How to calculate the effect of above-&- below market rents on real estate value

Contract rent that is above-or-below market rent affects the value of the leased-fee-interest in commercial real estate.  The following discussion tells you how to calculate the affect.

Assume a 10,000 SF Building with 15 months remaining on the lease.

Step 1

Convert contract rent PSF to a net equivalent rent.  For example, if the contract rent is $24.00 PSF on a full service basis, subtract the operating cost PSF to arrive at an equivalent NNN (triple net) contract rent.  If the operating expenses are $8.00 PSF, the equivalent NNN or net rent would be $16 PSF.

Step 2

If the market rent is $18 PSF, NNN the difference is $2.00 PSF.  Based on the sssumed 10,000 SF building, the difference is $20,000 per year or $1,667 per month, multiplied by 15 months = a loss of $25,000.

The Income Summary page should first show the value of the property based on market rent.

Then, on the last row of the Income Summary Table, subtract the effect of the below market rent $25,000) to arrive at an "as is" value via teh Income Approach.

Last, make sure to subtract this $25,000 from the value via the Sales Comparison Approach.

Present Value (PV)

For remaining lease terms longer than (24) months, the loss should be converted to present value.

Writer

Daniel Peele, RZ 887 (State Certified General Real Estate Appraiser)
is the founder and president of Central Florida Appraisal Consultants in Orlando, FL


407-230-1023
Dan@DanPeele.com















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