Commercial Real
Estate Lease Analysis - Comparative Lease Analysis

The following
are definitions of the critical manual inputs and instant results
that 24-year veteran John Tobin will provide you in a single Executive Summary page
of “Swiftcalc” (see a sample below), a more simplified Excel based
version (see a sample below) or using LseMod or Procalc as you
prefer. Clients have told us that reviewing our following
Swiftcalc definitions below provide a good refresher on the critical
factors in office lease cost comparison/ lease analysis. The
definitions below are listed in the order that each "Input" and
"Result" appears on the Swifcalc Executive Summary page.

Simplified Presentation

Back-up for Simplified
Presentation

Swiftcalc Executive Summary

Early Termination Cost Comparison

After personally previewing
all the available office properties in the desired geographic area
and short listing those properties that meet your standard corporate
criteria, John Tobin will send a client approved Request For
Proposal to the Landlord Rep of each competing office property. In
the Request For Proposal John will request all the property data
required to instantly compare the Landlord responses in a one page,
side by side, Excel based, Executive Summary cost comparison for
your review. See a sample Executive Summary by clicking on the
thumbnail above.

The four different cost comparisons above analyze
the same office leasing transaction in a different way. Each
presentation was customized by John Tobin based on a client request.
The Swiftcalc Executive Summary can be easily customized for
your SPECIFIC NEEDS. (see early termination cost comparison
above AS AN EXAMPLE.) John Tobin can provide a simplified version, Or any
variation on the samples ABOVE, for your easy presentation and
verification of the results TO upper management.

Note that the results of the "Simplified
Presentations" correspond exactly with both the "Swiftcalc Executive
Summary" and the "Early Termination Cost Comparison" results.
Each cost comparison serves as proof of accuracy of the other
since the "Simplified" cost comparison and the "Swiftcalc" cost
comparisons were each generated independently.

Further note that Swiftcalc's Net Present Value Cost result is the Net Present Value
for a series of cash flows that are never uniform. It is based on
the exact date of each tenant payment/ benefit and exact dollar
amount of each payment/ benefit. This is more accurate than the Net
Present Value given by a hand-held financial calculator which
assumes uniform timing for a series of cash flows. Swiftcalc
discounts the series of cash flows to the equivalent Net Present
Value Cost as of the Start Date of the lease using tenant's NPV
Discount Rate.

INPUT

Rentable
Square Feet:
John Tobin will input the square footage stated in the lease,
stated in the lease proposal or quoted by the landlord rep. The
Rentable Square Footage generally includes an Add On Factor
(common area factor) that accounts for common area not within
the tenant premises but still utilized by tenants (also called
"building common area"). The Rentable Square Footage is
multiplied times the annual BASE RENT rate to calculate the
tenant's annual BASE RENT cost.

INPUT

Add On Factor:
If the Landlord Rep quotes an Add On Factor of 5%, John Tobin
will input 1.05 here. If a 9% Add On Factor is quoted, John
Tobin will input 1.09 here, etc . . .

Rentable Square
Feet divided by the Add On Factor equals Usable Square Footage. The
Add On Factor (or common area factor) includes the area of the
building not within the tenant premises but still utilized by
tenants. The landlord generally adds a pro-rata share of the
building common area to the tenant's Usable Square Footage to
determine the tenant's Rentable Square Footage. Some landlords do
not have an Add On Factor. In that case John Tobin will input the
number zero here.

Loss Factor and Add on Factor are not the same thing. If a
15% Loss Factor is quoted on 10,000 rentable square feet, the usable
square footage is 10,000 x .85% = 8,500 usable square feet. The
Add On factor for the same office space is 10,000 rentable square feet ÷ 8,500 usable square
feet = 1.17647

Simplified Presentation

Back-up for Simplified
Presentation

Swiftcalc Executive Summary

Early Termination Cost Comparison

RESULT

Usable
Square Feet (Rentable Square Feet divided by Add On Factor):
The measured area within the Tenant's leased premises. Usable
Square Feet times the Add On Factor (common area factor) equals
Rentable Square Feet.

RESULT

ANNUITY AT
THE NPV DISCOUNT RATE (on a per usable square foot, annual basis):
A net present value, usable square foot comparison.
Highlighted
in light blue in the Swiftcalc “Results” section. THE
MOST TELLING COST COMPARISON since it takes into account both
the time value of money and the building Add On Factor. It is the
monthly NPV Equivalent Cost times 12 months divided by the
usable square footage of the lease. If you want to get
technical, it is the Annuity Equivalent Payment x 12 months =
Annual Annuity Equivalent (per usable square foot). For more on
this see below at ANNUITY at the NPV discount rate (monthly) and
AGGREGATE NPV
at the NPV discount rate
(total dollars).

