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Modeling Tool Instructions

Purpose of the Model

Under Idaho Code 67-5708, leases for all state facilities must be negotiated and approved by the Division of Public Works (DPW).

A comprehensive analysis must be performed by each state agency on its leased facilities to determine the lowest responsible cost to the taxpayer for as long as the facilities are expected to be needed, or for 40 years, whichever is less. This analysis must consider the alternative of acquiring a facility through the state building authority or other funding sources.

A Lease Analysis Advisory Group was formed to develop a workable system for the state agencies. The model used today is a result of many meetings with this group. The expectation is that the model will serve as a dynamic tool for the agencies and it is anticipated that future adjustments will be needed, especially with regard to real estate market conditions. Comments and questions are welcome.

This model can also be used as a negotiating tool for the agencies. With this tool, agency personnel will know what alternative is most financially advantageous and can communicate that information to the landlord. The landlord will then be able to determine if the space can be leased to the agency for less than what it would cost the state to build a facility.

Description of the Model

The Lease/Purchase Analysis Modeling Tool is a spreadsheet containing eight (8) worksheets. If you are unable to download the file, please call us.

This model was designed to answer the question “Is it better for the state to lease this facility or to construct a facility through the Idaho State Building Authority or other funding sources?” Naturally, this model can only answer the financial, or quantitative, aspects of your facility. We recognize that there are other issues which will impact your choices in determining which facility meets your needs. These issues, which are qualitative in nature, are addressed in the Facilities Questionnaire.

The first worksheet tab is titled “Assumptions.” You only need to insert information on this first worksheet. All calculations are automatically performed for you. If you would like to see how the calculations impact other worksheets, simply select the worksheet tabs at the bottom of the spreadsheet.

How the Model Works

One analysis must be done for each lease you have. If your agency has three facilities in one area which could be consolidated in the future, you need to do an analysis on each lease. Information from several different facilities can be consolidated at a later date. Please let us help you if this is an alternative that you are considering.

In order to complete the analysis, you need the following:

  • your most recent lease, plus any amendments or extensions made to the lease
  • the most recent rent invoice from your lessor (landlord)
  • your lessor’s phone number for any questions
  • information regarding any additional facility or occupancy costs you are paying (examples of this could be: utility bills, janitorial bills, or bills from your lessor for any share of the building expenses)
  • a calculator since you might need to convert some amounts into costs per square foot per year
  • the Lease/Purchase Analysis Modeling Tool opened on your computer
  • the DPW listing of your agencies leases (which can be obtained from our office)
  • a blank copy of the Lease/Purchase Analysis Modeling Tool

Occupancy of a purchased facility is designed to commence three (3) years after the analysis is performed in order to provide for an adequate amount of time for legislative approval and the construction process. In addition, the current policy is that the State of Idaho will not cancel leases until the leases have expired. The model automatically allows for this timing.

The analysis is intended to convert all leases to a “triple net” lease. Costs to operate and maintain facilities are removed from both the lease rate and from the cost to acquire and operate a building.

Once you open the Lease/Purchase Analysis Modeling Tool, make sure that you are on the Assumptions worksheet tab. A large portion of the worksheet is colored. However, you only need to be concerned with the areas that are not colored. The colored areas are preset with base assumptions made about your location. If you have information which conflicts with the base assumptions, please call! This is very important because you might have market information that we were not able to obtain and which could be beneficial to other agencies as well.

The Assumptions worksheet tab is divided into five (5) sections:

  • information about the lease agreement
  • land and construction costs
  • operating and financing costs
  • inflation assumptions
  • analysis results

This modeling tool is somewhat similar to filling out a tax form. The hardest part is to obtain the applicable information and interpret it correctly. Real estate is a highly-individualistic business because every building is different and every owner has different investment standards for his or her buildings. Even though the state uses a standard lease form, the rental rates, escalation provisions, and your actual facility cost can vary greatly from one location to the next.

SECTION 1: Information about the Lease Agreement

Enter the name of your agency. If you have more than one agency within a city, please use a numbering system to differentiate between each separate lease.

