Financial Analysis for Office Lease Transactions

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Well, you must have heard of a financial analysis in several instances. What is it? Financial Analysis is defined as a set of principles, procedures and tools that are used in organizing and interpretation of financial data

Make Perfect Lease Decisions

Making good decisions in real estate calls for proper use of economic models which are important tools that help improve the quality lease decision. The financial analysis involved in a lease transaction is not only a software program, but a product of formal training in finance. Ital so comes with years of experience in the commercial real estate field.

Decisions made by renewing a lease or relocating your office facilities requires a good financial analysis of the expected costs of the lease. This calls for technical expertise to analyses the costs associated with the decisions to be made. Similarly, the decision-making as to include comparison of Occupancy Costs of various alternatives. This move is important since it is clear that what appears to be the most economical deal in reality may not be the best alternative after assessing all the components of the transaction to be made. The concept of leasing office space is quite straight forward. However, commercial leases have a high financial structure that is complex. Well, let say you are a tenant. How do you determine the cost of such a lease? An ordinary office building lease include the following;

  • Fixed/ Escalated Base Rental Payments
  • Rent provisions in case there is an increase in operating expenses
  • Periods of reduced rent
  • Caps/ceilings on operating escalations in expenses
  • Contributions (loans) for leasehold improvements
  • Options such as expansion, renewal, contractions and cancellation
  • Parking fees
  • Electric charges
  • Cost to comply with government regulations (ADA)
  • Construction Management Fees
  • Interest fees for standard leasehold improvements

Comparison of Occupancy Costs

First step is to identify the occupancy costs linked with alternative leases and the underlying economics of the lease transaction proposed. The next step is the calculation of the projection of the total occupancy costs of the term of the lease as well as the annual basis. The estimated annual cash flows are subjected to discounted cash flow analysis (NPV) at the required discount rate (cost of capital). This accounts for the time value of money. From all of this, you get the Net Present Value of simply the price of the deal.

Occupancy keeps both the absolute and present values level led and analyzed in terms of rent able and usable square feet to help account for the difference in common area factors, as well as the efficiency of the space available.

Nowadays, technology have taken over with easy to implement software for financial analysis. The most popular ones being Leas Matrix, ProCalc, REI Wise and CoSta Lease Analysis.But remember, it is very important to understand the how this analysis works, and the impact of the overall cost of the cash flows when it comes to the art of negotiation.

Financial Analysis has been used as a negotiation tool which require a thorough understanding of the economics in the translation of this process. Well, I believe great deals are not only found but negotiated too. The skill in financial analysis allows you to measure the impact of various economics components on the value of the lease and quantify the effectiveness of the rental rates as indicated by the land lord. Viewing the lease in the landlord’s perspective will help to benchmark the landlords estimated return sandal some asure the impact of various changes in financial components of the lease. There is noway two lease transaction seven with identical rental rates yield similar returns to the landlord. The perfect structure is a “win-win” transaction without leaving any money on the negotiating table.

Posted on October 14, 2015 in Blog

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