RESULT

AVERAGE COST
(on a per usable square foot, annual basis):
An absolute value, usable square foot comparison. It takes into
account the building loss factor but not the time value of
money. It is the Absolute Value Cost (total dollars) below,
divided by the # of Years of lease term divided by the Usable
Square Feet. For more on this see AGGREGATE RENT (total
dollars) below.

Simplified Presentation

Back-up for Simplified
Presentation

Swiftcalc Executive Summary

Early Termination Cost Comparison

RESULT

ANNUITY AT
THE NPV DISCOUNT RATE (on a per rentable square foot, annual
basis):
A net present value, rentable square foot comparison. It takes
into account the time value of money but not the building loss
factor. It is the monthly NPV Equivalent Cost times 12 months
divided by the rentable square footage of the lease. If you
want to get technical, it is the Annuity Equivalent Payment x 12
months = Annual Annuity Equivalent (per rentable square foot).
For more on this see below at
ANNUITY at the NPV discount rate (monthly) and
AGGregate NPV at the NPV discount rate (total dollars).

RESULT

AVERAGE COST
(on a per rentable square foot, annual basis):
An absolute value, rentable square foot comparison. It is the
average yearly cost of the lease that does not take into account
the time value of money nor the building loss factor. It is the
Absolute Value Cost (total dollars) below divided by the # of
Years of lease term divided by the Rentable Square Feet. For
more on this see AGGREGATE RENT (total dollars) below.

RESULT

# of Years:
The total length of the lease in years. This is automatically
calculated from the data input in the Analysis Start Date and
Analysis End Date below.

Simplified Presentation

Back-up for Simplified
Presentation

Swiftcalc Executive Summary

Early Termination Cost Comparison

RESULT

ANNUITY AT
THE NPV DISCOUNT RATE (monthly):
A net present value comparison. It is the monthly cost of the
lease that takes into account the time value of money. It is
the equal periodic payments over the lease term having a present
value cost equivalent to the Net Present Value Cost. If you
want to get technical, it is the Annuity Equivalent Payment (on
a monthly basis) = Net Present Value. For more on this see
AGGregate NPV at the NPV discount rate (total dollars) below.

If Annuity Cost
is higher than Average Cost (i.e. a flat or increasing pmt.
schedule) the landlord will invest the tenant's money at the NPV
Discount Rate with the net result of earning more over the term than
the Average Cost on a time value of money basis. If Annuity Cost is
lower than Average Cost (i.e. an increasing pmt. schedule) it means
the tenant will invest the delayed rent over the term with the net
result of paying less than the Average Cost on a time value of money
basis. If the Annuity Cost is equal to the Average Cost neither the
landlord nor the tenant have a time value of money advantage. For
this reason Aggregate Net Present Value and the related Annuity Cost
are more telling cost comparisons.

RESULT

AVERAGE COST
(on a monthly basis):
An absolute value comparison. It is the average monthly cost of
the lease not taking into account the time value of money. It
is calculated by taking the Absolute Value Cost and dividing by
the # of Months of lease term.
The Absolute Value Cost is
calculated by simply adding all the tenant costs and subtracting
the benefits without accounting for the timing of the payments/
benefits and the related tenant income potential from other
investments during the lease term. See AGGREGATE RENT (total
dollars) below.

Simplified Presentation

Back-up for Simplified
Presentation

Swiftcalc Executive Summary

Early Termination Cost Comparison

RESULT

AGGREGATE
NET PRESENT VALUE AT THE NPV DISCOUNT RATE (on a total dollars
basis):
Net Present Value means equivalent cost today of an amount to be
paid in the future based on a compound interest rate (NPV
Discount Rate). Tenants often overlook Net Present Value Cost
as the most appropriate analytical tool for evaluating leasing
alternatives. Commercial real estate leases require multiple
cash outlays over different time periods. Net Present Value
Cost needs to be weighed heavily to enable the decision maker to
decide between and among such alternatives. Under the Net
Present Value method the decision maker discounts all future
capital outlays at tenant's required Discount Rate (return that
could be obtained from other investments, or return mandated or
desired by the user) to determine Net Present Value Cost of the
lease.

Swiftcalc's Net
Present Value Cost is the Net Present Value for a series of cash
flows that are never uniform. It is based on the exact date of
each tenant payment/ benefit and exact dollar amount of each
payment/ benefit. This is more accurate than the Net Present Value
given by a hand-held financial calculator which assumes uniform
timing for a series of cash flows. Swiftcalc discounts the series
of cash flows to the equivalent Net Present Value Cost as of the
Start Date of the lease using tenant's NPV Discount Rate.

