Leasing Rules
How to forecast how spaces are used when uses end
Leasing rules are the expected rates, terms and conditions that future leasing activity is expected to follow. As tenant turnover creates vacancies, the leasing rules forcast replacement uses like the popular video game Tetris – with projected leases dropping down from the top of the screen to fill in the gaps caused by vacancies.
In any given period of time, the existing and forecasted lease revenues can be summed together to create the projected cashflows of a property.
Leasing rules are a key element to building a financial model. Without them, once contracted leases expire, they will remain vacant for the remainder of the analysis period.
Defining a leasing rule
A leasing rule should be defined to represent the market use of each area you earn revenue. They should reflect the types of revenues found in the property's current lease agreements and reflect the market rents for the area assuming the space was leased immediately.
Leasing rule name
The name as it will appear for selection in the model and reports. It must be unique and should be short and descriptive, ideally describing its use case.
Examples include "Market Conditions," "Small Offices" or "Exterior Access."
Leasing rule type
Defines the type of use that will be forecast into a space during periods it is contractually unoccupied.
- Traditional Lease
- Commercial leases typical in the office and industrial subsector.
- Retail Lease
- Similar to commercial leases with the addition of percentage rent paid on a percentage of the tenant's sales.
Leasing rule description
An optional, longer description of the leasing rule to further clarify its use or the reference of its parameters.
For example, "Smaller offices that share common elements with other offices on their floor and carry higher rent."
Market parameters
A leasing rule is made up market parameters that are used to forecast a lease agreement's details when a space becomes unoccupied. These parameters are used to determine the performance of a usage compared to the market. These values are used to calculate the market rent, potential base rent and absorption and turnover vacancy, appearing on many reports.
These parameters may be the same or unique depending on if the forecasted tenant renews their lease or a new lease is forecast. This is commonly used to apply reduced rates and leasing costs to renewals, reflecting the property owner's savings. Selecting 'Use distinct market parameters' when enable both to be input separately. The new lease parameters are always chosen for market calculations when distinct parameters are input for both new and renewed leases.
Time to lease
The amount of time the space will remain vacant before a new lease will be forecasted. It is recommended to align the lease start to the first of a period to produce more realistic cashflows.
- Years / Months
- The duration in years or months as a decimal. A non-integer value will cause the calculated date to be divided using the Actual/Actual day-count convention.
- Weeks / Days
- The duration in weeks or days as an integer.
- Immediately
- There is no vacant period. The new lease begins the day after the previous ends.
Starts on
A forecasted lease can begin immediately after the time to lease has elapsed or be rounded to the beginning of a month. This is used to better reflect reality and simplify reports by aligning rents to the start of a reporting period.
- First of Next Month (rounded forward)
- The new lease begins on the first day of the following month. This is selected by default and is recommended.
- Exact Date
- The new lease begins the day after the time to lease.
- First of Month (rounded back)
- The new lease begins on the first day of the month that the new lease is scheduled to start.
Lease duration
The length of time the lease will be active before the next leasing event caused by the tenant moving out or renewing for a second term.
- Years / Months
- The duration in years or months as a decimal. A non-integer value will cause the calculated date to be divided using the Actual/Actual day-count convention.
- Weeks / Days
- The duration in weeks or days as an integer.
Upon expiry
This defines what is expected to happen after the end date of a forecasted lease. The forecasting engine will use this to determine if a new lease should be forecast, renewed or do nothing when remain vacant is chosen.
- Market
- The forecasted tenant will not be renewing their lease. A replacement lease will be forecast using the same leasing rules when the time to lease has elapsed.
- Renew
- The forecasted tenant will have some likelihood of renewing their lease. The likelihood of renewal must be entered as the percentage chance they will sign a new lease. 100% signifies that a renewal is guaranteed. The lease renewal will have its duration prorated by the likelihood percentage, and its parameters prorated by the renewal parameters during traditional analysis.
- Remain Vacant
- The forecasted tenant will not be renewing their lease. No lease will be forecast when the lease ends. This option might be chosen if the property owner intends to repurpose or combine the space with another and therefore doesn't want to model a new long-term lease. Effectively, a lease will be forecast only once.
Renewal duration
The renewal duration is required when the forecasted lease is set to renew and defines the length of the new term. The model will prorate the lease duration and parameters by the likelihood of renewal when performing a traditional analysis.
It is recommended that the renewal duration type match the lease duration type.
- Years / Months
- The duration in years or months as a decimal. A non-integer value will cause the calculated date to be divided using the Actual/Actual day-count convention.
- Weeks / Days
- The duration in weeks or days as an integer.