How do we calculate “Proposal Effective Rent”?

The  Proposal Effective Rent  calculation represents an “annuitized” rate. It is the equal monthly payment (annuitized) over the lease term, that when present valued, would equal the present value of the lease. The reason for doing the calculation this way is to allow for an “apples to apples” comparison of leases that may have a different term.

If you just looked at the present value of a lease to see which one was less expensive, typically the lease with the shortest term would have the lowest PV, when in fact it could turn out to be more expensive when considering both the PV and the term of the lease.

Many clients will calculate an Effective Rental Rate by dividing the Present Value per square foot by the number of months in the lease term in their spreadsheets.  While this approach is simple and works in many instances, it does not work in all cases whereas the “annuitized” approach does.

The “annuitized” approach is widely adopted and taught at Universities and the CCIM Institute. An Excel workbook is available upon request explaining the Lease Analysis calculations for Present Value, Internal Rate of Return, Proposal Effective Rent, and Value of Concessions.

How do we calculate “Value of Concessions”?

Lease Analysis uses the same calculation methodology as it uses for Proposal Effective Rent. Included in the calculation are Free Rent and items input in the “Other/Concessions” section.

In calculating the IRR what does Lease Analysis use as the owner’s investment?

If the Starting Investment Basis and Residual Cap Rate are input in the Key Metrics Settings, they are used along with tenant improvements, commissions, and negative cash flow to calculate the Internal Rate of Return for the Owner Perspective. If the Starting Investment Basis and Residual Cap Rate are not input the calculation is based on the tenant improvements, commissions, and negative cash flow only.

Using the Starting Investment Basis and Residual Cap Rate is the same approach commonly used to calculate an IRR when purchasing a building. It is strongly suggested that these assumptions be entered to obtain a realistic IRR.

How can I get an “apples to apples” comparison of leases with different start dates?

In the Key Metrics Settings for the Owner Perspective there is an option to input a “Present Value/Investment Date” that is before the Lease Start Date. This allows you to compare leases with different begin dates on an “apples to apples” basis.

Example: An owner has two proposals for an available space. The first proposal is for a lease that would begin January 1, 2017. The second proposal would begin the lease September 1, 2016, but at a slightly lower rental rate. In order to compare the two potential leases on an “apples to apples” basis to find the best financial outcome the Present Value / Investment Date for the proposal that begins January 1, 2017 must be changed to Sept. 1, 2016.

By changing the Present Value/Investment Date to Sept. 1, 2016 the present value calculation will include the downtime if you wait until January to lease the space. The same time value of money consideration would also affect the calculation of the Internal Rate of Return.

Can I input my Rent Roll in Lease Analysis?

Lease Analysis is tool to analyze and compare single lease transactions and cannot produce a cash flow and present value for an entire building. Hopefully, in the near future we will have a tool that cannot analyze data at the property level.

How can I see Metrics on a $/RSF basis, but not $USF?

If you input a Core Factor when inputting the Rentable SF in the General section you will get data on both a $/RSF basis and a $/USF basis. If you do not want data on a $/USF basis do not input a Core Factor

How is the Core Factor (sometimes called the “Add-on factor”) calculated?

Usable SF = Rentable SF / (1+Core Factor)

 Core Factor = Rentable SF / (Usable SF-1)

See CoStar Glossary for further details.

Can you input square footage that varies over the lease term?

In the General section, click on the drop down for “Rentable SF” and select “Area r”.

Where do I indicate I want to input Base Rent as a monthly rate ($ / RSF) instead of an annual rate ($ / RSF)?

“Base Rent Settings” in the Rent section.

How do you include Recoveries in Free Rent?

If Recoveries are included in Free Rent depends on the answer to “During Free Rent“ in the Recoveries section, either “Paid” or “Not Paid”.  When Recoveries are “Not Paid” during the Free Rent period clients will sometimes refer to this as “Gross Free Rent” and when recoveries are “Paid” as “Net Free Rent”.

Note: When the Service Type is “Triple Net” (“Net” in Canada) the “Expenses paid directly to landlord” checkbox must be checked for the “During Free Rent” prompt to be available.

Can you input a Global Inflation Rate that varies over the lease term?

In the Other section, click on the drop down for “Global Inflation” and select “% Varies”.

Where do I input a cost that is not specifically identified in Lease Analysis?

