REPE asset management: How do you/institutional firms analyze leasing deals before executing?
For me, I'm using an Excel spreadsheet I created (and am building out further). It calculates a deal's Net Effective Rent based on square footage of the space, a base rent, escalations ($ or %), lease term, any free rent months/lease-up time, and TI work. It also gives the option of amortizing the TI work over the lease term at customizable interest rates, and captures what the Net Effective Rent would be in that case.

This is how we look at deals to see if they pencil, and as a way to compare different lease packages. But ultimately, we're also taking into account what our brokers and the market are saying.

I'm wondering how others are analyzing deals. How do you do it? How does institutional REPE do it? What metrics and levers help you decide? What software are you using?
[{"id": "ixt31u9", "text": "Great question. There are so many different ways each owners look at these analyses.", "replies": [], "depth": 1}, {"id": "ixtdtl2", "text": "I work on office deals and put lease analyses together in excel fairly often, especially on deals 7.5k SF+.\n\nIn addition to NER, I calculate the payback period of TI/LC + any other upfront costs or LL work. I include a NPV and a NPV/SF/year a, a net income and a net income/SF/year, and a simple value accretion analysis. Complicated deals I also plug the potential scenarios in Argus to determine the change in value, dropping the export file into an excel valuation model that we use.  My lease analysis takes the latest proposal and compares it to underwriting, the current budget, and what we have in our Argus model (if any of these assumptions are different).  Our typical levers to get a tenant to the NER they\u2019re looking for while maintaining the face rent we need typically come down to term, free rent, and TI.  Every deal is a little different, of course.\n\nHope this helps!", "replies": [{"id": "ixu6hy1", "text": "What is the pay back period you are seeing these days?  \n\nAlso, when should a landlord walk away when a tenant wants massive TI amortized into a lease?  Does that impact the cap rate at exit?  For example, if rents are 30nnn and 100 TI package Vs 60nnn and 180 TI package?  Despite the payback of that TI faster in the larger nnn, you are paying above market nnn which I feel like a capital markets broker or institutional buyer will discount the value?!\n\nI am in multifamily but occasionally come across mixed you with outsized ground floor retail.  Trying to be strategic not to get caught flat footed, thoughts?!", "replies": [{"id": "ixutx12", "text": "The answer to a lot of these questions are \u201cit depends.\u201d Market conditions and what we are competing with drive most of our decisions it feels like.\n\nPayback period for the past handful of deals I\u2019ve put an analysis together for were anywhere from 24-36 months. But that period can change depending on the market and whether or not we\u2019re competing with other owners that are offering higher TI packages.\n\nWe\u2019ll walk away from a deal if the NER is less than what we underwrote or budgeted, assuming the prospective tenant is unwilling to increase the rate or term. This decision may change if there has been little to no other leasing interest, occupancy has been low, or if we are competing with other buildings in our comp set that are offering better terms (indicating the market may be changing). We also factor into our decision the leasing parameters in our loan docs. As far as a deal when the tenant wants to amortize a large TI, I would think we would take that deal, assuming that the financials look good and we are adequately securitized for the TI we\u2019re putting up.\n\nI can\u2019t speak to how someone on the acquisitions side would underwrite a deal like that, but I would assume that it would be discounted to closer to a market rent. Again, depends on the term, credit, and type of tenant. I don\u2019t have a lot of retail experience but that\u2019s my gut feeling. Might make difference if it\u2019s a restaurant vs some other type of retail use.", "replies": [{"id": "ixvvg7o", "text": "Do you have an excel you can share of this. Very insightful!", "replies": [{"id": "ixwrawm", "text": "I can build you an excel model to do this but you would have to pay.  DM me if interested and we can work something out. \n\nI have developed complex waterfalls for joint ventures, analyzed leases, and had a solid understanding of CRE finance.", "replies": [], "depth": 5}], "depth": 4}, {"id": "ixwr3dv", "text": "Agreed with you on a lot of the it depends scenarios. Cycles impact caprates.  I recently had a scenario where we had the tenants, one wanted crazy TI and was willing to pay crazy high rents\u2026 our concern was that the market would inflate the exit on that anchor tenant which would screw up.  They also didn\u2019t want to guarantee the lease which was an even bigger concern! We passed on the deal.  Curious to see how other groups look at it and you seemed very informed.", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}]