Fit-out, dilapidations, moving and dual running come first and the rent saving comes slowly, which is why the tenant's cost of leaving is the landlord's negotiating room.
Compare the present value of everything each option costs over the same term, not the two rents. On an illustrative 2,000 m² office, a move to a building quoting 20 per m² less, with twice the rent-free, still costs 1,558,917 more than renewing over ten years at 7 per cent, because fit-out, dilapidations, moving and three months of dual running come first and the rent saving comes slowly. The tenant would only be better off moving if the renewal rent rose above 538.89 per m², 28.3 per cent over the 420 offered.
Worked in full in Office Real Estate by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
A lease decision is a choice between two streams of cash. Put each on the same footing: the same area, the same term, the same discount rate, and every cost the tenant actually pays, rent and service charge and rates, plus the capital costs at the start.
PV of an option = up-front costs + Σ (rent after rent-free + service charge + rates) × area / (1 + r)t
Equivalent annual cost per m² = PV × r / (1 − (1 + r)−n) / area
Excel: =Upfront+NPV(7%,AnnualCosts), then =PMT(7%,10,-PV)/Area
A fictional occupier of 2,000 m², now paying 380 per m², reaches the end of its lease. Its landlord offers a ten-year renewal; a newer building nearby offers a ten-year lease on the same area. All figures are illustrative.
| Item | Renew | Relocate |
|---|---|---|
| Rent | 420 | 400 |
| Rent-free, months | 6 | 12 |
| Service charge | 90 | 100 |
| Business rates | 140 | 130 |
| Fit-out, net of landlord contribution | 150 | 900 |
| Dilapidations on the old lease | 0 | 120 |
| Moving, IT and signage, total | 0 | 150,000 |
| Dual running on the old premises, months | 0 | 3 |
The relocation fit-out costs 1,200 per m², 2,400,000, of which the new landlord contributes 300 per m², 600,000. Renewing needs only a refresh at 150. Dilapidations on the old lease are avoided on renewal because the tenant stays; in practice they are deferred, but the deferral is worth having. Dual running is three months of the old premises at 610 per m² a year, rent, service charge and rates.
Step 1, the up-front costs. Renew: 150 × 2,000 = 300,000. Relocate: fit-out 1,800,000 + dilapidations 240,000 + moving 150,000 + dual running 305,000 = 2,495,000. Moving is 2,195,000 dearer on day one.
Step 2, the annual running cost. Renew: year one (420 × 0.5 + 90 + 140) × 2,000 = 880,000, then 1,300,000 a year. Relocate: year one (0 + 100 + 130) × 2,000 = 460,000, then 1,260,000.
Step 3, discount at 7 per cent over ten years. Running costs are worth 8,738,133 renewing and 8,102,049 relocating, so moving saves 636,083 in present value on the lease itself.
Step 4, add up.
| Up-front | Running, PV | Total PV | Per m² a year | |
|---|---|---|---|---|
| Renew | 300,000 | 8,738,133 | 9,038,133 | 643.41 |
| Relocate | 2,495,000 | 8,102,049 | 10,597,049 | 754.39 |
| Relocating costs more | 2,195,000 | -636,083 | 1,558,917 | 110.98 |
The cheaper rent, 20 per m² or 40,000 a year, and the extra six months free do not come close to paying for the move. Expressed as an equivalent annual cost, moving costs 110.98 per m² a year more for ten years.
| New rent per m² | 12 months free | 18 months free | 24 months free |
|---|---|---|---|
| 360 | 1,071,796 | 757,358 | 442,920 |
| 380 | 1,315,356 | 983,450 | 651,543 |
| 400 | 1,558,917 | 1,209,541 | 860,166 |
Even at 360 with two years free, moving costs 442,920 more. The bigger lever is the fit-out contribution: doubling it to 600 per m² cuts the gap to 958,917. A tenant that moves on these numbers is buying something else, a better building, a better location or a smaller, denser floor, and should price that explicitly.
For the owner, the tenant's cost of moving is negotiating room. Solved for the renewal rent at which the two PVs are equal, the tenant breaks even at 538.89 per m², 118.89 above the 420 offered. No landlord will get all of it, since the tenant can also negotiate, but an owner who opens at a discount to market because "the tenant might leave" is giving away value the arithmetic does not require. Set against it the cost of the alternative: a void, a new fit-out contribution and fees, the re-letting cycle worked in the capital-adjusted yield on an office.
Headline rent, rent-free and fit-out contributions are converted to net effective rent, in both directions, in the free workbook for this case.
Usually renewing, because moving front-loads fit-out, dilapidations, moving costs and dual running. In the illustrative case these add 2,195,000 on day one, while the lower rent and longer rent-free save only 636,083 in present value over ten years, so relocating costs 1,558,917 more.
In theory up to the rent at which the tenant's present value of staying equals that of moving. On the worked 2,000 m² office that is 538.89 per m² against an offered 420, 28.3 per cent higher. In practice the tenant negotiates too and may value a better building, so the landlord captures only part of that room.
Fit-out net of any landlord contribution, dilapidations on the old lease, moving, IT and signage, and dual running while both premises are paid for, plus rent after rent-free, service charge and rates for the term. In the worked case dual running is 305,000 and dilapidations 240,000, together 545,000 that a rent-only comparison misses.
This article is one calculation from Office Real Estate. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
Get the book on Amazon →Free companion files
Also on Amazon UK · Amazon Germany · Amazon France · Amazon Canada
Reading guide: real estate investing, finance and fund management → · All 1340 articles →
If this book helped, or didn’t, a few lines on Amazon are worth more than they look: they are what the next reader goes on. Write a review. The workbook stays free either way.