Reforecasting an office acquisition after a 20,000-square-foot giveback

The initial model carries a full-space renewal. The anchor retains 62,000 square feet for ten years at $54.00 per square foot with 2.5% annual increases, ten months of free rent, an $85-per-square-foot tenant-improvement allowance and an $8 per square foot commission. The leasing memo also carries the existing recovery structure, so the model retains the 2013 expense base and the current recovery amount.

That case keeps the building 91.0% leased after the December expiry. Two months of anchor cash rent fall into Year 1 after the ten-month abatement, contributing $558,000. The old expense base contributes another $341,000 of recoveries. With $8.950 million of base rent from the other tenants, the initial case produces $8.400 million of Year 1 cash NOI.

The signed amendment changes that case without changing the tenant's identity or the lease-expiration date. The tenant retains 42,000 square feet at $55.00, receives 14 months free and a $95-per-square-foot allowance, and surrenders 20,000 square feet at expiry. The retained premises use a 2027 expense base. The returned floor requires demising work before it can be marketed as a separate suite.

The retained 42,000 square feet and the returned 20,000 square feet separate on January 1. The renewal rent, abatement, allowance and commission apply only to the retained premises. The surrendered space becomes vacant inventory with a different market rent, downtime, free-rent package, allowance and commission. Blending the two areas into a revised anchor rent hides both cash-rent commencement dates.

The base-year reset is applied on the same date. Under the existing lease, the tenant pays the increase in operating expenses above a $12.50-per-square-foot 2013 base. At the current $18.00 expense level, that produces $341,000 across 62,000 square feet. The amendment resets the retained premises to a 2027 base, so the Year 1 recovery is zero. The giveback produces no recovery while vacant.

The replacement case for the giveback assumes 12 months to lease execution and delivery, followed by eight months free at $53.00 per square foot, $110 per square foot of tenant improvements and an $11-per-square-foot commission. Cash rent begins in month 21. The assumptions remain separate from the signed amendment: one is a contractual obligation and the other is the acquisition team's leasing case.

The initial case receives two months of anchor base rent after the ten-month free period. The signed case receives none: the 14-month abatement extends beyond Year 1, and the giveback remains in downtime. Anchor and giveback base rent therefore moves from $558,000 to zero. This is a cash-NOI treatment; straight-line rent does not fund debt service or the tenant-improvement draws during the abatement.

The $341,000 recovery attached to the old base year also leaves Year 1. The operating expense line declines by $61,000 because the vacant floor no longer incurs the same occupied janitorial, electricity and after-hours service load. That saving does not offset the lost recovery. Parking and other income falls by $62,000 after the spaces assigned to the surrendered premises are returned.

The other tenants remain unchanged. Their $8.950 million of base rent and $2.850 million of recoveries provide the fixed part of the bridge. With the revised anchor and giveback treatment, effective gross income falls by $961,000 and cash NOI falls by $900,000, from $8.400 million to $7.500 million.

The smaller renewal does not produce a proportionate reduction in landlord exposure. The initial full-space case carries $5.270 million of tenant improvements, a $496,000 commission and $2.790 million of free rent. The signed renewal reduces those amounts on the retained premises, but the giveback creates a second leasing event with its own capital and carry.

At the base assumptions, the returned floor requires $2.200 million of tenant improvements, a $220,000 commission and $707,000 of free rent. Demising the floor adds $450,000. Twelve months of unrecovered operating expense during downtime adds $360,000. Total modeled leasing exposure rises from $8.556 million to $11.042 million.

These amounts do not occur on one date. The renewal commission is due at execution; the allowance follows the work-letter requisitions; demising work precedes delivery of the contraction space; free rent and vacancy carry appear month by month. The monthly sources and uses therefore needs the lease dates and draw conditions, not only the total allowance per square foot.

At the $126 million purchase price, the initial $8.400 million of cash NOI produces a 6.67% going-in cash cap rate. The $75.600 million loan is constrained by 60% LTV and has an 11.11% debt yield. At 6.25% interest-only debt service, DSCR is 1.78×.

The revised $7.500 million of cash NOI produces a 5.95% cash cap rate. At the same loan amount, debt yield is 9.92%, below the quoted 10.25% minimum. Debt yield now sizes proceeds at $73.171 million, adding $2.429 million to purchase-price equity. Combined with the $2.486 million increase in leasing exposure, the modeled capital behind the purchase price and identified leasing work increases by $4.915 million.

The signed renewal is still valuable. It secures 42,000 square feet for ten years and removes the binary risk of a full 62,000-square-foot vacancy. What it does not do is preserve the original revenue, recovery or capital case. The underwriting changes because the renewal resolved into a different set of lease economics than the probability-weighted line it replaced.

The amendment is fixed; the re-leasing case is not. Delivering the contraction space in six months rather than 12 reduces vacancy carry and brings cash rent forward. A 24-month delivery assumption does the opposite and requires a higher allowance and longer free-rent package. Each treatment begins with the same 20,000-square-foot giveback rather than changing the signed renewal to make the scenario work.

Cap Orbit can work across the current rent roll, suite schedule, original lease, prior amendments, signed renewal, work letter, operating-expense reconciliations, recovery statements, parking schedule, leasing budget, debt quote and existing acquisition workbook in the same deal. The retained premises and the contraction space can be separated at the surrender date without losing the terms that governed the original 62,000 square feet.

From there, you can have Cap Orbit rebuild the post-expiry suite schedule, carry the abatement and tenant-improvement draws on their actual dates, remove the old-base recoveries, create the 20,000-square-foot giveback case and update the monthly debt and equity cash flow in the existing model. The signed area, starting rent, base year, free-rent period and allowance retain their source trace. Downtime, market rent, TI, LC and demising cost remain visible underwriting assumptions.

The same deal record supports the giveback cases that matter here: deliver the space in six, 12 or 24 months; divide it into smaller suites; change the market package; or carry it vacant through the hold. Each case starts from the signed contraction and returns the same connected outputs—leased area, cash-rent commencement, recoveries, leasing exposure, cash NOI, debt yield, loan proceeds and required equity.

That is the standard for AI on this asset class. The useful result is not a lease abstract that says the anchor renewed. It is an acquisition case in which the retained premises, returned floor, recovery reset and landlord obligations resolve into the same monthly cash flow and capital structure.