Leasing the right commercial property can make or break a business, because there are many variables at play, including a lease analysis. You don’t want to end up paying too much for leasing a building in an area of town that makes turning a profit more challenging, because these factors will hinder your bottom line.
It’s also worth noting that the least expensive building isn’t always the best one to meet your needs, because it could have other features that limit revenue. Taking every aspect into consideration is essential when leasing a property that best meets your needs.
There’s some math involved when comparing properties and making the best decision for your company. This guide will take you through the benefits of completing a comparative lease analysis before leasing a commercial property and let you know what your research should cover.
Comparative Lease Analysis, Explained
A comparative lease analysis involves examining the detailed costs of two or more leases. Companies that are changing locations, expanding, or opening up their first office should complete a breakdown of each potential contract to ensure they end up at a site that will make them the most money.
Multiple properties could have similar rental rates, but the company could end up paying varying amounts based on other variables. A lease analysis will uncover cash flows and discount them into the present time, ensuring the company gets the best possible deal.
Factors to Consider Before Beginning a Comparative Lease Analysis
It’s a good idea to dig into some other variables that could influence the value a particular property has for your organization before starting a lease analysis. These variables determine whether buildings are suitable to make a good comparison, because properties with significant differences can be challenging to examine.
Completing a practical comparison between two properties relies on finding buildings with similar physical characteristics. These similarities should go beyond size; the layout, age, and class of property are factors that will influence how much you pay. It’s nearly impossible to compare a brand new luxury office in a downtown high rise to one in a strip mall down the street, so taking these factors into account is a good starting point.
It should go without saying that the building’s location is another factor to keep in mind before including it in a comparison. Comparing a building in downtown D.C. with one in Bethesda won’t provide an accurate analysis, because the different locations have a different value attached to them. You could, however, compare a building in Logan Circle with the downtown property, because they’re locationally similar.
A final aspect to look at before beginning a comparative analysis is the income each property has the potential to generate. Businesses reliant on a downtown location because it’s the only place they can generate income will need to bite the bullet and pay up if they want their business to survive. There are situations, though, in which making a little less income but realizing significant savings on your lease could be a net positive.
Identifying commercial properties that are similar enough to compare ensures your analysis is accurate and valuable. Taking these steps puts you on the right track by ensuring the things you’re attempting to compare are close enough to make the work valid.
5 Steps for Completing Your Lease Analysis
A comparative lease analysis digs deep into the numbers to show you if your rental agreement will end up benefiting you at a particular price point. This process is incredibly valuable when comparing two similar-sized buildings, because it offers insight into the money you stand to make. Here are the steps to put one together:
1. Time Value of Money
The first thing to consider when analyzing a lease agreement is the time value of money. The gist is that a dollar today is worth more than a dollar in the future, because you can make interest on the money you have in hand. Lease cash flow exists in the future, so your analysis will have to include a discount rate to make up for the time value of money.
2. Present Value
Your calculations will use the time value of money to create the present value of the money you’re using to lease the property. This number gives greater insight into what the lease is actually costing you by factoring in how much you’re missing out on interest if you were to invest the money.
3. Net Effective Rent
You determine the net effective rent of your lease by using its present value. This number comes by dividing the gross rent at the current value by the number of months on the lease. Any concessions or free months you will receive in negotiations will factor into this equation, maximizing its accuracy.
4. Net Present Value
You’ll need to identify all the lease agreement’s cash flows to identify its net present value. This number takes time value and net effective rent into account while also including calculations on how much you stand to make through this change.
5. Effective Rent
The final step is figuring out the effective rent rate by converting the net present value into an equivalent level annuity.
Completing all these steps is a lot of work. Your lease analysis is worth it, though, because without one it’s difficult to compare the costs of each potential contract to determine which is more suitable financially. It’s often best to receive professional assistance throughout this process, because the calculation can be quite complex.
Get the Professional Assistance You Need
There are significant challenges associated with putting a comparative lease analysis together, because you’ll need to gather a lot of information and crunch the numbers. The job is difficult for less experienced individuals, but there is help available if you need it.
The Genau Group provides full tenant representation for companies looking for space in the Washington, D.C., area. Our team can handle your lease analysis while also helping you find the perfect space in the ideal location. Contact our experienced team to learn more about our tenant representation services.