Analysis / Terminology

Question 1

What does a rent free period reflect?

Answer 1

Something to incentivise a tenant to take a lease for a property. It if often in exchange for

1. Time to fit out the premises
2. Agreement by the tenant to carry out repairs or improve the property
3. Acceptance of specific liabilities under the lease
4. Commitment to pay a higher rent

Question 2

What incentives are you aware of?

Answer 2

Rent free periods, stepped rents, capital contributions

Question 3

What is a headline rent?

Answer 3

The contractual amount stated in the lease, disregarding tenant incentives

Question 4

What is a net effective rent?

Answer 4

The average rent receivable after deducting rent incentives from the value of the headline rent over the term certain (excluding a rent free period for a fit out specific to the tenant).

Question 5

How would you typically find the net effective rent?

Answer 5

I would assess the value of the incentive package deduct any incentive attributable to a tenants fit out.

I would typically use the straight line approach and deduct the rent incentive from the value of the headline rent over the term certain. i.e. to a break clause, rent review or end of the lease.

Question 6

How else could you approach the net effective rent?

Answer 6

1. You could use a time weighted approach to take into account that money discounts over a period of time.

Capitalise the head rent at a discount rate for the term certain, but defer it for the for the duration of the rent incentive. You would then divide the present value of the headline rent at the discount rate for the duration of the term certain.

2. Use a discounted cashflow approach to take into account rental growth.

Question 7

How would you treat a rent free period that had been granted for the tenants fit out when assessing the Net Effective Rent?

Answer 7

I would exclude it from my calculations. So for example if the tenant received a rent free period of 6 months and 2 months were attributable to a tenants fit out, I would deduct 4 months from the value of the headline rent over the term certain.

Question 8

How would you treat a rent free period that had been granted for the tenants fit out when assessing the Net Effective Rent?

Answer 8

I would exclude it from my calculations. So for example if the tenant received a rent free period of 6 months and 2 months were attributable to a tenants fit out, I would deduct 4 months from the value of the headline rent over the term certain.

Question 9

What is present value?

Answer 9

The value of money at a future date on the basis that the value on money discounts over a period of time.

Question 10

What is a YP and what does it show?

Answer 10

1. It is a representation of the number of years for the income to repay the expenditure incurred from the investment.
2. It is used to work out the value of an income flow today on the basis that real money discounts over a period of time.