A thorough financial analysis of direct and indirect costs is necessary to make an informed real estate decision. Reliable financial analysis requires both technical ability and years of experience. A successful analysis will yield the true occupancy cost of each alternative location for an ‘apples to apples’ comparison. The analysis should take into account all significant costs associated with a location and the lease contract, including:
Base rental payments, rent escalation & rent abatement
Operating expense pass-throughs
Tenant improvement expenses and allowances
Options (Renewal, Expansion, Contraction, Cancellation)
Add on factor (Rentable vs Usable Square Feet)
Relocation costs (moving & marketing expenses)
The first step of an analysis is to identify and understand the costs (and, if appropriate, income) associated with alternative locations under consideration. The next step is to project the total costs (and income) over the duration of the lease term or holding period on an annual basis. The projected cash flows are then discounted by the space user’s cost of capital to yield the net present value.
The absolute occupancy cost and the present value basis are effective tools in the comparison of location alternatives. Financial analysis is an important negotiation tool as well, as your analysis should assist you in determining the landlord’s bottom line and negotiating a deal that does not leave any money on the table.
Financial analysis is one of the most valuable services performed by a tenant representation broker. When interviewing potential brokers, firms should be sure that candidates have the technical skills necessary to perform a sound financial analysis.
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