Leasing a Property - Financial Analysis
The most appropriate financial analysis to use when considering leasing a property is Net Present Value (NPV) analysis. This analysis is used to establish and compare whole of lease term costs including annual rental payments, property outgoings and fit-out costs. Also, it includes any rental incentives, or rent free period being offered by the Landlord.
Primarily, NPV modelling is ideal to compare the costs on an annual cashflow basis attributed to a property. Each cost component is discounted back to a Present Value (PV) over the life of a proposed lease.
The key is to identify expected cashflows associated with a renting a property. The primary cash outflows for a Lessee (tenant) are the rent, outgoings, carparking, fitout costs and other sundry costs, such as cleaning and make good. A possible inflow for a tenant is an incentive paid, or rent free agreed by the Lessor (property owner) to secure the tenant.
The main principle behind NPV analysis, is the value of a cashflow, discounted or reduced, for the purpose of timing. This is primarily attributed to the opportunity cost of money, with a PV factor applied to the cashflows, under the premises that a Dollar today holds more value than a Dollar received at some time in the future. For a tenant, the NPV is the total discounted cash outflows and inflows, over the term of a proposed lease commitment for a premises.
Accurately estimating the cashflows from a business, budgeting and operational perspective is essential, when comparing NPV's between different properties (or options) under consideration.
Peter Flynn - Director Intercommercial Property Group
Intercommercial Property Group is an independent consulting firm providing clients with the knowledge and confidence to make an informed decision.