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How can I calculate a commercial lease buyout?
We have a well established and profitable business that currently leases space in a strip mall. This strip mall is in the process of being bought out by a developer. who plans to tear down the current building to put up a mixed use condo development. They are now sending out offers to buyout the current tenant leases. We currently have 7 years left on our lease. My question is how can we determine the current value of our lease? Is their a formula that can be used (moving costs, loss of business costs, difference in our current negotiated premium lease rate and comparable lease rates in the area for the time left on our lease, etc...). Also, since the new development has the backing of the city, how can Eminent domain come into play? and if this would go to court, how would the courts determine "fair value" for a buyout? I know a good real estate lawyer is a must, but I am hoping that someone here may have gone through something similar and can answer.
Here's my guess, but real estate attorney is definitely a must:
(1) Get quote on moving costs to business in area. If a retail business, estimate marketing costs to reach customers and local population to inform them of new location. Estimate reasonable lost business net profits for the time period (couple months?) where people are acclimating to the new location. Add this together to get one sum.
(2) Get quotes on lease to equivalent space (square footage, parking, lease conditions, location of course). If utilities and other expenses are more, make sure you add the increases (from current expenses) as well. Subtract from current monthly lease payment, and let's call this monthly operating expense differential. Then calculate the present value of this figure for the months remaining in lease, say at 3%.
(3) Add sum (1) and (2), plus attorney costs. You may be able to charge more or less depending on situation with fellow tenants, market conditions, etc.
Once you determine your net cashflows (inflows less outflows), discount it for the life of the lease (7 yrs) at a cost of debt to finance your activities. Fair value would be determined in a similar way but for the net cashflows to someone other than you (someone in the market looking to invest).by Abella - 6 years ago