Enter the code for the city where the leased facility is located:
A1 = Buhl, Payette
B1 = Burley, Grangeville, Moscow, Rexburg, Salmon, Lewiston
C1 = Caldwell, Nampa
D1 = Idaho Falls, McCall, Mountain Home, Pocatello, Twin Falls, Jerome
E1 = Downtown Boise
F1 = Boise, Coeur d’Alene, Meridian
G1 = Hailey, Kethcum

Different areas of the state have varying market conditions which need addressed in the analysis. These city rates will be further refined at a later date to adjust for changing market conditions.

Enter the net rentable square feet that your agency is leasing. This should be found in paragraph 3 of your lease. If your agency expanded, you need to locate the new net rentable square feet in the lease amendment. If you are in a multi-tenanted office building and if the lease states “subject to measurement using the BOMA standard,” enter the square feet shown in paragraph 3. If not, you need to keep in mind that some leases will be based upon “usable” square feet and some upon “gross” square feet. If the lease does not specify whether your space is net rentable, usable, or gross square feet, call your lessor and ask what the net rentable square feet of your space is (sometimes the lessor won’t know). If the lessor does not know, here are some general guidelines:

Net Rentable Space = Usable Space Plus Lobbies, Restrooms, Hallways

  • Usable square feet is the space within your own facility, from the middle of the outside wall to the inside finished surface of the wall of your adjoining neighbor. It is the space that you use on a day-to-day basis and includes your offices, conference rooms, and reception areas.
  • Net rentable square feet is the your usable space plus restrooms, lobbies, hallways, and so forth that you share with other tenants in the building.
  • Gross square feet is the outside dimension of the building.

If you lease a completely separate building or if you have your own restrooms and lobby within your own space, enter the square feet shown on paragraph 3 of the lease.

Enter the base rent that your agency is currently paying. This should be expressed as dollars per square foot per year. The base rent can be found in paragraph 3 of the lease and usually states: “computed at a rate of $ x per square foot, per year.”

Monthly Rent × 12 ÷ sqft = $ per sqft per year
Compare the most-recent rent invoice from the lessor to the amount shown in paragraph 3 of the lease. If they are not the same and you do not know why, you should determine if the lease contains any increases in rent under paragraph 7 “Special Provisions.” The rent may be increased by the Consumer Price Index, a certain percentage amount per year, or a pre-determined amount per year.

List the expiration year of the lease. If the lease has been renewed, put the expiration year of the renewed lease here. If the lease contains an option to purchase the leased facility at a predetermined period of time, enter the year the facility may be acquired minus two years. The model allows two years for construction of a new facility and one year for legislative approval.

Your agency’s lease may contain one or more options to renew the lease. Generally, options to renew the lease are located in paragraph 7 of the lease, under Special Conditions. If all renewal options have already been exercised, leave this line blank. If there are remaining options to renew the lease, insert the year the last renewal option would expire.

If the lease contains an option to purchase the leased facility at a predetermined period of time, enter the year that the facility may be acquired minus two years. For example, if the year the agency may purchase the facility is 2008, enter 2006. The model allows two years for construction of a new facility and one year for legislative approval.

Enter P if this lease is an office or retail facility. Enter W if this lease is a storage or warehouse facility.

Insert the current calendar year.

If there are no predetermined rent increases in the lease, go to cell B-17. Otherwise, enter rent increases shown in the lease, directly opposite the applicable year. These generally are located in paragraph 7 of the lease under Special Provisions. These increases need to be in rent per square foot per year. Show the total rent paid not just the total increase. For example, if the rent is to increase to $12.00 per square foot per year from $10.00 per square foot per year, you would insert $12.00 in the cell directly opposite the applicable year. Please note that the model will automatically set up a six year period of time to allow you to increase your rents according to your current lease.

If you have increases in your lease agreement based on the Consumer Price Index (CPI), complete these seven cells. These increases are generally located in paragraph 7 of the lease under Special Provisions.