The Net Present
Value Cost reflects the time value of money. The time value of
money states that payments made sooner are more costly than payments
made later. In other words, the later in the lease term a lease
payment can be scheduled the greater opportunity the tenant has to
earn income from the available capital. (The tenant needs to know
that for the landlord the opposite is true. The earlier the
landlord can schedule a tenant lease payment the greater opportunity
the landlord can earn income from the available capital.) The
annual rate of return that the tenant estimates it can earn while
keeping the money in its control is the NPV Discount Rate. The
resulting monetary benefits reduce the tenant's Net Present Value
Cost of the lease. In contrast, the Absolute Value Cost is
calculated by simply adding all the tenant costs and subtracting
all the tenant financial benefits without accounting for the timing
of the payments/ benefits and the related tenant income potential
from alternative investments during the lease term.

Simplified Presentation

Back-up for Simplified
Presentation

Swiftcalc Executive Summary

Early Termination Cost Comparison

RESULT

AGGREGATE
RENT (on a total dollars basis):
TENANTS OFTEN MAKE THE MISTAKE OF USING THE ABSOLUTE VALUE COST
AS THE SOLE CRITERIA IN THEIR DECISION MAKING PROCESS WITHOUT
RECOGNIZING THE NEED TO WEIGH THE NET PRESENT VALUE COST HEAVILY
AS AN ANALYTICAL TOOL. Absolute Value Cost is the total dollar
cost of the lease adding every tenant payment to the landlord
and subtracting every dollar benefit from the landlord without
taking into account the scheduling of the payments/ benefits or
the time value of money. The time value of money states that
payments made sooner are more costly than payments made later.
See Net Present Value Cost for more on the time value of money.

INPUT

NPV Discount Rate:
Under the Net Present Value method the decision maker discounts
all of the future capital outlays at the tenant's required NPV
Discount Rate (the percentage return that the tenant could
obtain from other investments, or the percentage return mandated
or desired by the tenant) to determine the Net Present Value
Cost of the lease. 8% is currently a typical NPV Discount Rate.

For example, over the years the tenant may have established
the practice of investing all surplus capital in a stock market
index fund. The tenant may have found that it could consistently
expect an average 8% return on surplus capital. In this example, 8%
would be the tenant provided NPV Discount Rate.

The NPV Discount Rate, Net Present Value Cost and Annuity
Equivalent Pmt. reflect the time value of money. The time value of
money states that payments made sooner are more costly than payments
made later. In other words, the later in the lease term a lease
payment can be scheduled the greater opportunity for the tenant to
earn income from the available capital thereby reducing its Net
Present Value Cost.

The tenant needs to know that for the landlord the opposite
is true. The earlier the landlord can schedule a tenant lease
payment the greater opportunity the landlord can earn income from
the available capital thereby increasing the landlord's Net Present
Value Return and the tenant's Net Present Value Cost. The annual
rate of return that the tenant estimates it can earn while keeping
more money in its control for a longer period of time is the
Discount Rate. The resulting monetary benefits reduce the tenant's
"Net Present Value Cost' of the lease.

The higher the
tenant Discount Rate the larger the reduction in the Net Present
Value Cost and Annuity Equivalent Pmt.

Simplified Presentation

Back-up for Simplified
Presentation

Swiftcalc Executive Summary

Early Termination Cost Comparison

INPUT

The Consumer
Price Index (C.P.I.) Pass Thru also known as the "Annual Base
Rent Percentage Increase":
In place of or in addition to a stepped base rental schedule the
landlord rep may request an "Annual Base Rent % Increase" that
is determined by the Consumer Price Index (C.P.I.). It is
customary that this base rent percentage increase is compounded
annually like the interest in your savings account. The
calculation here reflects the annual compounding. The
introduction of a C.P.I. Pass Thru will dramatically increase
the tenant cost in the later years of the lease.

INPUT

COMBINED TAX
& OPERATING costs:
Tax & Operating Costs can be a substantial portion of a
commercial tenant's lease cost. The two broad categories for
commercial leases are Gross and Net. In a Gross lease the
tenant pays only the increase in the annual Tax & Operating Cost
above a certain Base Year multiplied times the percentage of
building rentable area that the tenant occupies. In a Net lease
the tenant incurs 100% of the annual Tax & Operating cost
associated with the commercial property. There are variations
on the two broad categories described above. These variations
exclude certain items as a tenant cost. In this case all that
is needed is for John Tobin to . . .

1)Ask the landlord rep whether the lease fits into the broad
category of a Gross or Net lease.

