LeaseMatrix makes it drop dead simple to compare an existing renewal option to a prevailing market rate.

This isn’t always a difficult task; if a tenant has a renewal option at \$32.00 per RSF and the market rent is \$28.00, you aren’t going to need a calculator to know that it’s worth going back to the landlord to negotiate the renewal.

But, what if the market rental rate is \$32.00 and the stated renewal is \$32.00. The tenant should just elect to mail in their renewal exercise notice? Not so fast…

In this low inflationary environment, it is a good idea to check what the escalation rate of their rent is during the renewal option period, as well.

Let’s look at an example. Let’s assume both the renewal option and the market rate are \$32.00 per RSF, but the renewal escalator is 3.0% annually and the prevailing market escalator is more like 2.0% annually. What would this look like?

Base Rent Schedule Prevailing Market Renewal Option Difference
Year 1 \$32.00 \$32.00 \$ –
Year 2 \$32.64 \$32.96 \$0.32
Year 3 \$33.29 \$33.95 \$0.66
Year 4 \$33.96 \$34.97 \$1.01
Year 5 \$34.64 \$36.02 \$1.38
Year 6 \$35.33 \$37.10 \$1.77
Avg. Base Rent \$33.64 \$34.50 \$0.85

If the tenant were to simply “mail in” their renewal notice, they’d be agreeing to an average base rent of \$0.85 per RSF more over the course of their 6 year lease renewal.

Let’s use LeaseMatrix to quantify this savings in gross dollars.

Base Rent Schedule Prevailing Market Renewal Option Difference
Year 1 \$1,078,800 \$1,078,800 \$ –
Year 2 \$1,101,050 \$1,109,050 \$8,000
Year 3 \$1,123,776 \$1,140,176 \$16,400
Year 4 \$1,146,989 \$1,172,204 \$25,215
Year 5 \$1,170,699 \$1,205,160 \$34,461
Year 6 \$1,194,917 \$1,239,071 \$44,155
Total Deal Cost \$6,816,231 \$6,944,462 \$128,231

This difference of 1.0% in the escalation factor equates to a six figure savings of \$128,231 over the extension’s 72 month term.

This type of comparison takes less than 5 minutes to perform using LeaseMatrix.

1. First, enter the terms of the renewal option as stated in the original lease.
2. Clone the terms of the renewal option (see how).
3. Edit the escalation factor, and any other prevailing market terms (see how).
4. Click save. Then from the Dashboard, click “View report” under the “Deal actions” menu.
5. Click the “Difference” tab on the Deal Comparison report (see how).

And voila, here’s the end result (view a live version here).

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## Lease vs Buy Analysis Template

This Excel model allows anyone to compare leasing vs owning office, retail or industrial space. Proven to be simple and easy to use, this template has underwritten billions of dollars of transactions.

### 2 Responses to Comparing a renewal option to “market”

1. Let’s not get carried away here! The rent is the least important factor in analyzing a deal. There are numerous other costs that have a significant effect. Taxes, CAM, Cap Ex, Concessions, Utilities.are only a few of the qualitative factors. Lots of quantitative factors as well. Base Rent is just one line in a complex decision table.

• LeaseMatrix says:

Jonathan,

Yep, this is a simple example which only covers the base rent (i.e. perhaps it is a Gross lease). Using LeaseMatrix, you can also include all of the other quantifiable variables you mention above – Taxes, CAM, Cap Ex, Concessions, Utilities – within this comparison. I hope you’ll give LeaseMatrix a shot to see just how easy it is.