From a landlord's perspective, how do you go about analyzing different lease proposals that have different rates, terms & options? There's a lot of info from a tenants perspective (i.e. occupancy cost) but not much for LL's,
Is there any way to measure a lease proposal against your properties existing returns to determine if the lease is actually accretive to your portfolio? Once you model out the CFs, are there any specific metrics you like to look at?
I know there is a lot of qualitative factors that play into it but I'd love to hear how you guys do more of the quantitative analysis.
Thanks!
What does your firm currently use?
I started using Argus to create scenario analyses with a base case (this could be based on your property's current rent roll) and various scenarios that tweak certain assumptions, particularly TI's, rent, and term because those are most impactful for the deals we underwrite.
I use IRR, equity multiple, NPV, cash flow stability, etc. when evaluating the return on a given proposal/scenario. We (maybe) could model it out using simpler metrics like net effective rent (and we do this for small deals), but the Argus approach is more robust since it's essentially lease underwriting that quantitatively looks at where you want to be/could end up at disposition. It also does well comparing proposals with different term lengths (e.g. 120 months vs. 60).
On the leasing side, brokers and landlords use NER, or net equivalent rent. Its essentially a PV of all costs and revenues (so think net rent, tenant improvements, any amortization of the tenant improvement, rent step ups, etc.).
Landlord and tenant then go back and forth on various scenarios and offers (tenant offers lower NER, landlord counters with higher NER). Eventually meet somewhere in the middle at a "market" NER.
This doesn't really answer your question about how it affects your portfolio or if its accreditive or not. At portfolio level, it seems pretty basic calc.
Does doing this lease deal increase NOI? If yes, proceed.
Next question, is the total landlord costs of doing this deal (landlord buildout, TI) less than the total property value increase? If yes, proceed.
Finally, is the NER, or base rent at market? If Yes, sign that deal we good to go! If no, you're renting below market --> portfolio value is not being maximized.
I don't understand why analysts are running argus assumptions unless you're working for a top 50 REPE fund with a whole committee that needs to see the underwriting...I personally think it's a waste of time. it isn't that calculated and or complicated. just do a NER and NOI calculation
I don't know what low impact, multi tenant leases you're doing (garden style multi family?), but when you're looking at $1mm buildouts for AA credit tenants that involve relocating tenants at lower rates to accommodate this new tenant which you never underwrote at acquisition... well you kinda want to know more than a fucking Net Effective Rent that says nothing about cash flow, nothing about the time value of money (an actual thing), nothing about where NOI will sit at the end of the hold period such that you can understand what your exit price, net sale proceeds, and ultimate ROI will be. Argus gives you all of that, and all you do is adjust a few assumptions.
You don't need to be a top 50 REPE firm to use a $2k per year software. Ignore everything I said if your "business plan" (raise rents, lower expenses?) operates in a sandbox. If you're doing more than that, totally makes sense to use Argus.
Finally, and I'll get off my soap box, you don't need to be a top 50 REPE to work with institutional partners who value the sophistication and data-driven approach of return analysis of an Argus run. Good fucking luck using NER and NOI to justify your unforeseen $1mm capital call from Oakstreet that was supposed to be saved for Year 3 CapEx. 😜
Edit: By the way, this example is straight from experience with an industrial building, so don't you dare think I'm talking retail or Class A office and dismiss it as irrelevant to your business.
Odio molestias accusantium consectetur error. Labore quas neque et recusandae accusamus est rerum. Iure consequatur est est perspiciatis. Qui voluptatibus perspiciatis suscipit et sit consequuntur. Voluptatem est laborum occaecati. Et voluptates dolores aut non aliquam. Minima facere sunt dolorum omnis blanditiis voluptas vitae.
Accusantium consectetur nisi ducimus quis minus. Veniam quisquam aliquam quam recusandae molestiae rerum. Qui ipsa in quibusdam.
Perferendis dolorem necessitatibus voluptas corporis. Odit esse ipsum dolorum est et. Harum eos eligendi adipisci et odio sapiente consequatur.
Enim iste adipisci voluptas sunt rerum deserunt vitae nam. Animi hic nam aut quam occaecati. Necessitatibus ut sit nobis vitae voluptate commodi quod laborum. Nesciunt dolor id saepe quia amet optio ut qui.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...