A rent roll shows 3,510,250 of in-place rent against 3,872,000 at market. The gap is 361,750 a year, 10.3%
above passing, and at a 6.25% capitalisation rate that is 5,788,000 of value — about
10.3% of the asset. Every offer memorandum on an under-rented building prints a number that way.
Work the three refinements everyone agrees are necessary and the same rent roll is worth
807,365.
That is a correction of 4,980,635, or 86% of the printed figure — and 8.9% of the whole asset.
For comparison, the clause-by-clause value bridge that gets itemised to the dollar in most lease
abstracts comes to 1,752,400 here, which is 2.84 times smaller. The small number is worked carefully; the
large one is left as three sentences beginning “of course, one would refine this”.
The rent roll
Tenant
Area, sf
In-place
Market
Gap / year
Years left
Anchor law firm
25,000
41.75
44.00
+56,250
2.5
Technology tenant
18,500
36.00
44.00
+148,000
6.0
Insurance broker
12,000
48.50
44.00
−54,000
4.0
Regional bank
9,500
39.00
44.00
+47,500
1.0
Coworking operator
14,000
34.00
44.00
+140,000
8.5
Ground-floor retail
6,000
62.00
66.00
+24,000
3.5
Total / weighted
85,000
41.30
45.55
+361,750
4.36
Six leases, one building, a 6.25% capitalisation rate.
Four tenants are under market, one is over, one is a small retail unit slightly under.
Weighted average lease term is 4.36 years by area and 4.17 by rent — and that second number is
doing more work than it usually gets credit for, because it is the horizon over which any of this
gap can be captured.
Refinement three first, because it is already inside the headline
Everyone warns against capitalising a short over-market stream in perpetuity. The aggregate
mark-to-market does exactly that, silently, by netting the over-market lease against the
under-market ones before capitalising the total.
The one over-market lease
Value
Over-market income, a year
54,000
Years it has left to run
4.0
Capitalised in perpetuity, as the aggregate does
864,000
Present value of the 4 years it actually has
186,049
The perpetuity overstates the penalty by
677,951
A stream with a known expiry date, netted at a perpetual basis against perpetual gaps.
Correcting this runs upward: the naive netting takes 677,951 too much off,
because it treats a 4-year over-market stream as if it lasted forever. That is the one
refinement that helps the seller, and it is the one nobody performs — presumably because
the instinct is that refinements make numbers smaller.
Refinement one: a gap that starts at expiry is not worth its face today
A below-market lease is not producing extra rent now. It is an uplift that begins when the
lease expires, so it should be valued as a perpetuity starting then, discounted back at the same
rate the perpetuity uses.
Tenant
Gap capitalised
Years to expiry
Discount factor
Present value
Anchor law firm
900,000
2.5
0.859
773,428
Technology tenant
2,368,000
6.0
0.695
1,645,918
Regional bank
760,000
1.0
0.941
715,294
Coworking operator
2,240,000
8.5
0.597
1,337,987
Ground-floor retail
384,000
3.5
0.809
310,585
Below-market total
6,652,000
—
—
4,783,212
A below-market gap is an uplift that begins at expiry, not today.
Time-weighting alone removes 1,868,788 — 28.1% of the gross below-market gap
— and it removes it very unevenly. The coworking lease has the largest gap on the roll and
8.5 years to run, so it keeps only 60% of its face value. The regional bank’s smaller gap
arrives next year and keeps 94%. A building’s mark-to-market is as much a statement about
its expiry profile as about its rents.
Refinement two: capturing the gap costs money
Every expiry is either a renewal or a re-letting, and they cost very different amounts.
On this building a renewal costs 32.01 per square foot in improvement allowance and commission. A
re-letting costs 119.68, because it adds nine months of downtime and a much larger allowance.
Renewal probability
Leakage per sf
Total leakage, PV
Net mark-to-market
Of the printed figure
100%
32.01
1,808,433
2,788,730
48.2%
75%
53.93
3,046,786
1,550,377
26.8%
60%
67.08
3,789,798
807,365
13.9%
50%
75.84
4,285,139
312,024
5.4%
25%
97.76
5,523,492
−926,330
-16.0%
0%
119.68
6,761,845
−2,164,683
-37.4%
Renewal costs 32.01 per square foot. Re-letting costs 119.68.
At the 60% renewal assumption the mark-to-market is worth 807,365 —
14% of what the memorandum prints. At 50% renewals it is worth 312,024. And the level at which it is
worth nothing at all is a renewal rate of 43.7%, which is not a
pessimistic assumption on a multi-tenant office building.
And this arithmetic is generous
One asymmetry is worth naming, because it means the break-even renewal rate above is an
understatement. The uplift is valued as a perpetuity while the leasing cost is charged once. A
perpetuity of market rent implies a re-letting at every future expiry, and each of those costs
again. Charge them and the break-even moves higher still.
The line that changes a negotiation
There is a seventh item most one-page summaries name and almost none prints: the
contractual-only mark-to-market, with every renewal probability set to zero. On this
building it is -2,164,683. With no renewals assumed, capturing the gap costs more than
the gap is worth.
That is not a rhetorical point. It is the number a buyer should put on the table when a
seller argues the mark-to-market is contractual upside, because it separates what the leases
promise from what a leasing team would have to deliver.
