Residential: This shall be a standard residential lease where tenant pays electricity, cable, water, internet, etc., separately.  Assuming all payments during the lease term are made timely, tenant shall have the option to renew the lease 30-days prior to expiration.  The request to renew must be in writing.  Renewal shall be for a term of 1-year.  Renewal rate shall be at a 5% increase from the original rent rate or then previling market rents within a 2-mile radius for similar type residential properties -- which ever is higher.  Building security services and janitorial services to building common areas are included in the lease.  Recycling shall be enouraged, but not required of residential tenants.

Retail:  A percentage of sale rents arrangement was considered and declined.  The Hogan Building owners prefer to be strictly in the real estate business and not a hybrid real estate/retail hybrid.  There shall be no co-tenancy clause.  Within the lease term, annual rents shall increase 3%.  If any retail tenant vacates the premises, the remaining retail tenants shall have the right of first refusal on space contiguous to their own.  This right must be exercised in writing within 15 days of the tenant being notified of the vacancy.  Should the existing tenant exercise this right, the rent on the additional space shall be at then prevailing market rates.

        Assuming all payments during the lease term are made timely, tenant shall have the option to renew the lease 120-days prior to expiration. The request to renew must be in writing. Renewal shall be for a minimum term of 3-years, but may be longer if the tenant and owner agree. Renewal rate shall be at a 5% increase from the original rent rate or then previling market rents within a 2-mile radius for similar type retail properties -- which ever is higher. Building security services and janitorial services to building common areas are included in the lease. Basic daily janitorial services such as emptying the trash, vacuming, sweeping the floors and light dusting will be included as part of lease. 

Recycling shall be required of retail tenants.  Retail tenants that fail to recycle glass, plastic, and cardboard shall receive one verbal warning.  A second violation will receive a written reprimand and notice to cure.  Third and any future violations shall be sanctioned with  $100 per incident fine that will be payable within 10 business days.

     Office:  Office lease rates shall increase 3% per year within the lease term.  There shall be no co-tenancy clause. However, the owner agrees not lease to another business enterprise that is in the same industry as current tenants without the current tenant's approval.  For example, if a CPA firm is a current tenant, then vacant space will not be leased to a CPA firm that would compete with the existing tenant CPA.  If any office tenant vacates the premises, the remaining off tenants shall have the right of first refusal on space contiguous to their own. This right must be exercised in writing within 30 days of the tenant being notified of the vacancy. Should the existing tenant exercise this right, the rent on the additional space shall be at then prevailing market rates.

Assuming all payments during the lease term are made timely, tenant shall have the option to renew the lease 180-days prior to expiration. The request to renew must be in writing. Renewal shall be for a term of 5-years. Renewal rate shall be at a 5% increase from the original rent rate or then previling market rents within Fort Worth's Central Business District for Class B Office Space -- which ever is higher. 

Building security services and janitorial services to building common areas are included in the lease. The security services include premises surveillance and controlled access to the premises 24-hours a day.  Basic daily janitorial services such as emptying the trash, vacuming, sweeping the floors and light dusting will be included as part of lease. Recycling shall be required of office tenants.  Office tenants that fail to recycle glass, plastic, and cardboard shall receive one verbal warning. 

A second violation will receive a written reprimand and notice to cure. Third and any future violations shall be sanctioned with $250 per incident fine that will be payable within 10 business days.  Should tenant violate this provision of the lease 7 times within any 12-month period, owner shall have the right to terminate the lease for cause upon 5 days written notice.

Tax Benefits of Sustainable Features

     EPAct:  In 2005, the US Congress passed the Energy Policy Act of 2005 ("EPAct").  The act incentivised energy efficient construction and "retrofitting" of existing buildings.  The most coomonly utilized provision under EPAct is the Energy Efficient Commercial Buildings Deduction.

     Full Deduction:  The Energy Efficient Commercial Buildings Deduction allows a property owner to claim an immediate tax deduction of up to $1.80 per square foot for energy efficient improvements to a building's envelope or its lighting, water and heating, ventilation and air conditionaing systems.  A building qualifies for the full deduction when energy efficient improvements are installed as part of a plan to reduce the building's total annual energy and power costs by 50% when measured against a reference building located in the same climate zone that meets the minimum requirements of American Society of Heating, Refrigeration and Air Conditioning Engineers or ASHRAE Standard 90.1-2001. 

Partial Deduction: A partial deduction is available for energy efficient improvements in each of the building's systems that result in energy cost savings of 16.6%.  The partial deduction equals up to $.60 per square foot for each qualifiying system.

     Hogan Building: The plan to incorporate the sustainable features of energy efficient windows and lighting controls may qualify the Hogan Building for the above tax deduction.  If these features qualify, the Hogan Building would definitely be eligible for the partial deduction and possibly the full deduction.

