What metrics do you use to UW lease terms?
In excel I have a tab for each set of deal terms I want to model and compare against each other. Calculates based on rent rate, term, escalations, free rent, TI/LC, and even factors in Opex if a FSG lease. I find the NPV of the deal (usually I use 10% discount rate), and then divide this by the # of months in the lease term. This gives me a "discounted Net effective rate" that I use as my main metric. The point of this is that it normalizes deal points that differ in lease term. For example, of course a 10 yr deal is going to have a higher NPV than a 2 yr deal, just because it's more total consideration. So to compare the two terms, I would divide the NPV's by 120 months and 24 months respectively.
Any issues you guys see with this approach? What are you guys using as your metrics to value and analyze deals?
Based on the most helpful WSO content, here are some insights and metrics that can be used to underwrite lease terms and analyze deals:
Spreadsheet Tracking:
Metrics for Valuation:
Normalization of Deal Points:
Discount Rate:
Additional Considerations:
Comparative Analysis:
By following these guidelines and metrics, you can effectively underwrite lease terms and analyze deals with a comprehensive and normalized approach.
Sources: Thinking like an Investor: The key financial metrics, Beginners Guide to Valuation and Metrics By Sector, Beginners Guide to Valuation and Metrics By Sector, https://www.wallstreetoasis.com/forum/private-equity/thinking-like-an-investor-the-key-financial-metrics?customgpt=1, Acquisitions Analyst Advice - New Analysts
Bump
Look into Net Equivalent Rent
Payback is huge for us
this^
I use NPV to compare multiple options.
After one has emerged as a front runner I look at the MIRR to understand the return. This allows us to be more realistic about the return due to the reinvestment of cashflow at a lower rate (high yield cash acct.) than the project given how unrealistic it is to be able to immediately reinvest that capital into another project with a similar return (which is what IRR assumes).
The discount rate typically varies for each opportunity depending on the risk premium (various risk factors) involved with the property with the risk free rate staying constant. I'd be wary of using 10% as the default for each of your options.
Other metrics:
Expense as a percent of gross income
Payback period
GRM
DCR
Equity Multiple
thoughts on discount rate being your in-place cash on cash, maybe with a small buffer?
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