URGENT: Break Clause within Case study
Hi guys,
Quick one, when you face the following in a case study:
"Let to XXX expiring 2nd Nov 2025, with a tenant’s break clause dated 25 Jan 2024"
What's the impact on rent modeling? Do you account for a Yes / No Scenario and as such cut the rent and look for another tenant (or not).
Or do you set up a probability percentage exactly like you do when there is a renewal or not scenario?
IE: When it comes to modeling, is breakclause the same as lease rollover?
Thanks
If the verbiage mentions the tenant is breaking, would presume that it would be 100% new assumptions so full term vacancy, tenant improvements, and rent abatement. Do not assume a renewal / mixed % (renew/new) economics.
Thanks!
Value add case study so I would assume it's the opportunity for "us" to terminate the lease earlier and refurb?
But to me 2 scenarii:
1. Starting refurb day-1, (while tenant is here with rent still kicking in, as I could see on a ACRE value add model) tenant would benefit from a very nice refurbished asset for let's say a year then bye bye and rent far higher based on given assumptions
2. Wait until break clause and I would only draw capital for refurb (approx. 50% of the acquisition price) after more than a year?
I'd rather use scenario 1 if it can make sense!
Is there any structure you came accross before such as:
Low price acquisition financed through Eq, then after 1/2/3y before we can evict the tenant we do nothing apart from benefiting from current property, then once the tenant leaves we draw on the senior loan to refurb and then we exit?
Thanks again
If it does not specifically state that tenant will exercise, I would use an IF statement to test if tenant breaks. From there either use market LC/TI/Free rent/Down time * 100% or 1- renewal %.
Assume 100% yes or no unless you are told otherwise . Adding probabilities is a pain in the ass as it not only affects your rent, but also your leakage.
Thanks! But as main goal is to refurb/renovate, can I decide that I as a landlord will exercice?
It's basically:
Acquisition Y0
Break Clause Y2.5
Lease End Y5
Bit weird to wait or is this common? Again I would question the financing structure?
Low price so Eq or Eq + Senior Loan then when refurb starts another loan?
Thanks
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