Sustainability Feature #3: Waterless Urinals

     How Waterless Urinals Work:  The concept behind waterless urinals is simple. The design of the bowl prevents urine from pooling and gathering. Instead, it flows down through small holes or a grating at the bottom of the bowl into a small reservoir called a trap. Inside this reservoir, the waste flows through a barrier of sealant, an oil-like liquid lighter than water that traps odors and prevents the urine from being exposed to air. Once underneath the sealant, the urine rests in a cylindrical well around a raised section of exposed pipe leading to the drainage line for the bathroom.

     As the waste rises higher than the top of the open drain pipe, the excess trickles down the drain. As more men use the urinal, the urine in the well continually flows out through the pipe as new urine displaces it. The urinals are designed in such a way that the flow of urine is continuous from the point it enters the trap until it enters the drain. This allows the waste to drain naturally, without needing to be forced out like a traditional urinal.

     Waterless urinals were actually invented back in the 1990s, but the recent push toward green construction has made them a more viable, commonplace option.

    

     Costs:  The cost of waterless urinals varies based on quality and quantity purchased.  A durable commercial grade waterless urinal can be obtained from www.airdelights.com for $320.  Installation costs are estimated to be an additional $80 for a total unit cost of $400 per unit installed.  The Hogan Building has 6 urinals that could be replaced with this system.  Accordingly, the total cost to install this system would be $2,400.  Cartridges in the system would need to be replaced every three months.  Replacement catridges cost about $40 and would be a maintenance component represented in the buildings operational expenses.

     Savings:  In an office building, the water used for flushing urinals is the largest use of water in the building.   Proponents of the waterless urinal system estimate it saves anywhere between 15,000 and 45,000 gallons of water per urinal per year.  Given the six urinals located in the Hogan Building, installing the waterless system could realize savings of 90,000 to 270,000 gallons of water per year.  This equates to significant savings on annual water bills.

     Benefits: Due to the savings discused above, which will be realized by tenants on their utility costs under NNN leases, the tenants will likely be willing to pay a "rent premium," for space in the Hogan Building.   The "rent premium" will be a portion of the savings realized by the tenant for energy and utility costs. After paying this portion to the owner, the tenant will still recognize a savings over what their costs would be in a building that lacked these sustainable features.  Utilizing the waterless urinal system combined with the incorporation of other sustainable elements will allow the Hogan Building to command an additional $1/sf/yr on the rents in each space in the building's three above ground floors. This would equate to an increase in annual rents on the 15,600 sf of rentable space on the first 3 floors of approximately $15,600 and year.

      Benefits of a sustainable building also extend beyond the financial realm. Occupying a "green building" is important to many young professionals who desire an urban lifestyle. Having "green aspects" incorporated into the Hogan Building will make it more attractive to this target demograhic. 

Sustainable Feature #2: Lighting Controls

     Let There Be Light (When Needed):   Significant opportunities for savings from lighting controls exist at the Hogan Building. The idea is for light to be immediately available in building spaces when needed and for cost savings to be realized by turning off lights in spaces when they are not occupied.  For example, bathrooms are unoccupied 70% of the time, and offices may be unoccupied up to 53% of the time, during any given workday.  Industry studies suggest that energy savings  related to lighting could reach 60% if  automatic off sensors were utilized.  These are basically motion sensors that are tied to the light switches.  When no motion is detected for a pre-determined period of time, usually a few minutes, the light control sensors turn off the lights.  The lights are reactivated when motion is sensed, such as would result from a person re-entering a room.  The potential energy savings from lighting controls and sensors are further supported by  research reported by the US EPA in their September 2007 report: “Putting Energy in  Profits: ENERGY STAR® Small Business Online Guide which show energy savings of 25% to 75% depending on the room type.  Such lighting controls are relatively inexpensive to install.

     Costs:  Wireless motion sensors with a detection range of 25 feet to control lighting can be purchase at Lowe's or Home Depot for apprximately $25 inclusive of tax.  The Hogan Building would need two wireless control sensors in each of its 24 rentable spaces in the basement and on floors 1 - 3.  An additional 4 sensors would be needed for the bathrrooms in the basement and on Floor 2 where there will be shared office space.  A total of 52 wireless motion control sensors at $25 a piece puts the materials cost at $1,300.  Allowing $700 for installation labor, the total cost of incorporating this sustainable feature into the Hogan Building would be approximately $2,000.

