Dear Ms. Lopez:

Based on a quantitative and qualitative assessment of the current offer, it is my recommendation NOT to accept the offer of $22,500,000 for Uptown Plaza because there is an approximate 80% probability that the present value of Uptown Plaza will be greater than the current offer if you wait until the lease renewals for the tenants in question are in place (see Appendix A). The below assessment summarizes the downside, but more importantly in this case, upside risk of waiting to sell rather than accepting the current offer.

There are 3 key factors that drive the present commercial value of the shopping centre – the probability of renewal, the renewed rental amount, and the probability of a new tenant in the event of non-renewal. Other factors include variability in monthly operating costs and future interest rates i.e., impact on cap rate. It is important that each factor be assessed individually at a tenant level, rather than applying averages which may mask key drivers.

In the “base” case, where the assumed probabilities of lease renewal and new tenant are taken and fair market rental rates are assumed, the present value of Uptown Plaza is $23,844,000. This assumes a 9% cap rate and a 0.5% monthly increase in operating costs. Additionally, when

In a “conservative” scenario, where all tenants are renewed at TriDev’s minimum acceptable rent increase, the valuation is still higher than the current offer ($23,226,000). However, due to the high probability of renewal amongst the 4 larger tenants (>90%), assuming fair market rent increases is reasonable.

Only in a “worst case” scenario, that further assumes a 10% cap rate and a plus 10% variance on operating cost increases, does the valuation decrease to an amount below the current offer ($19,903,000). Sensitivity analysis shows that the valuation is most sensitive to variance in cap rate.