Market Leasing Assumptions

If you attempt to leave the rent roll or insert another line, and you haven't set up any Market Leasing Assumptions, Argus is going to make you. And that's what's happening to me right now, so let's go ahead and give it what it wants. 

Market Leasing Assumptions are your projections of what will happen in the future. We already know, according to our rent roll, that Willa's Mediline is going to be in the space through 4/30/2018. But what happens after that? We don't know, but we'll make some assumptions. So! Click on the box under Market Leasing until a new box pops up.

Starting at the top. 

Category: This is the name you're going to give the MLA. It's good to give it a descriptive name so you can remember what it is you're modeling.  I'm going to name this MLA "Office- $2.80" 

Press Tab. (To switch through menu items, press tab. To switch through table items, press enter. It takes awhile to get used to it. Clicking on the box you want to work in works as well.) 

Lease Status: Leave it as Speculative. 

Press Tab. 

Renewal Probability

Definition: The likelihood that the tenant is going to renew their lease. I typically enter this as 75%.This is saying, there's a 75% likelihood that when Willa's Mediline's lease expires, they're going to renew.

It's possible to enter the number straight into the box, but this can create a headache down the road. It's best to have all your assumptions as detail. So, with the white box next to Renewal Probability selected, either press the "Detail..." button down below OR Alt+E. 

A box that says "Renewal Probability" will pop up. It will be blank (unlike mine, that's pictured below). 



















Click the "New..." button OR Alt+N. A new box will pop up looking like: 

Name it "75%" in the Category Box. 

Leave the "Based On" box alone. It should say "None"

Click on the first white box next to % to Renew.

Type 75%. 

Press Alt+E to extend 75% into every year. (OR press the extend button) 

Detail (what you're in right now) gives you the ability to have different assumptions for different years. For renewal, it's rare you would assume a different % for different years. 

Your table should now look like: 

Press the OK button. (OR tab then enter.) 

Now you have a renewal probability assumption! 

Press the Close button. (OR tab then enter.) 

Renewal Probability is entered. Let's move onto Market Rent. 

Market Rent

Definition: The price a tenant will pay at the beginning of their lease. 

We once again want to enter the rate in the detail. With the Market Rent white box selected, press the Detail... button (Or Alt+E) Alt+E does so many wonderful things. 

Then Press "New..." (Or Alt+N) This box should pop up: 













The market rent for this building is $2.80 per square foot per month. for the Category name, type in the category box: $2.80/SF/MO. 

Based on: None

Unit of Measure: $/SqFt/Mo (It can be super duper easy to forget to change this box from psf per year to psf per month and this will lead to some wonky/incorrect cash flows) so make sure you change it to $/SqFt/Mo. Sometimes you'll be given market rates on a per year basis and sometimes on a per month basis. It all depends on the market and what's standard in the market. 

Sometimes I'll get information such as: "Market rent should be $2.80 in 2015, $3.00 in 2016, $3.20 in 2017, and $3.30 in 2018 with 3% rent growth after that." I would override the inflation with 0% and input those numbers in the boxes. It would look like this: 

But this time we just want the market inflation to control how the rent grows. Enter $2.80 in the first New box and press Alt+E or Extend... so every box has $2.80 in it. Do not enter anything in the renewal line. This will make it default to the New line. Do not enter anything in the inflation line. This will make it default to the Market Rent inflation we put in the Inflation Tab. It should look like this when you're done. 

Press Ok. Press Close. You should be back to the main MLA page. 

Let's move onto Months Vacant. 

Months Vacant

Definition: The amount of down time between when the old lease expires and the new lease begins. Depending on how aggressive we're being, usually between 6-12 months. Let's assume 9 months of vacancy. 

What you're entering in is GROSS Months Vacant. There are both Gross and Net months Vacant. The difference revolves around the Renewal Probability. 

Given a Renewal Probability of 75%, 75% of the time, the tenant will be assumed to renew and there is NO downtime. There are no months vacant in the space.  25% of the time (100%-Renewal Probability) there will be 9 months of vacancy. Argus takes these two assumptions, and calculates the NET Months Vacant. 