B-17
Use this cell only if the Consumer Price Index cannot exceed a certain percentage amount per year (ror example, the increase shall not exceed 3% per year).

B-18
This cell is a little more difficult to determine. Sometimes the increase is based upon the initial lease rate and adjusted annually. For example, a lease could have an initial lease rate of $11.00 per square foot with an annual Consumer Price Index and a cap on the increase of 2%. In this scenario, cell B-17 would be 2% and cell B-18 would be $11.00.

However, sometimes the increase is based upon a lease rate that was raised during previous years of the lease. For example, the lease could have an initial lease rate of $11.00 per square foot, increasing to $12.00 per square foot on the third year of the lease. On the fourth year, the lease calls for a Consumer Price Index increase on the $12.00 per square foot rate. In this scenario, cell B-18 would be $12.00. If you have any questions, please call.

B-20 to B-24
This model allows you to adjust rents according to any increases in the Consumer Price Index over five years. In cells B-20 to B-24, enter Yes or No for any specific year that a CPI increase would be effective.

The list of your leases from DPW will provide you with basic information regarding the pass-through of building expenses. If the Comments section contains items such as “base year,” “$2.75 expense stop,” or “pass-thru of taxes, insurance, and/or cam,” your agency is being billed for building expenses. Copies of the bills received from your lessor for any building expenses should be reviewed at this time. These billings are generally described in paragraph 7 of the lease under Special Provisions. The most widely used method is the operating expense escalation clause with which any increases in building expenses are passed onto tenants based upon the square feet they lease. The key word here is increase. You can generally tell if your agency is being billed for an increase in operating expenses if the language in paragraph 7 refers to items such as “Base Year,” “Expense Stop,” or “any increase over $x per square foot.” If your agency is only billed for an increase in building expenses, skip cells B-26 to B-30, and then go to B-33.

Building expenses could include real estate taxes, building insurance, lobby/hall maintenance, utilities, snow removal, landscaping, and cleaning service. Another way a lease can be structured with regard to building expenses would be for the lessor to pass through the costs directly to your agency. Building expenses could include such items as real estate taxes, building insurance, common area maintenance, utilities, management fees, snow removal, landscaping, and janitorial services which the Lessor supplies on your behalf. If the Comments section in the listing of your leases from DPW contains words such as “pass-thru of taxes,” “pass thru of insur,” or “pass-thru of taxes, insurance, and/or cam,” these expenses are being passed directly through to your agency.

EXAMPLE: Property Taxes
$75,000 per yr ÷ 150,000 sqft = $0.50 per sqft per yr
If the annual property taxes on a 150,000 square foot building were $75,000, then the cost per square foot per year would be $0.50. The lessor would send your agency a bill for $0.50 times the amount of square feet leased by your agency. On a 2,500 square foot facility, your agency’s bill for the property taxes would be $1,250. The lessor is thus passing through the entire expense of the property taxes directly to your agency and cell B-26 would be $0.50 (per square foot per year). Again, all costs must be expressed as dollars per square foot per year.

If the building expenses are not separated by the lessor into tax, insurance, utility, and so forth expense categories, simply put the total expense billed to your agency on cell B-32 (Miscellaneous). Again, do not list any expenses here that are billed to your agency for any increases in operating expenses from one year to the next. Increases are addressed later in cell E-19. Since this can get confusing, please call if you have any questions!

You can make yourself notes about any of these building expenses in cells C-26 to C-30.

List items that your agency is paying to the lessor over and above its standard lease rate. Examples would be payments reimbursing the lessor for construction done to the facility (also known as amortization of tenant finish), conference room use, or parking space rents. Again, these costs must be expressed in costs per square foot per year. Generally, these other costs would be noted under paragraph 7 of the lease or in a lease amendment. There is an area for you to detail these charges in cell C-32 as well.

Two kinds of bills can be listed here. If the agency pays any bills directly to a company other than the lessor, enter Yes in D-17. The actual costs will be entered later in cells E-7 to E-17. Examples of some of these bills could be electricity, additional parking spaces, or janitorial services.

