apples-to-applesWe hear this all the time: “No two deals are alike.”

This is the reason that, in order to compare lease proposals side-by-side, adjustments need to be made in order to compare “apples-to-apples”.

For instance, one proposal may have a longer lease term than another, more square footage than another or greater incentives than another.

In order to adjust for all these variables, many users chose to compare each lease proposal’s NPV of the Total Cost / Year / RSF in order remove the impact these variables have on any financial analysis. (Learn why this calculation is so helpful.)

What about lease comps? What adjustments need to be made?

What if you have a lease comp in a specific building your client is considering. How do you effectively compare this comp to the landlord’s proposal? Must you compare the Base Rent, Escalations, Free Rent, Lease Structure, Lease Term, Improvement Allowance and Square Footage in order to understand whether or not the proposed deal is similar to the lease comp you have?

There’s actually a way to boil it all down to a single number. This number is commonly called “Effective Rent”.

Here’s how it works:

Effective Rent takes into consideration the rent paid for every year of the lease, then reduces this number by any landlord concessions such as free months and tenant improvement allowance.

Here’s the underlying formula –

(Total Rent – Free Rent – Landlord Concessions & Incentives) ÷ by the Rentable Square Feet  ÷ by the Lease Term

This means you don’t need to know the comp’s NPV or spend time comparing every little deal point. Instead, the Effective Rent formula does a great job of minimizing the impact of many of the most common variables (rent concessions, any improvement allowance or other cash incentives, the lease term and the square footage) which likely impacted the deal’s final rental rate.

Understanding this, the question becomes, “Where do I find lease comps which include this ‘Effective Rent’ calculation?!”

LeaseMatrix + CompStak = Easy lease proposal to lease comp comparisons

Using the CompStak Effective Rent line on every LeaseMatrix comparison report, you can compare this number to the Effective Rent line on any CompStak lease comp report. (If you haven’t heard of CompStak before, check them out now.)

NOTE: No data is ever shared between LeaseMatrix and CompStak. The Effective Rent calculations are included only as a convenient way to utilize these two services.

Let’s look at an example. Say you just received a proposal from Tysons Metro Center I and it looks something like this:

LeaseMatrix Effective Rent line

LeaseMatrix Effective Rent line

How does this compare to a similar deal recently inked by Tysons Wealth Advisors?

CompStak Comp

CompStak Comp Report

It looks like the $29.88 Effective Rent of the proposal is a little higher than the $29.37 Tyson’s Wealth Advisors just obtained.

This means it is worth digging into why this rate is higher; perhaps there is still room to negotiate. Identify where the differences are; was it more free rent, more TI or just a better credit tenant?

Understanding these differences will allow you to construct a more productive counter proposal for your client.

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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.

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