     Benefits:  Due to the cost savings discused above, which will be realized by tenants on their utility costs under NNN leases, the tenants will likely be willing to pay a "rent premium," for space in the Hogan Building.  The "rent premium" will be a portion of the savings realized by the tenant for energy and utility costs. After paying this portion to the owner, the tenant will still recognize a savings over what their costs would be in a building that lacked these sustainable features. Utilizing the wireless motion sensor lighting controls combined with the incorporation of other sustainable elements will allow the Hogan Building to command an additional $1/sf/yr on the rents in each space in the building's three above ground floors. This would equate to an increase in annual rents on the 15,600 sf of rentable space on the first 3 floors of approximately $15,600 and year.

       
     Benefits of a sustainable building also extend beyond the financial realm. Occupying a "green building" is important to many young professionals who desire an urban lifestyle. Having "green aspects" incorporated into the Hogan Building will make it more attractive to this target demograhic. The general public will also receive the benefit of the Hogan Building's lowered emissions and reduction in carbon footprint.

Sustainable Feature #1: Windows

     The Role of Windows:  Windows in a commercial building serve many purposes.  They regulate the types and amount of light that penetrate the buildings interior, allow for views, and can set the general mood inside the building's space.  Windows also play a significant role in the operations costs of a building.

     Energy Lost:  Many windows in older buildings, such as the Hogan Building, are single-pane or lack tinting or coating.  This decreases a buildings operational efficiency and leads to a tremendous loss of buiding energy. In the Winter, building heat escapes these windows to the outside environment and forces the building's central heating system to run harder and longer to attain a comfortable, acceptable interior temperature.  The reverse is true in the Summer months.

Replacement Costs:   Replacing all windows in a building can be very expensive.  The exact costs vary with the method of replacement and quality of the new windows. According to amberix.com, a rough estimate for a typical new, highly insulated, energy efficient, 12 square foot window is approximately $200.  Energetechs.com offers window replacement estimats that range from $38/sf to $133/sf.  On the second and third floor of the Hogan Building there are 96 windows.  Assuming a $200 per window replacement cost, it will cost approximately $20,000 to replace all windows on these two floors.  Additional costs would be incurred by replacing the aluminum store front windows on two sides of the first floor of Hogan Building.    Given the square footage of glass in the storefront windows on the first floor of the Hogan Building, a conservative estimate for the replacement of all first floor windows would br $20,000.  Accordingly, the minimum estimate to replace all windows at the Hogan Building is $40,000.

Benefits:  The US Green Building Counsel, the EPA and private industry studies suggest that installation of energy efficient windows can reduce building energy expenditures by 25% - 33%.   In addition to the reduced energy expenditures, building maintenance costs will also likely be reduced.   Due to these cost savings that will be realized by tenants on their utility costs under NNN leases, they will likely be willing to pay a "rent premium," for space in the Hogan Building.  The "rent premium" will be a portion of the savings realized by the tenant for energy and utility costs.  After paying this portion to the owner, the tenant will still recognize a savings over what their costs would be in a building that lacked these sustainable features.  Replacement of the windows combined with the incorporation of other sustainable elements will allow the Hogan Building to command an additional $1/sf/yr on the rents in each space in the building's three above ground floors. This would equate to an increase in annual rents on the 15,600 sf of rentable space on the first 3 floors of approximately 15,600 and year.  Therefore, the "payback period" on this investment, assuming the increased rent rate, would be approximately 10 years. 

 

   Benefits of a sustainable building also extend beyond the financial realm.  Occupying a "green building" is important to many young professionals who desire an urban lifestyle.  Having "green aspects" incorporated into the Hogan Building will make it more attractive to this target demograhic.  The general public will also receive the benefit of the Hogan Building's lowered emissions and reduction in carbon footprint.  

Investor Requires Incorporation of Sustainable Features

Sustainability Desired:  Investor Fred Forgey is pleased that the Hogan Building Project is feasible.  However, he desires to have at least 3 sustainability features incorporated into the building before agreeing to move forward with the purchase.  This will require identifying sustainable features and completing a cost--benefit analysis of the incorporation of each into the Hogan Building.  This all begs the questions:  What is a Sustainable Commercial Building?

What is a Sustainable Commercial Building?:  A sustainable commercial building can be defined as a building with planning, design, construction, operation,and management practices that reduce the impact of development on the environment.  A sustainable commercial building is also economically viable, andpotentially enhances the social amenity of its occupants and community.

Sustainable Features:  There are many different sustainable features that can be incorporated into new and existing buildings.  These rangefrom energy efficient HVAC systems and window to waterless urinals, green roofs and interior lighting controls.  Any sustainable feature that may be incorporated into the Hogan Building will need to be evaluated, at a minimum, in the context of market and financial performance.  Subsequnet blog entries will identify and analyze 3 specific sustainable features: 1) Energy Efficient Windows; 2) Automatic Lighting Controls; and 3) Waterless Urinals.