Office Modeling Questions - Purchase Price and Leases
A couple questions came up while I was working on a case study. Curious to see how others would go about it.
1. Vacancy - I usually will input a percentage for vacancy, but with this office model, they indicated a percentage that indicates the likelihood of the lease being renewed. I was looking online, and saw that an option is doing something blended. Is that the best option?
2. Is the best way to determine the land purchase price through goal seek if the price isn't given to you?
TIA!
Monte Carlo sims are the best way, however your case study might give you indicators to the likelihood of renewal. Is it based purely on a ficticious company or is it based on an actual event? Granted the hindsight approach wont work here but if it based on real events you can do time based research to determine if the releasing probability is accurate or not.
I'll have to look into Monte Carlo! The case study just indicates 60% renewal possibility. I'm assuming the scenario isn't real since the assumptions are relatively vague and based on the research we need to do online.
Okay if the company is real and you are expected to do online research you should go the extra mile and do some research on the tenants at the time to see if you can get some gist of their viability for growth or contraction at the time.
Posted to the wrong level - moved comment
Leases are a blend of vacancy and renewals based on a renewal % after your expiration -- please see below on the methodology to model. There are certain options that you can model post expiration. What you see below is a market leasing assumption based on new/renewal probabilities. You can also assume renew tenants (would assume your renewal % is 100%) or new tenants (AKA a vacate and assumes your new % is 100%).
Downtime = X months = X Months * (1-renewal %)
Market Rent = New Rate / Renewal Rate = ((New Rate * (1-renewal %)) + (Renewal Rate * (renewal %))
Tenant Improvements = New TI / Renewal TI = ((New Rate * (1-renewal %)) + (Renewal Rate * (renewal %))
Free Rent = New Free Rent / Renewal Free Rent = ((New Rate * (1-renewal %)) + (Renewal Rate * (renewal %)) [FYI - can structure based on what's included to be abated whether recoveries, misc. rent, etc.]
Leasing Commissions = New Leasing Commissions / Renewal Leasing Commissions = ((New Rate * (1-renewal %)) + (Renewal Rate * (renewal %)) [FYI - can structure LC's in various ways through lease periods that step down and also based on net/mfg/gross rents]
*(1-renewal%) = new %
Thank you! This is super helpful.
Assume this is a single tenant building for simplicity sake. We'd underwrite a lease rollover like this:
Renewal probability: 60% (per your example)
Downtime: 10 months (time between the prior tenant vacating and the new tenant commencing; chose an arbitrary no. of months for the example but we have different figures for each of the sub-markets our assets are located in)
FMR: $10/sf
Property SF: 1,000
60% of 10 months is 6 months, so we'd underwrite 6 months of vacancy at fair market rent for the unit.
6 months at $10/sf = 12 months at $5/sf
$5/sf * 1,000 sf = $5,000
So in this super simple example, the 60% renewal probability would lead to an expected VCL of -$5,000. Hope this helps!
This definitely helps! In the case study, they said to assume multiple tenants, so in that case, would it make sense to just have separate lines for each tenant and separately for the probability of renewal?
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