What are the steps to conduct financial analysis for a commercial lease?

1 Calculate the rent

The first step is to calculate the rent for each lease option. Rent can be expressed as a base rent per square foot, a percentage of sales, or a combination of both. You also need to consider any rent escalations, rent abatements, or rent concessions that may affect the rent amount over time. To compare different lease options, you need to calculate the net present value (NPV) of the rent payments, which is the sum of the discounted future rent payments.

2 Calculate the operating expenses

The second step is to calculate the operating expenses for each lease option. Operating expenses are the costs of maintaining and running the property, such as taxes, insurance, utilities, repairs, and maintenance. Depending on the type of lease, the tenant or the landlord may be responsible for paying some or all of the operating expenses. The most common types of leases are gross leases, net leases, and modified gross leases. To compare different lease options, you need to calculate the NPV of the operating expenses, which is the sum of the discounted future operating expenses.

3 Calculate the income tax

The third step is to calculate the income tax for each lease option. Income tax is the tax that the tenant or the landlord pays on the income generated by the property. The income tax rate depends on the tax status and jurisdiction of the tenant or the landlord. The income tax also depends on the depreciation and amortization of the property and the leasehold improvements, which are the costs of making changes to the property to suit the tenant's needs. To compare different lease options, you need to calculate the NPV of the income tax, which is the sum of the discounted future income tax payments.

4 Calculate the cash flow

The fourth step is to calculate the cash flow for each lease option. Cash flow is the difference between the income and the expenses of the property. Cash flow can be positive or negative, depending on whether the income exceeds or falls short of the expenses. To compare different lease options, you need to calculate the NPV of the cash flow, which is the sum of the discounted future cash flow amounts.

5 Calculate the return on investment

The fifth step is to calculate the return on investment (ROI) for each lease option. ROI is the ratio of the profit or loss from the property to the initial investment. The initial investment can include the security deposit, the leasehold improvements, and any other upfront costs. To compare different lease options, you need to calculate the ROI percentage, which is the NPV of the cash flow divided by the initial investment.

6 Calculate the break-even point

The sixth step is to calculate the break-even point for each lease option. The break-even point is the point at which the income and the expenses of the property are equal. The break-even point can be expressed as a number of months or years, or as a percentage of sales or occupancy. To compare different lease options, you need to calculate the break-even point using the cash flow amounts and the initial investment.

7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?