MARKET LEASING PROFILE SECTION
Welcome to this video. In this video, I am going to cover the market leasing profile section in the ARGUS Excel Model. Market Leasing Profile is a set of leasing assumptions I define to predict what will happen after the existing leases expire. There are two possibilities after the lease expiration: the first one is the tenant renews the lease and stays. The other possibility is the current tenant leaves, and a new tenant comes in, which is also called “rollover”. The market leasing profile considers both possibilities.
Benefits of Market Leasing Profile
Rather than defining future leasing assumptions tenant by tenant, I can create three types of leasing profiles that can be assigned to individual tenants. Three benefits are coming with this function. First, it is a time-saver. I can avoid creating the same set of leasing assumptions repetitively for different tenants. Secondly, I can generalize future leasing assumptions into three types: major tenant, medium tenant, and minor tenant, which simplifies the underwriting. That being said, this model still allows me to make different assumptions on each tenant and this topic will be covered later in another video. Third, I can review all future leasing assumptions in just three rows and compare them easily.
I will start with the definition of different types of tenants. I will say the minor tenant is a tenant that occupies a space of less than 3,000 square feet. The medium tenant occupies a space of greater than 3,000 square feet and less than 10,000 square feet. Naturally, the major tenant is a tenant that occupies a space of greater than 10,000 square feet. I will also note that these inputs are optional, which means they are not part of the calculation and they only provide information for someone looking at this model. The category names are also information-based.
Let’s move to the market rent input. I will input the current market rent for different types of tenants and these rent rates will be inflated by the Annual Market Rent Growth in the Other Assumptions Section, which I will cover later in another video. As a rule of thumb, the market rent increases every year with the inflation. A lease expires in 2020 will renew at a market rent of 2020 and a lease expires in 2021 will renew at the 2021 market rent in the backend of this model calculation. The difference is (that) 2021 market rent is inflated by the Annual Market Rent Growth factor one more time than 2020 market rent. This functionality captures the inflation in the economy and results in a more accurate financial forecast. In the real world, I would need to do my market research to see what comparable properties are charging their tenants to come up with the market rent. I will simply input an annual market rent of 19 dollars per square foot for minor tenants. Generally speaking, the larger the space the tenant occupies, the less expensive the per square foot rent will be. I will input 18 dollars for the medium tenant and 17 dollars for the major tenant.
Let’s move onto lease term fields. I will input 84 months for major tenants’ lease term and 60 months for both medium and minor tenants.
Let’s jump over to the Renewal Probability. I will say for all types of tenants. The probability for the existing tenant to renew the leases is 65%, which means there is a 35% probability for rollovers. Once the tenant leaves, it takes time to get a new tenant in and the space will stay empty for a while so I will say 12 months downtime for major tenants, 6 months for medium tenants and 4 months for minor tenants. Generally speaking, the large spaces usually take more time to lease than the small ones.
Owners typically will engage a broker to help them with the leasing activities and the leasing commission (“LC”) is calculated as a percentage of total rental payment over the life of the lease. For example, a broker helps to secure a lease of 5 years and the annual rent is $100,000, so the lifetime payment of the tenant is 5 * 100,000, which equals to $500,000. The leasing commission is 500,000 times 3% equals 15,000. In my case, I will input 6% for new tenants and 3% for renewal tenants. If the owner takes care of the leasing efforts by themselves, I could fill in 0% for both new and renewal tenants.
After the tenant moves in or renews, the owner will offer an allowance to configure the space for the needs of the tenant. This allowance is also called “Tenant Improvement”. The tenant would pay any amount over the allowance out of its own pocket for its configuration. For the major tenant, I will say tenant improvement is $35 per square foot for new tenants and $15 for renewal tenants as the renewal tenants tend to make minor changes to their existing space. For medium tenants, $25 for new tenants and $10 for renewal tenants. For minor tenant, $15 for new tenant and $5 for renewal tenant.
Another incentive that the owner offers is free rent. For major tenant, I will input 5 months free rent for new tenants and 5 months for renewal tenants; For medium tenant, I will input 3 months for new tenants and 2 months for renewal tenants; For minor tenant, 2 months for new tenants and 0 month for renewal tenants.
For Reimbursement method, I will fill in the triple net for all types of tenants. If I choose the fixed amount, I will also fill in the annual fixed amount in the next column.
Let’s scroll back to the left. I can see a Tenant Improvement of $22. This is the weighted average of the new tenant’s and renewal tenant’s Tenant Improvement I just input. And the weight is the renewal probability of 65% as this formula shows. The same goes for the free rent period and the leasing commission. These weighted averages will directly go into the calculation in this model.
Free Rent Outside Lease
There is a field called Free Rent Outside Lease. If I select Yes, then the major tenant is going to stay for 89 months in the next lease term, equals to 84 plus 5. If I select No, then the major tenant is going to stay for 84 months in the next lease term, because the free rent period is included in the lease term. In other words, the tenant is paying rent for 79 months out of the 84 months. I am going to select No for all three types of tenants.
I complete the market leasing profile section in the ARGUS Excel Model. Thanks for watching this video. I will see you in the next one.