Comparative Lease Analysis for the Corporation

Article excerpt

Comparative Lease Analysis for the Corporation

To a manager responsible for locating a leased building and justifying its economic feasibility, the job of lease analysis can be demanding and time consuming. The difficult process of comparing leased facilities involves taking into account complicated variables such as methods of measuring floor size and efficiencies, formulas for escalating rent and operating costs, and methods of evaluating tenant improvements and amenities.

To make matters worse, projecting a lease's economic costs over a five to ten year period, considering all the possible "what if" scenarios, can be very tedious and frustrating.

Fortunately, the personal computer, with its powerful "number crunching" electronic spreadsheets, greatly increases the productivity of the real estate analyst. At Apple Computer, Inc., as in real estate departments throughout corporate America, the personal computer has become a standard tool, facilitating the creative manipulation of the many variables involved in lease negotiations and greatly increasing the property manager's ability to make decisions.

It is the intent of this article to demonstrate how an electronic spreadsheet, such as Microsoft's Excel, can assist in the evaluation and negotiation of lease contracts. In replicating the spreadsheet formulas in this article, managers will gain proficiency with spreadsheet formats and will acquire experience in the design and modification of custom templates for the specific purpose of lease analysis.

The reason for using Excel, or any other spreadsheet program, in projecting lease costs is to develop "what if" strategies - to modify assumptions and measure their effects on the bottom line. A manager who can quantitatively calculate the effects of different variables on a lease will be able to determine their effect on rent, and thereby will be able to negotiate the best possible lease.

Spreadsheet design

The accompanying spreadsheet was designed for ease of use and interpretation by management. The results could be used as supporting documentation in comparing proposed rent schedules and in negotiating specific rates.

Data for each of the three buildings is input to the appropriate field on the Summary/Input Table (Figure 1). At any time, different financial criteria can be substituted to determine their effect on each property's rental rate.

The financial variables which may be manipulated in the course of the analysis include the following: the security deposit, building size, rentable area and required usable area, tenant improvement budget, as well as the building's improvement allowance, lease term, lease initiation date, date of rent commencement, free rent, rental rate, timing of rent escalations, and the discount rate.

As the analyst changes the input data in Figure 1, the subsequent tables (Figures 2-4) automatically recalculate.

The Summary/Input Table allows for easy modification of the input data. In addition to its input function, this table summarizes the input criteria and presents the conclusions of the 10-year analysis. The analyst may view the Conclusion section of Figure One to determine the net present value (NPV) of future rent flows, the NPV per square foot, and the building's load factor and employee density per usable area.

Variables in lease analysis

Three variables affecting the lease analysis are the building size, the rentable area, and the usable area of the premises. It is important for an analyst to distinguish clearly between usable square feet and rentable square feet. Typically building rent is quoted on a rentable basis and tenant improvement allowances on a usable basis. Yet one cannot assume that this is the standard practice of all managers across the country, so this point must be clarified.

The standard improvement allowance is the dollar allowance provided by the owner for the construction of the tenant's interior improvements, while the above standard allowance is the amount provided by the owner as a concession to induce the tenant to lease the facility. …