Skip to content
×
Try PRO Free Today!
BiggerPockets Pro offers you a comprehensive suite of tools and resources
Market and Deal Finder Tools
Deal Analysis Calculators
Property Management Software
Exclusive discounts to Home Depot, RentRedi, and more
$0
7 days free
$828/yr or $69/mo when billed monthly.
$390/yr or $32.5/mo when billed annually.
7 days free. Cancel anytime.
Already a Pro Member? Sign in here

Join Over 3 Million Real Estate Investors

Create a free BiggerPockets account to comment, participate, and connect with over 3 million real estate investors.
Use your real name
By signing up, you indicate that you agree to the BiggerPockets Terms & Conditions.
The community here is like my own little personal real estate army that I can depend upon to help me through ANY problems I come across.
Commercial Real Estate Investing
All Forum Categories
Followed Discussions
Followed Categories
Followed People
Followed Locations
Market News & Data
General Info
Real Estate Strategies
Landlording & Rental Properties
Real Estate Professionals
Financial, Tax, & Legal
Real Estate Classifieds
Reviews & Feedback

Updated over 4 years ago on . Most recent reply

User Stats

18
Posts
3
Votes
Dan Nad
  • arlington, va
3
Votes |
18
Posts

How much to cancel store lease

Dan Nad
  • arlington, va
Posted

How much would it cost a retailer to cancel $100M of lease obligations with a length of 0-5 years? These leases are usually about 1000 sqft in malls and some on streets. I've tried to look at public companies but typically the lease cancellation expense isn't broken out separately. Is it done as a fee or a percentage of remaining lease? 

Most Popular Reply

User Stats

103
Posts
111
Votes
James Storey
  • Real Estate Agent
  • Indianapolis, IN
111
Votes |
103
Posts
James Storey
  • Real Estate Agent
  • Indianapolis, IN
Replied

@Dan Nad in my experience, there has never been a set in place cancellation standard unless it is specifically written out in the lease. Some tenants will negotiate a lease cancellation clause up front to limit their expenses if something were to go wrong and they were to buy out their lease.

If there is nothing in the lease that states how the lease is to be paid in the event of a cancellation, then it's up to the landlord and the tenant to negotiate how much the tenant should pay for the landlord to remove the lease obligation. This can be costly in legal fees to write up a lease cancellation agreement and negotiating it back and forth, especially if you are dealing with a large corporation as a tenant.

In my experience, the best and most reasonable way of calculating the fee the tenant should pay to buy out their lease is to run a Present Value calculation on the remaining lease obligation at a specified discount rate. You would do this by running out the remaining lease obligation (rent, CAM, reimbursed expenses, etc), and discount it back at a specified discount rate. The discount rate is determined by the landlord based on his/hers expected return on the lease. The higher the discount rate (higher expected return), the lower the buy out fee is, the lower the discount rate (lower expected return), the higher the buy out fee. This is similar to the way a bank will determine the prepayment penalty if you pay your mortgage off prior to the end of maturity. Keep in mind, this is very simplified.

EXAMPLE:

Lets assume a tenant has $100M in lease obligation left over 5 years, like in your question. And that leaves the tenant paying $20M a year on their lease. Let's also assume that the landlord determines that he can make a 9% return (discount rate) on his money today. Plugging this into a discounted cash flow calculator would determine the lease buyout would be about $77M in Net Present Value. 

This is not set in stone in the way to negotiate this but it's a great starting point. The tenant get's a discount on their lease liability and the landlord can take the $77M and recoup their investment and reinvest at 9% to replace their lease value. However, I will be up front, if you are dealing with a large corporation that has a ton of legal backing, expect to get thrown around in the ring because it can be a tough and costly negotiation.

Hope this helps.

James Storey, CCIM

Loading replies...