I am building a cash flow for an office property. The leases have a modified gross structure whereby the tenants reimburse certain operating expenses over a base year amount. I am wondering if it is standard practice to assume a base year reset for lease renewals, such that the reimbursement would go back to 0 upon renewal.
Thanks for any suggestions.
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Yes, at any expiration, your model should assume a reset to the base year (whether MFG or FSG). It's a bit tricky because you'd ideally run a renewal probability on a reset base year vs. recoverable amounts over the stop amount on a weighted average lease probability. Would be massively and overly complex so for the sake of conservatism always recommend resetting at natural LXD. If the tenant is exercising an option, that's a different story (you'd typically continue with the base year -- although there's an argument to be made that if you're bumping up to market their BY should reset but landlords typically continue with the historic stop). PM if you need more detail.
Agree with this. Part of marking tenants up to market with a renewal is typically resetting the base year.
Thanks, that makes sense. I am modeling this in Argus for a new office development (not yet delivered). Argus is defaulting to resetting the base years for renewals, so I just wanted to make sure that is appropriate.
You got it right, smeagol97. Keep that Argus functionality as it rolls to the market consistent. Just ensure that the MFG base year calc is commensurate in the MLAs. Good stuff! Gotta love Argus!
Depending on the market and class of the property, I've noticed a lot of office owners transitioning their gross leases to triple net leases at expiration.
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