I am working on a case study and not sure how to handle this question. A tenant needs to terminate the lease early in exchange for a fee. But they do not have a termination right under their lease, and 5 years of remaining lease term. How do I determine the termination fee based on this situation if investor require a fix annual yield.
Thanks!
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This is one of those questions where it depends a lot on the asset and the market. Is this a single-tenant building? Is the leasing market strong? Is what they are paying currently above or below market, etc.
Yes, it is a single tenant. The vacancy rate for the market is around 5% and they are paying slightly below the market. I am thinking about to find out what's the average days that an office building is listed on the market before rented out, and ask them to pay for those days at market rent as the penalty. I am not sure if this is the right approach.
I work with an office developer and investment firm and how we approach terminations is never the same. That being said, what I typically look for is a fee equal to unamortized costs (tenant improvement, leasing commission, plus abated rent value) and a percentage return for unpaid rent after that to cover the pref that would have been paid on their rent stream.
Another way that I've done it is through a lease buyout that is equal to 50% of the remaining rent which generally covers the amount they would contribute to the cashflow for a pref payout.
Ryan is right - tenant improvement, leasing commission, plus abated rent value. Also would take a look at opex during the vacancy (depends on rent structure).
Thank you!
This is only if they have the termination right in the lease. If they don't have the termination right in the lease they are not getting that deal.
Also don’t press a deadbeat to perform or pursue them in mediation or court at your expense for counsel hoping for damages and fees. It’s costs a lot of time and money to prove you’re right. Odds are if they’re busting their lease you’ll never collect on a judgement. Get them to pay out as much as possible to terminate amicably and tie them up as long as possible while you try to relet, then move on
Usually it is about a two month/three month rent.
Then add your TIs/Broker Fees (in monthly rents)/void period/Rent frees if you're doing a model :)
Way off on this - thats for residential, not office. The cost to re-tenant a space is staggering and most office Landlords don't recoup their investments until several years into the lease
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