Real estate investing renewal probability workout.

On our workout tab, we are being asked to use the weighted average renewal probability to calculate the five year expected cash flow for the following situation. We have the possibility of a tenant renewal being weighed against the probability of a new tenant coming in and they're weighting it at 80% that the tenant renews versus 20% that the new tenant comes in. And there will be some cost differentials because tenant allowances have to be allowed for the new tenant as well as downtime to find that tenant and to, and to build out the tenant improvements. There's also a difference in the leasing commission paid for a renewal versus a new tenant. And the new tenant will be paying a slightly higher market rate versus the renewing tenant. So we're gonna calculate the five year expected cashflow using these probabilities and assumptions. The base rent per square foot per year will be the calculation of rent per square foot for each tenant times the probability.

The leasing commission, which will be calculated on the base rent will be weighted as well.

The tenant allowance per square foot will also be weighted 15 times 20, and the downtime as well. We now need to put these weightings into the forecast. The rental revenue is not going to change each year so we'll anchor that. Again, this is the weighting of the revenue from the two different parties so that's not going to change over the next five years. We're not factoring in any price increases. The leasing commission is going to be calculated based on the net rental revenue of the five year contract. So we're assuming that this is essentially a five year contract for renewal here. So we're going to base that leasing commission on the entire amount of rental revenue.

And this is a cash outflow because it is being paid outside of the building to an agent or a broker.

The leasing commission only gets paid in that first year. It doesn't get paid each year because it's only paid to bring in a new tenant. The tenant improvements as well are only gonna happen in the first year of a new tenant. So we're going to take the tenant allowance per square foot of $3 and multiply it by the square footage which is the same under either tenant and this is also going to be a negative.

And then lastly we have to calculate what the downtime translates into in terms of lost rent, and that's going to be equal to the annual rent revenue divided by 12 to get it into months times the number of months we expect to lose. And since it is a loss, it's going to be negative one and that again is only gonna happen in one year because you only have the downtime once. And I will move my formulas out here to the right so I don't get any values, and I will simply add up what my projected cash flow is for the next five years of this lease or potential lease using the renewal probability.