Rent Free Adjustment
Can I get your thoughts on the following: When you’re calculating your exiting proceeds in a deal and apply an exit cap rate to pre-rent free forward NOI, is it fair to deduct rent frees from the exit proceeds and, if so, do you adjust for (1) only the rent frees in the forward NOI or (2) the future rent frees included in all in-place leases at the time of exit (eg if > 12 months rent frees)?
Yes - it is common practice to remove the Free Rent that wasn't included in your capped NOI amount from your proceeds. This would be all outstanding Free Rent but nothing for leases that hadn't been signed. The seller is usually responsible for these costs (also TI/LC that are outstanding) and usually cover it by giving the buyer a seller credit on close.
If for some reason you have abatement that is further out than 12-months (I've seen like 24 months of half rent on a 10 year deal) they would be included as well. The concept is that you are paying for the revenue when you cap it so the seller needs to cover the procurement.
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