- 1). Analyze the lease carefully. See if the lease truly carries a firm 15-year term without any option for the tenant to vacate the space, and see if the lease has escalators to protect the building's owner from future inflation. In addition, look to see what portion of the building's operating expenses the tenant will pay.
- 2). Research your market's valuation norms. Consider both capitalization rates as well as prices per square feet to get a sense of what buyers are paying for comparable buildings. If you do not want to license a third-party reporting source, call the assessor in your county. The assessor sets values for property tax purposes and should have a good sense of property valuation metrics. Alternately, you could ask a professional commercial real estate agent for help.
- 3). Determine a reasonable capitalization rate for your building both with and without the new tenant. The cap rate will vary based on your market, the size of your building, the type and quality of the building, the strength of the lease, and how much of the space the tenant will be occupying. Typically speaking, buildings with higher occupancies carry slightly higher capitalization rates relative to their actual income, since a new owner cannot create value by leasing out vacant space. Then again, their net operating incomes are higher, making them more valuable.
- 4). Calculate the building's net operating income with and without the new lease by subtracting the building's expenses from its income. When projecting the net operating income with the new lease, remember to adjust your expenses accordingly. Buildings with more income and more tenants typically have a higher management fee, since the rental collections are up. In addition, expenses tied to occupancy, such as water consumption or janitorial services, may go up.
- 5). Divide the pre-lease net operating income by the cap rate for the building in that state, then divide the post-lease net operating income by the cap rate for the building in that state. You will get two valuations.
- 6). Subtract the value of the building before the tenant from its value with the tenant. The product of that equation is the amount of value that has been added. To figure out how much you actually made, subtract what you spent to have the lease signed from the equity growth. Tenant acquisition expenditures can include leasing commissions and tenant improvement allowances, which is money that you spend to customize the space for the tenant.
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