If you previously entered any costs in cells B-26 to B-32 when you completed the section on building expenses billed to you by the lessor, a Yes or No was automatically entered for you in this section.

If you pay any amounts to the lessor other than those detailed in section B-26 to B-30, please enter Yes in this section. Paragraph 6 of the lease has a section called Services which details which costs are the lessor’s and which are the agency’s. The listing of your leases from DPW can also provide assistance here. If the EXC column has any details in it, the agency is paying for some services for its own behalf. See below for additional information.

U = Utilities
AS = All Services
J = Janitorial
NNN = Triple Net Lease (agency pays for all costs on the property)

Please note that if you used Miscellaneous in cell B-32, it cannot be used again in this section as the information in cell B-32 has automatically transferred over to cells D-17 and E-17.

Enter in this section the cost per square foot per year of any increase in operating expenses the lessor billed you for during the last year. Again, if you have any questions on these escalations, please call.

If this facility is an office/warehouse facility, please enter the percent of finished office area. Finished office area would typically also include retail or show room space.

If the agency is paying for all costs on the property, the lease for the facility is a Triple Net Lease (also knows as a Net, Net, or Net Lease). All costs would include property taxes, insurance, maintenance, landscaping, snow removal, utilities, trash service, and so forth. If the lease is a triple net lease, please enter Yes in cell D-25.

If known, show the cost per sqft per year. Since the analysis is designed to convert all leases to a triple net lease, it is important to obtain cost information on the operating expenses of the leased facility. Information for this section can be obtained from four different sources:

  • Any information entered in cells B-26 to B-32 will automatically transfer over to this section and will override DPW’s estimated costs.
  • If your agency pays for any services directly, such as utilities or janitorial, enter the annual cost per square foot here.
  • If you receive bills for any increases in operating expenses of the building, all or some of the information could be noted on the bill from the lessor. In addition, the lessor may be willing to share his or her operating expenses with you.
  • DPW has estimated some of the costs of operating a building. These are located in cells F-10 to F-21.

SECTION 2: Land and Construction Costs

On most occasions, this information will be provided to you automatically. If you do not agree with the number provided, your suggestions would be of great assistance to this office.

On most occasions, this information will be provided to you automatically. If you do not agree with the numbers provided, your suggestions would be helpful.

On most occasions, this information will be pre-established for your benefit.

SECTION 3: Operating and Financing Costs

Enter the number of full time employees who work in this facility.

Generally, this is found in paragraph 2 of the lease.

SECTION 4: Inflation Assumptions

Historically, the trend is prices increase. These inflation assumptions have been preset. If you do not agree with the numbers provided, your suggestions would be helpful and will further refine the model.

SECTION 5: Analysis Results

This section compares the cost of leasing to the cost of acquiring a building through the State Building Authority or other funding sources. Costs are compared over a 40-year period on both a cash method and a net present value basis. The easiest way to compare leasing to acquiring a building is to look at the following lines:

  • difference between purchase and leasing: cash basis over 40 years
  • difference between purchase and leasing: net present value basis
  • break-even year: year that the cost of leasing is equal to the cost of acquiring a facility through the State Building Authority or other funding sources
  • cost ratio-net present value: This value is calculated by dividing the net present value of the purchase alternative by the net present value of the leasing alternative. If the cost efficiency ratio is .56, this would mean that the acquisition proposal can provide the facility for $0.56 per square foot versus the current lease expense of $1.00 per square foot.

Qualitative Factors

Please see our Facilities Questionnaire which allows your agency to prioritize their facility needs and address issues that cannot be incorporated into the Lease/Purchase Analysis Modeling Tool.

Completion of the Model

After both the Lease/Purchase Analysis Modeling Tool and the Facilities Questionnaire are complete, please return them to this office (by mail or email). Ensure that you save each analysis in a separate file for future reference, and thoroughly review any tentative conclusions that were made. Those tentative conclusions might impact your facility decisions in the future. Thank you for your cooperation and assistance with this analysis.

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