Given 75% Renewal Probability and 9 months vacant: 

Net Months Vacant = 2.25 months (75% * 0 mos. + 25% * 9 mos. = 2.25 mos.) 

So. Once again to enter the 9 mos. vacant, we're going to enter it in the detail. Seriously,  totally worth it to go into the detail. 

This is exactly what I pressed on the keyboard starting at the MLA screen with Months Vacant selected: 

Alt+E

Alt+N

9 mos. 

Tab

Tab

9

Alt+E

Tab

Enter

Tab

Enter

You should be back in the MLA's with 9 mos. entered in the months vacant. 

Let's just leave Tenant Improvements, Leasing Commissions, Rent Abatements and Security Deposit Alone for right now. We'll swing around and fill in those assumptions in a new post. 

Let's jump to Rent Changes. 

Rent Changes

It currently says "No" and we're going to change that. 

Definition: Rent changes affects the rent your speculative tenant will pay once the lease begins. If you do not do anything with the Rent Changes, every lease that begins in 2015 with these MLA's will pay $2.80 for the entire term. Unless you're working with the government or failing retail, that isn't realistic. 

Typically I model either 3% annual increases or $0.50/per SF/yr rent bumps.

With the Rent Changes white box selected, press Alt+E (Detail...) Press Alt+E again. Press Alt+N. You should get to the screen shown below:

Name the category 3% Annual Inc. 

Go to the date column and Enter "1" This means the start of the lease/Month 1 

Press Enter. 

Enter "100" in the Amount Box

Press Enter. 

Under the Units Column click on the box and scroll through the options until you find  % of Market

Press Enter. 

You should be on the second line. Enter "13" This is the number of months into the term. We want there to be an increase in rent the month after the last month of the year, i.e. the 13th month. 

Press Enter. 

Enter "3" 

Press Enter. 

Scroll through the Units until you find "% Inc, Annual" 

Press Enter. 

This means that every year, the rent will grow by 3%. 

It should look like this when you're done: 

Press Ok then press close then Ok. You should be back at the Market Leasing Assumptions page. 

The last thing we'll go over in this post: Term Lengths

You can't enter detail into Term Lengths. We're going to assume a Term of 5 Years. Enter 5 in the box. 

Your MLA's should now look like this: 

Oops, except I had already entered in TI's/Leasing Commissions/Rent Abatements. Ignore those! Press ok! You should be back on the Rent Roll page. Hooftah. I feel like we covered a lot.  

Rent Roll

Ok! Download this rent roll: Sparkle RR. Then we'll get started. 

Go to Tenant > Rent Roll (Also, CTRL+R)

Click Insert. (Note: once you have a line inserted, if you click away, argus will demand you input Market Leasing Assumptions. If this happens go: HERE for an explanation of MLA's)

The first tenant in the rent roll is Willa's Mediline. Under Tenant Name/Description write: Willa's Mediline Press Enter.

Under the Suite, enter 101, to match the rent roll. Press Enter.

Office will automatically populate. Press Enter.

Contract will automatically Populate. This means the lease is signed. If you have a letter of intent or just a suspicion that the lease will be in-place you would change this to "speculative". Willa's Mediline is contract so press enter.

The size is 13,699 SF.  Press Enter.

Start Date is 5/1/2012. Entering it in argus you'll put 5/12. Argus assumes if you put month/year in it starts on the first. Press Enter.

End Date is 4/30/18. Enter it in argus as 4/18. Argus assumes end date to end on the last day of the month.

Base/Min Rent is next. If there was one base rent for the entire term, you could enter it straight into the cell. But since the rent roll shows there are rent increases, you must go into the Detail. There's two ways. When the Base/Min Rent is selected, you can press the detail button or press ALT+E.

Detailed Base Rent will pop up.

Enter in Willa's Mediline Rent:

It's always best to enter annual amounts since they're more specific. Under Units, there are many options. Press ok.

Rent changes are within base rent so press enter. Don't use Rent Changes. Don't use Retail Sales. Press enter. Reimbursements is next and deserves a whole post.

