Mechanism to discount TI's into Base Rent
Hi,

I am comparing a few different lease comps and i'm trying (more or less) to have apples vs. apples.

There are a few different methods of how to discount base rent in order to reflect the amount of TI's and free rent given to the tenant.

Any suggestions or thoughts on how to do this properly?

&amp;#x200B;

Many thanks!
[{"id": "g3gjfj6", "text": "I essentially think in terms of how long am I comfortable with recouping the money I am laying out/\"investing\" to get the tenant. So if TI/free rent equals $100,000, at X price per square foot for rent, how many months/years to get back the $100,000?\n\nDo I believe the tenant will be there for at least that long or longer? What situations does the property have in that time frame or do I have personally that would make it not good to take that amount of time to \"break even\"? This is the thought process I use.\n\nIf I'm more than fine with the time period, I know I have a little room to discount rent if that helps secure the deal.", "replies": [], "depth": 1}, {"id": "g3glyan", "text": "You can either divide it over the whole period - $100,000 over 60 months is $1,666.67 per month of repayment.\n\nOr you can do that, but also discount it to reflect the opportunity cost. If you do that, the value of the TI's is $1,515.15 in Year 1, assuming a 10% discount rate, and $1,034 in Year 5.\n\nDivide that by your square feet, and you'll have an idea. It is always best to do what your market does.", "replies": [], "depth": 1}, {"id": "g3gpnyl", "text": "You are trying to solve to the \u201cNet Effective Rent\u201d which is how to compare leases on an apples-to-apples basis.   In its simplest form (and from a landlords perspective), net effective rent subtracts the TI divided by the term from the base rent.   It\u2019s a good \u201cback of the envelope metric\u201d but it ignores a lot of factors including time value of money and delivery condition of the space.     \n\nThe right way is to look at the total cost of the lease including landlord work, TI, leasing commissions, and interest on capital, divided by the term and subtracted from the total rental charges.   This is more complicated and often leads to the same result as the simple metric but is \u201cmore correct\u201d.\n\nThe same logic holds from a tenant perspective.   Figure out what you will be spending upfront under each lease (assuming you will be borrowing these funds), apply the proper interest factor, divide by the term and add that to the base rent.   That should give you a level playing field.", "replies": [{"id": "g3h7ka0", "text": "&gt; delivery condition of the space\n\nThis a very important one. It's easy to look at the amount a landlord is willing to invest in building out a space, but what if they already did that work to a brand new spec suite for example? You aren't going to give value to those real dollars the landlord already spent? For that reason, it's best to look at real out of pocked dollars the tenant will be spending (and risk exposure to uncontrolled rising passthroughs) in one category and the condition, quality, buildout/TI, amenities and location in another.", "replies": [], "depth": 2}], "depth": 1}]