What to put on the one page
In-place rent and market rent, then the time-weighted mark-to-market net of realisation
cost — not the gross gap. Weighted average lease term by area and by rent. The
expiry profile with capital committed to each expiry, since that capital is the price of the
uplift. Over-market income shown at present value rather than as a perpetuity. And the
contractual-only figure, with renewals at zero.
Five of those six items are already in the abstract somewhere. The one that is almost never
there — the cost of realising the gap — is the one that moves the answer by 86%.
The workbook behind this article
Every figure above is a live formula in the companion file for
How to Read a Commercial Lease, which holds the rent roll, all three refinements in order, the leakage grid at six renewal assumptions and the break-even renewal rate. It is free, and it needs no account and
no email address.
Should corporate debt be fixed or floating?78.1818 per cent of gross debt fixed, and a net floating exposure after cash of -608,000.00 — the proportion, not the instrument.
Does an undrawn revolver count as liquidity?67.4567 per cent of the headroom, and it leaves at a fall in annual revenue of 8.4127 per cent — not the 13.3333 per cent the board deck implies.
Does supply chain finance count as debt?66,049,315 released, and leverage of 2.7622× or 3.1362× depending on which balance the test is asked of — the second is a breach at today's EBITDA.
How do you set a minimum cash balance?Three components, 124,596,281 in total — and the double count that turns a margin of 27,403,719 into an apparent shortfall of -3,988,281.
Is a 2/10 net 60 discount worth taking?An annualised 14.8980 per cent against a revolver at 4.50 per cent — worth 5,471,890 a year, and 0.3132 turns of reported leverage.
At what wealth does a family office pay?A five-person office costs the same $2,442,000 at $100m as at $2bn. Against a tiered multi-family schedule the two curves cross exactly once.
Does the fulcrum move with enterprise value?A worked capital structure at three enterprise values. The break migrates from the first lien to the subordinated notes without a single document changing.
How many companies does a reserve pool defend?Holding pro rata to the Series D costs $14.76m per company. A $40m reserve defends 2.71 of forty — and 61 per cent of the cost is the last round.
How much room a 1.15x downside actually leaves79 basis points of margin. The leverage covenant fails first, five basis points before the coverage covenant the chapter reports on, and 4.6 per cent of EBITDA is the whole cushion.
How the GP catch-up is actually solvedMost write-ups state the catch-up formula then hardcode the answer. Set it as a solve and it moves on its own when the carry rate does.
Six ways to state the same fund's return7.12 per cent, 18.04 per cent, or 1.323 times the public market — one fund, one set of flows. The eleven-point gap is the valuation, and it is not cash.
The IRR at which a closed-ended fund merely tiesA drawdown fund advertising 13.25 per cent ties an evergreen netting 8.64. On committed rather than called capital, 78.7 per cent of the edge vanishes.
The month a remediation trigger has to be armed byMonth 8, on a one-year window and a 14-week hiring lead time. The date is 12W − L/4.33 and holds for any portfolio size — the book only changes the euros.
Two routes to the same NAVFive findings in one quarter-end close, and not one of them was a modelling error. Every one was a control that did not exist.
What a CBAM certificate buffer costs to holdCarry and protection are both linear in the buffer, so the break-even probability is identical at 5 per cent and at 30 — and 2027 costs exactly twice 2026.
What a clawback actually collateralises24 million recovers 13.20 net of tax and 7.20 is escrowed. The rule is e ≥ 1 − t, and every euro won on the tax clause lands uncollateralised.
What a co-investment programme actually saves37 basis points, and a 22.8 per cent total-loss rate erases it. At the usual per-deal cap a single failure is 37 per cent of the annual cohort.
What a diligence exercise actually recoversEighteen basis points is only the part that reaches the yield. Three of the four instruments never do, and the exercise is worth thirty-one.
What a follow-on reserve is actually worth0.019 turns under plain dilution, 0.285 under pay-to-play. The optimum is a property of the shareholders’ agreement, not of the portfolio.
What a minimum payment actually does£81.53 leaves the account and £20.46 reaches the debt. On minimums alone the set clears in 258 months and repays 1.78 times what was borrowed.
What a month of delay costs in an enforcement463,000 euros of present value a month. No single error about enforcement, and no pair of errors, moves the indifference point from 58.7 cents to the 72 on the table.
What a pro rata cheque actually costsDefending costs 1.25 times the initial cheque across two rounds, not more in each — and below a 521 exit the follow-on dollars come back worth less than they cost.
What a subscription line does to the IRR20 per cent becomes 38.41 on the same asset while the multiple falls. Two dollars of interest buys 18.4 points, and the longer the line runs the cheaper each point gets.
What one point of fees actually costsOne point on the annual charge turns 738,846 into 567,961 over forty years — 23 per cent of the pot, and 2.43 of wealth lost per 1 of fee.
When the promote stops clearingCarried interest is not proportional to performance near the hurdle. It is a step function, and $2m of headroom is what stands between a promote and none.
Why a secondaries bid-ask gap has no zoneThe seller’s floor and the buyer’s ceiling are one formula at two rates. At equal required returns the zone is exactly zero — here it is 11.02 points apart.
Why refining a due diligence rubric makes it weakerThree of twelve managers carry a terminal flaw and the average approves all three. Splitting eight domains into sixteen makes it easier to hide, not harder.
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