Break-Even Analysis on Leases
Does anyone have any experience doing a break-even analysis between two separate tenants for almost the same space?

Tenant A wants to lease 3,830 sq. ft. at $115 psf, with a $5 increase in years 4 and 8 of the lease. We’re providing $100 psf in allowance and 4.5% in commission. 

Tenant B wants to lease 10,000 sq. ft. at $80 psf, with a $10 increase in years 3, 5, and 7 of the lease. We will also be providing $100 psf in allowance and 4.5% in commission. 

Landlord Work is the same for both, which is $4 mil. Both tenants are looking at the same space, but Tenant A wants to lease a smaller portion of it. 

The question comes down to what rents and allowance can we provide to both tenants in order to see when we break-even. I’ve done a present value on both deals and then tried using the Solver add-in excel, but it seems like I’m not doing it correctly.
[{"id": "fvvrs9a", "text": "Sign the lease for the tenant who wants more space....\nThe huge TI for the smaller tenant probably makes that offer totally sideways. You have to amortize that over the length of the term.\n\nEdit: by TI, I mean Landlords work. Is the $4M construction cost?", "replies": [{"id": "fvwo5x2", "text": "Yeah, it\u2019s pretty much all base building improvements", "replies": [], "depth": 2}], "depth": 1}, {"id": "fvvryo2", "text": "Why would you be communicating anything about the 3rd party offer to the other prospective tenant?", "replies": [{"id": "fvw2xn9", "text": "We wouldn\u2019t be communicating anything to either of them", "replies": [{"id": "fvwlnvf", "text": "I've misread your question. And trying to re-interpret it.\n\nWhen you say 'break even' you mean on the cost incurred to the landlord right including the commission, $4m landlords work and the $100psf allowance right? \n\nAnd by how long and at what rent do you mean on years? Or would you prefer to have that set, eg '6 years', and for the rent schedule to be calculated from that duration?\n\nLastly, do you want to apply a discount rate for time value of money, if so what rate?", "replies": [{"id": "fvwo4cv", "text": "No worries. We\u2019re trying to figure out what rent and allowance we can achieve where either deal makes sense. Similar to a crossover rate. Both would be a 10-year term. \n\nWe would be using our current discount rate for the asset. I believe it\u2019s 6.5%\n\nI feel like having two variables makes this a little more challenging to solve, or maybe I\u2019m missing something.", "replies": [{"id": "fvxd5gw", "text": "Ok then. If the terms are the same length ignore the building upgrade, ignore the $psf allowance as these are currently equivalent on a psf basis and the $4M is a sunk cost anyway. While we are at it, let's ignore the comission because this is really just approximate anyway, it does matter though.\n\nSo to solve for this, you need to compare the prospect of a third tenant who will rent the remaining space alongside tenant A (the ~6170sf remaining). What will that rent for, and when will it rent? There is absolutely a large element of risk to that (bird in hand), but you need that detail. As a result of the risk you need to be conservative, and hopefully you know your market and can make the right assumptions.\n\nFor the purpose of my reply, assume it will take 6 months to rent the remaining 6170 square feet for $80psf annually increasing by 2% per year to tenant C. Rent for tenant A and tenant B starts in 12 months. Tenant C starts in 18 months. Payments are annual, in advance for simplicity, with a 6.5% annual discount rate. A and B are now actually equivalent. NPV for A + C is $1000 better than tenant B alone (equivalent). Let me know if you want the spreadsheet.\n\nIf you think you can rent the remainder for more rent than $80, and/or if you think you can rent that space in less than 6 months then this option becomes more attractive. Your mileage will vary because COVID.\n\nThere are other considerations, does the asset manager want more tenants for diversified risk, with potentially higher revenue with demised space, or maybe (likely) they are already diversified and don't get much value in diversification from a demised space. Maybe there is a ton of other space that needs to be rented in the same development?\n\n---BACK TO YOUR QUESTION---\n\nGiven what I wrote, you could use assumptions about the third tenant to determine what you want to extend to tenant A as an inducement, or what you want to counter with tenant B as an increase in rent. But from where I stand, I think the pragmatic advice seems to be take the deal with the larger tenant B.\n\nEdit:\nI've left out a few assumptions, namely what happens after year 10.my analysis basically ends at year 10, even for tenant C who's hypothetical lease ends at 10 years plus 6 months. If the investor is going to sell, having higher rents is possibly going to increase the sales price. I've for this analysis just assumed the investor will continue to hold and that the spaces will be renewed and that the sales price is basically not a factor (although it might be). Anyway, we don't know those terms but if we assume the investor holds the property, and the tenants renew I think my analysis is sound.\n\nEdit:2\n\nI also didn't factor in the landlord having to pay the operating expenses for the period where you are not getting rent from Tenant C, don't know what the operating costs are for your project, but this puts things in favor of tenant B", "replies": [{"id": "fwic3w2", "text": "This is very helpful! I just got back around to looking at this problem and I agree that we need to include the remaining space. It looks like 3600 sq ft is going to be leased up along with tenant a and the remainder of that is going to be used as bike storage. If you still don\u2019t mind sharing that spreadsheet, I\u2019d love to take a look at it", "replies": [{"id": "fwjv50s", "text": "Hey you are welcome, I DM'd you the spreadsheet", "replies": [], "depth": 7}], "depth": 6}], "depth": 5}, {"id": "fw4ju3p", "text": "Your discount rate should be equal to or greater than the projects unlevered IRR or else the project isn\u2019t accretive to the overall deal", "replies": [], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "fvw6ml6", "text": "Give me 10% and I\u2019ll give you an answer", "replies": [], "depth": 1}, {"id": "fvwb80z", "text": "Run a net effective rent analysis (NER) which it sounds like you\u2019ve done (PV). Also important to consider cash flow diversification of the asset, tenant credit quality and lease up velocity of remaining space in scenario A. \n\nSeems like B is the best solution.", "replies": [], "depth": 1}, {"id": "fvwkpq5", "text": "How can 3830 SF and 10000 SF be almost the same space?", "replies": [], "depth": 1}]