Leasing Commission Methodology

[Anonymous]

4 years, 11 months ago #2494

Hi Spencer,

Not sure if this is a bug or was intentional, but it looks like the leasing commission calculation takes the total commission (say 6%) and multiplies it by the total square footage (say 10,000 sq ft), the total term (say 84 months), and the base year rate (say $10.00 [the actually formula is monthly – so 83 cents])). This would give a total leasing commission of $42,000.

However, in practice leasing commissions are typically paid across the value of the escalations too. So if the above lease had a 3% escalation each year, the 83 cents averages about 91 cents, giving a commission of ~$46k. Not sure if your methodology is intentional because the analysis term may last longer than some leases, but I thought I’d point it out in case it wasn’t intentional.

Thanks Spencer!

Ozzie

[Spencer Burton]

4 years, 11 months ago #2926

Hi Ozzie,

Thanks for the question. You’re correct, the leasing commissions calculation is based on base year rent exclusive of any escalations. This isn’t a bug, insofar as I was aware of this limitation when I wrote the formula. So in one way, the methodology is overly aggressive since it charges less leasing commissions to the deal then may actually be paid. On the flip side, this methodology may be conservative given that sometimes leasing commissions are paid out over time or on a falling scale.

This gets to a broader point about the limitations of any Excel-based alternative attempting to model the nuances of long-term leases. Namely, that many of the methodologies are approximations, with the formulas written either to reduce processor load or to accommodate an imperfect tool.

With that said, I’ll look into altering the leasing commissions calculation to include rent escalations. I don’t recall why I opted not to initially, other than I believe I thought it was overly complex and the impact of greater precision was de minimis. But I’ll look at it again nonetheless.

Thanks for the comment!

Spencer