Purpose
The purpose of this post is to outline the key functions of the New Lease Assumptions in CREModels Commercial Acquisition models. The New Lease Assumptions can be found in the TURNOVER ASSUMPTIONS section of the Commercial Acquisition Model in the CRE Suite. This tutorial will go over the inputs and outputs of the New Lease Assumptions section.
Overview
New Lease Assumptions are inputs used in order for the model to evaluate the expenses and incomes of different units of a building once the current term for a specific tenant is expired and the unit is vacant. The user will input data for different types of units (typically based on the square footage of units) and the model will use this information to adjust the annual cashflow based on expired tenants and what the income might look like if a tenant takes over the unit. In the model, any value in blue text with a blue-filled cell is an input and any value otherwise is an output. In New Lease Assumptions, every value is an input. Read further to see the details of how this section of the Commercial Acquisition model of the CRE Suite works!
Section 1
The first section of the New Lease Assumptions table provides inputs for the Name, Renewal Probability, and Rent for each New Lease Assumption. All inputs entered in the Name column of the New Lease Assumptions table will become visible within the dropdown under the Turnover Assumption column of the Rent Roll table. This is how each tenant will be assigned to a New Lease Assumption. The Renewal Probability input will be used to calculate the weighted average of all inputs that require new and renewal values (Rent, Tenant Improvements, Leasing Commissions, and Downtime) for pro forma projections. For example, as shown for the first New Lease Assumption in the image below, if the Renewal Probability entered is 65%, and Rent is $22.00 and $20.50 for New and Renewal, respectively, then the actual Rent calculated by the model will be: (65% x $20.50) + (35% x $22.00) = $21.03.
Then, the user must enter the expected PSF rent of each New Lease Assumption for both new tenants and renewals. This will be the initial Rent for the first year of the Lease (or first year of the renewal term, if applicable), and will be subject to Rent Increases as described in the following section.
Section 2
The second section of the New Lease Assumptions table provides inputs for Rent Increases and Reimbursement. The user must first select a Rent Incr Type: Market Inflation, Percentage, or $/SF. If Market Inflation is selected, the Rent will be increased annually by the Market Inflation (Annual) input entered in the table directly below the New Lease Assumptions table. If Percentage or $/SF is selected, a dropdown will become visible in the Rent Inc Frequency column to the right, and an input cell in the Rent Increase column will become available. The user has the option to choose whether Rent Increases will occur Annually or Every 5 yrs. Then, the user must enter the Rent Increase amount (either as a % or $/SF amount, as previously selected).
In addition to base rent information, the user also has the option to provide Reimbursement Structure information for New Lease Assumptions. In the Reimb. Structure column, the user has 5 options to select from in the dropdown: Continue Prior, Fixed, Pro Rata, Base Year, and Base Year +1. If Continue Prior is selected, new leases with this assumption will have the same Reimbursement Structure as entered for that tenant/space in the Rent Roll. If Fixed is selected, the user will then be able to enter a fixed $/SF/Yr amount, and the option of adding annual rent increases (as a %). If Pro Rata is selected, the new lease will pay its PRS (tenant SF/total property SF) of all operating expenses. If Base Year is selected, the tenant will begin reimbursing for operating expenses in the second year of its term, and the tenant will be paying its pro rata share of only the increase in operating expenses from year 1 to year 2 of its term. Base Year +1 operates in a similar way except that the tenant will begin reimbursing for operating expenses in the third year of its term, and the tenant will pay its pro rata share of the increase in operating expenses from year 2 to year 3 of its term.
Section 3
The final section of the New Lease Assumptions table gives the user the ability to add additional leasing terms, including Tenant Improvements, Leasing Commissions, Downtime, Rent Abatements, and Term length. For Tenant Improvements, Leasing Commissions, Downtime, and Rent Abatements, the user has the option to enter values for both new leases and renewals. Tenant Improvements are calculated from PSF inputs, and Leasing Commissions are calculated as a % of the total base rental value of the lease. Downtime will be factored in as the number of months the space is vacant before the new tenant begins occupying the space, or the renewing tenant continues to lease the space. Rent Abatements will be the number of months (commencing at the start of the term) in which the new or renewing tenant is granted free rent.
NOTE: Below New Lease Assumptions there is a small table with Market Inflation (Annual) and TI Growth. This table allows the user to input the expected Annual Market Inflation percentage and the TI Growth percentage that the user would like to place on the New Lease Assumptions. The Annual Market Inflation will inflate any New Lease Assumptions which are grown at Market Inflation, while the TI Growth uses this percentage to add growth in the on the TIs.
