Real estate is a large field with an even larger set of terms. Understanding all of the different terminologies is tough, but since things may change on a case-by-case basis, it can be even more confusing and overwhelming. As a landlord or even just an investor, you will need to understand different things than if you are a tenant. With each, there are different expectations that will follow and being prepared is the best thing you can do.
Taking the time to learn more about the industry and the ins and outs of the real estate world will make the entire process easier for you, especially if this is your first venture into commercial real estate. However, not only does understanding the real estate industry help you when things are good, but if you are experiencing trouble, you will have a better idea of how to identify the problem and what you need to do.
Leasing Assumptions in Commercial Properties
When a lease expires for a tenant on a commercial property, there are a lot of unknowns. That’s where a market leasing assumption comes in. A market leasing assumption, also referred to as a speculative rent profile, is what defines what will occur when the lease is over. You should never assume that a tenant will renew the lease. Generally there are only two types of assumptions when the lease ends. The first assumption is that the tenant does decide to renew the lease. The second assumption is that the tenant does not decide to renew the existing lease, and a new tenant needs to be found.
In addition to the two general assumptions is the renewal probability, which is used to determine the weighted median of the two assumptions. Understanding how leasing assumptions work can be easy, depending on the situation. However, they can get extremely complicated depending on how many variables are relevant to your particular case. That is why having a trusted real estate group like Landwin Commercial Real Estate to help guide you through this process is recommended. Having trained professionals to help figure out what applies to you and what makes most sense regarding your situation can save you a lot of frustration.
More About Leasing Assumptions
As previously mentioned, there are two assumptions when the lease expires on a commercial property: either you renew the lease or the tenant vacates and you find a new tenant. Since prior to the lease ending you sometimes have no clue if the tenant will renew the lease, marketing lease assumptions will take into account each potential outcome. To do so, you would calculate the possibility for each of these outcomes, based on the renewal probability. The renewal probability is essentially an estimate on the likelihood that the tenant will renew their lease.
Market leasing assumptions would technically fall under the umbrella of accounting to some extent. There are a lot of predictions and estimates measured in order to be able to determine what the future would look like if you either had your tenant renew or you need to find a new tenant. By planning for both potential outcomes, you give yourself the ability to determine what your next steps should be and will be far more prepared when the end of the lease arrives.
Final Thoughts on Market Leasing Assumptions
Market leasing assumptions for commercial real estate can be tricky to understand since there can be so many layers to it. Working with professionals to help you determine the likelihood that your tenant will renew the lease and the steps that will follow is strongly advised. There are a lot of parts to accurately determining what your market leasing assumptions are, so there is no shame in asking questions or slowly working through it.
Doing research and looking at examples will help you better understand how the process works from an overview, which can definitely help you when you start to determine the market leasing assumptions for your own property. By simply asking a trusted real estate professional such as those at Landwin Commercial Real Estate, you can really make a difference in the entire process.