Calculate price of a commercial condo

[Nick L.]

I'm building the pro forma for a mixed-use urban infill development. In speaking with potential retail tenants, a couple have expressed the desire to own rather than lease their space. That works for me because I can use the difference between construction cost and sale price as equity in financing the development.

Where I'm stuck is how to price the commercial condo. I am currently working on two models:

1. Simple cost-plus approach. Figure out all my hard costs, soft costs and financing costs for that portion of the development, then add a markup for my developer profit.

2. Calculate the NPV of a commercial lease. For example a 15yr term with initial rent set at comps, 3% annual increases and a terminal sale for the FV of construction cost - all discounted back to NPV at a 6-8% discount rate.

These methods provide quite different prices, especially because the NPV is so sensitive to changes in assumptions.

Has anyone done this before and how did you calculate the price?