2)If it is a Gross lease John will ask the landlord rep for the
Base Year Tax & Operating Cost on a per rentable square foot basis.
If it is a Net lease John will ask the landlord rep for the 1st year
Tax & Operating Cost on a per rentable square foot basis.

3)John will ask the landlord rep if any cost items will be
excluded from the Annual Tax & Operating Cost provided. (i.e.
capital improvement costs, asbestos abatement costs, etc...)

4)John will ensure that the excluded cost items are excluded
from the Base Year or 1st Year Cost that John enters here.

INPUT

Annual %
Increase:
John Tobin will input the landlord’s estimate of the annual
increase in COMBINED TAX & OPERATING expenses for each Option.
John will request from each prospective property a 5 or 10
year tax and operating expense history to verify the accuracy of
landlord’s estimate. If a landlord rep will not provide us with
this information, John Tobin will recommend removing that
property from consideration.

INPUT

Annual % Cap:
If a cap, ceiling or limit is provided on the Annual % Increase
in COMBINED TAX & OPERATING expenses, John Tobin will insert the
Annual % Cap.

Simplified Presentation

Back-up for Simplified
Presentation

Swiftcalc Executive Summary

Early Termination Cost Comparison

INPUT

Gross Lease:
A gross lease includes all tax and operating costs - heating
ventilation and air conditioning (HVAC), insurance, janitorial
serves and maintenance charges. The base year is the initial
period during which a tenant on a gross lease will pay no pass-throughs,
i.e. increases in tax and operating costs over and above the
base year. This should typically be the first full calendar
year of actual occupancy or can be negotiated as such. When
paying pass-throughs after the base year the tenant is
reimbursing the landlord for only the increase in Tax and
Operating Costs over the base year multiplied times the
percentage of rentable building area that the tenant occupies.
This customary practice is reflected in the automatic
calculations below.

John Tobin will
ask the landlord what base year for the "Combined Tax & Operating"
Costs (i.e. 2008, 2009, etc . . .) will be utilized and the combined
rentable square foot cost for that base year. John will input the
combined rentable square foot cost number here. In a Gross lease,
Tax & Operating Costs are subject to varying interpretations and can
be a major profit center for some landlords. John will clarify in
writing exactly the manner in which the tenant charges for tax and
operating costs will be determined and ensure that those charges are
customary at each competing
property.

INPUT

Net Lease:
Generally, there are two types of Net leases. A triple Net or
"NNN" lease is a lease whereby, in addition to the rent
stipulated, all of the tax and operating costs associated with
the commercial space (i.e. such expenses as taxes, insurance and
maintenance) is paid directly by the tenant. A "Net" lease
includes partial payment of tax and operating costs. Be certain
that this is clearly spelled out.

Swiftcalc’s
automatic calculations will handle either a "NNN" or "Net" lease.
John Tobin will ask the landlord rep for the 1st year tax and
operating cost for which the tenant will be responsible as well as a
5 or 10 year history of those same costs. John will input the
combined 1st Year rentable square foot cost number here. He will
use the cost history of those expenses to create an estimate of the
Annual % Increase/Cap above.

If the OPTION is
a multi-tenant property, the Tax and Operating Costs are multiplied
times the pro-rata percentage of building area that the tenant
occupies. These charges begin on the lease commencement date and
include any increases in tax and operating costs through the end of
the lease term. Note that Swiftcalc’s automatic calculations below
are only an estimate derived from a 1st Year Cost amount and a fixed
annual percentage increase. Historically, the increase in annual
Tax & Operating Costs for commercial properties has varied from year
to year and a 3% projected annual increase is recommended by most
Landlords. John Tobin will request capping the increases at a
certain "not to exceed" percentage each lease year.

INPUT

Tenant Early
Termination Penalty:
If Tenant desires an Early Termination option, John Tobin will
request one from each prospective Landlord. Tenant early
termination rights are always tied to an early termination
penalty amount to be paid on a specific date prior to the
effective early termination date. John will calculate the early
termination penalty amount for each prospective property and
input here. He will also input here the tenant's payment date.
This payment date and payment amount will be picked up and used
in Swiftcalc’s automatic present value calculation. John does
this when the tenant wants to compare the Aggregate Cost of each
prospective property on a minimum lease term/ early termination
basis. (See a sample "Early Termination Cost Comparison"
below.)

INPUT

Tenant
Additional Tenant Improvement Cost:
These are not Tenant Improvement costs that the landlord is
paying. John Tobin will input here only the rentable square
foot cost of Tenant Improvements that the tenant will absorb, if
any. He will also input here the tenant's approximate payment
date. This payment date and payment amount will be picked up
and used in Swiftcalc’s automatic present value calculation.