Hello Real Estate Pros,
Recently got modeling tests where I needed to model rent roll taking into account 1st lease break option probability, end of lease probability and renewal. I must admit I got some difficulties modeling that. For example how would you model:
- Rent 300k€ per year,
- Stard Modeling, ie acquisition date 31/12/2021
- 1st lease break 31/12/2023 probability of 80%,
- end of lease 31/12/2025
- New ERV 450k€
- Free Rent 6 months
- Downtime 6 months
I myself tried to model doing 100% in-place rent until first lease break, then did 1st lease break x probability for rent, rent free, downtime and (1-lease break probability) x rent, rent free, downtime at maturity. Feedback I got was there are mistakes in the model (not sure it is about that specific point though)
Thank you for your help guys.
Cheers,
Paul
It sounds like your approach was correct so could have been an issue with formulas.
A lease break option is modeled the same as the probability of a unit rolling to market at lease end, with the only difference being the "renewal" rate is just the in-place rent at time of lease break rather than a potentially higher renewal rent you'd model at end of lease. You take the weighted average of the tenant's current rent with the market rent assumption.
Were you also applying the 80/20 weighting to downtime, free rent, and TIs/LCs?
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