Input Item                                                                    Lease Analysis Section

Operating Expenses                                                    Recoveries

Tenant Improvements                                     Capital/Tenant Improvements

Landlord TI Allowance                                                            Capital/Tenant Improvements

Commissions                                                               Capital/Commissions

Parking                                                                        Other/Parking

Storage                                                                        Other/Storage

Other Rent (Signage, Antennae, etc)                          Other/Other Rent

Landlord Concessions                                                 Other/Concessions

Any other cost should be input in the Other/Other Cost section. This might be moving costs, furniture costs, security deposit, early termination fee, ….

Important: Other/Other Costs are specific to the Perspective in which they are entered. If you input a cost when you are in the Tenant Perspective it is consider a cost to the tenant. If you input a cost when you are in the Owner Perspective it is considered a cost to the owner.

Are you able to input a cost that varies or only occurs over a portion of the lease term?

Data can be input on a month by month basis using the “r” option. This type of data entry is available as an input option in the following sections:

Input Section                                                               Data Field Entered

General                                                                       Rentable SF

Percentage Rent                                                         Sales

                                                                                    Breakpoint

Recoveries                                                                  Operating Expenses

Other/Parking                                                             Spaces

                                                                                    Amount

Other/Storage                                                             Area

                                                                                    Amount

Other/Other Rent                                                        Amount

Other/Other Costs                                                      Amount

Other/Concessions                                                     Amount

Can you have fee that is a % of Base Rent?

Currently, Lease Analysis does not have an option for calculating a cost as a % of Base Rent. If you know the “Amount” of the cost you can input it in the Other/Other Costs section.

Does Lease Analysis show detailed Recovery calculations?

Yes, see the Recovery Audit report. It is an invaluable tool for checking the recovery calculations. It can be accessed directly from the Recoveries section or in the Report tab.

If you find the recoveries are not being calculated as you would like it might be because of the “Recovery and Expense Inflation Year End” which defaults to December. If a lease begins in a month other than January the expenses increase and a base year stop is still calculated based on a December year end. You can change the “Recovery and Expense Inflation Year End” to match the lease year end on the Recovery detail screen.

Note: There is also a Percentage Rent Audit report which details those calculations.

How do I get the $/RSF to show on the Cash Flow?

Both the Cash Flow tab and the Reports tab have “Setting” options that can be accessed by clicking on the “Settings” icon that is located on the right side of the screen when you are in those tabs. Besides requesting the $/RSF to appear on the Cash Flow you can also include the $/USF, choose a Display Type (Lease, Fiscal, or Calendar year), the Fiscal Year End, and whether to view Monthly or Yearly.

How can I abate the Parking expense in the 1^st year of the lease?

Input the number of parking spaces as zero in the first year of the lease using the “r” input option.

How to I input a Commissions % that varies over the lease term?

In the Commissions section click on the drop down for “%” and select the “% r” option. The Commissions section also has an option for when Commissions are paid.

Can you print the “Sensitivity” grid?

No

Do I have to do anything to save my data input?

No, the data is saved automatically as it is input.

Can you share models with others so that they can edit the data?

You can currently share models with other CoStar subscribers and eventually with non-CoStar subscribers. See the on-line “Help” within Lease Analysis for more information.

Can you export the Lease Analysis data to Excel?

You can export the reports to Excel, however the formulas are not included. You can also export to Word or create PDF files.

Can you send Lease Analysis reports via an email link?

No

What is the quickest way to make a second version of a model in order to make changes while leaving the original model intact?

You can “Duplicate” a model from within the Lease Modeling screen “Menu” or on the Model List page within the Model “Utility” options.

Does Lease Analysis have a report that will compare two lease proposals and show the differences?

Yes. In the Report tab there are reports that compare two lease proposals input data and output results and show the differences. In order to generate the “Cash Flow Comparison” and “Input Detail Comparison” reports, you must select the model you wish to compare to the current model, in the “Report Settings”.

Note: You can also get the Cash Flow Comparison report for two models that are in the “Share History”.

Does information I enter in Lease Analysis become public information available to other CoStar subscribers?

No, your data is strictly confidential.

How do I check Lease Analysis Present Value/IRR calculations in Excel?

An Excel workbook is available upon request explaining the Lease Analysis calculations for Present Value, Internal Rate of Return, Proposal Effective Rent, and Value of Concessions.