I am underwriting a three tenant (each tenant is NN) medical office building deal (3 doctors) and want to calculate the Weighted Average Lease Term on the building accounting for the 3% annual rent bumps over each of their respective lease terms.
I know WALT is the sum of individual tenant rent (economic rent) divided by total rent multiplied by remaining lease term. How do I account for the year over year rent bumps? Thanks.
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This explains it nicely:
For example, if there is a 10,000 sf building with 3 tenants tenant A leases 5,000 square feet and pays $10.00 per square foot for 5 years, tenant B leases 3,000 square feet and pays $12.00 per square foot for 3 years and tenant C leases 2,000 square feet at $6.00 per square foot for 7 years. First compute total rent (5,000 x $10.00) + (3,000 x $12.00) + (2,000 x $6.00) = $98,000. Then compute the percentage of rent each tenant accounts for: A = 51.02%, B=36.73% and C=12.24%. Then multiple the percentages by lease term and sum together: A (2.55 years) + B(1.10 years) + C (0.86 years) = 4.51 years. This is for economic rent, but the same principle applies if calculated based on occupancy (square footage).
I have never seen it done this way. WALT generally refers to just the term weighted on tenant size because you are trying to see on average how much space you're getting back. What you're describing would be average duration of in-place income. You have to be careful with this because there could be TI's/other income that is being included/excluded that you don't know about which would skew these numbers.
Regarding OP's question on the rent bumps, this wouldn't really matter if the bumps are all the same (3%). All of the rents are going to go up proportionately.
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