General Options

At the beginning of every argus file, there's a couple options I always change around. In the left hand corner, on the same line as "File" and "Property" there is "Options.

Click Options > Input...

The following screen pops up.

Select Use market rate abatement categories

Select Use reimbursable reporting groups

Select Allow leases to start and end on specific dates

Screen will look like this:

A box will pop up asking if you are sure you want to enable specific dates. Yea, you are. Press ok.

Argus is ready to go. Now we get to input the rent roll.

Inflation Rates

On the Property Inflation Tab. 

Most everything can be left alone. 

Based On: None

Reimbursement Method: Switch to Calendar reimbursement under calendar inflation

Inflation Month: Analysis Start

Below you will see a table where you will input the inflation rates you want. 

In the General Row you will see 0% in each of the years. Miscellaneous Revenues, Reimbursable, Non-Reimbursable, etc, all have nothing in the rows. This means they will default to the General Inflation. 

Typically the assumption is 3% inflation. This means every year everything will grow at 3%. 

Input 3% into the first General box under Dec-2016. 

We want all the years to be 3%. Pressing enter will move your icon across and you can manually enter 3% into each of the boxes OR on the right is a button called "Extend" push it and the 3% will extend across the row. OR ALT+E will do the same. 

I leave the rest of the boxes empty so they default to the General Inflation EXCEPT for Market Rent

Growing up in a brokerage house, I'm of the belief market rent must grow at a better rate than 3%, right?!?! 

Let's assume the Sparkle palace is right in the middle of a CBD that fell on hard times during the recession and is Hot hot hottototot! Grow market rent at the following rates: 

2016: 5% 2017: 7% 2018: 5% 2019: 4% 2020+: 3%

So if Market rent is $20.00 /SF/YR then in 2016 it will be $21.00, in 2017 it will be $22.47, 2018 it will be $23.59 etc. 

We're done with the property Description. The other tabs aren't important. Press ok and exit out. Next we'll go into options and change a few things about the setup of the argus. 

Area Measures

We have our timing input! If not, go HERE! 

Onto the next tab. Onto the next tab. 

Area Measures. Click it. The below screen will pop up. 

This is where you'll input the Rentable Square Feet of your property. 

Property Size should be selected when you get on this screen. Click the "Edit..." Button. 

Sparkle Palace has a lovely 47,685 SF. Input that number in the Size Box. 

There are many many other things you can do with the property size, but they're all very sideline options which really aren't worth our time to delve into right now. I rarely, if ever, use an alternate property size. 

Click OK. 

Property Size is Inputted! 

Property Constants is unimportant! 

Onto  Property Inflation! 

Timing- Analysis Start Date & Years to Report

Ok! We've got our Reporting Start Date of 2/15, what's our Analysis Start Date?  

Always, always I input the Analysis Start Date as starting in January. The year can vary, but we want it to be on the Calendar Year because we almost always get the information for our input into argus off documents that work around the calendar year (e.g. historical operating statements and budgets).  

The Analysis Start Date controls argus' assumptions about input. We have to tell Argus: these operating expenses/miscellaneous revenues/etc. are based on a calendar year. Then Argus does the dirty work so when we say we have a reporting start date of 2/15, it calculates inflation/occupancy/does our dirty work and gives us an output starting 2/1/15 and ending 1/31/2016. 

Depending on the time of year and what the client is willing to give you (budgets are very sacred), that will decide what you're going to work off of. Work off the most up-to-date information they give you. If that's the current year's Year-To-Date (YTD) actual operating statements with the remaining months revised budgeted amounts, great. If it's next year's budget, awesome. This will decide which year you pick for the Analysis Start Date. If you're inputting 2014 numbers, the year will be 2014. if you're inputting the 2015 budget, the year will be 2015. 

Let's say the owner of Sparkle Palace gave us everything they had, which included a 2015 budget. We're going to input the Analysis Start Date as 1/15

The third box- Years to Report or End Date just tells argus how many years of cash flows you want to see. I usually pick 12. You can go up to 40 years of reporting. 

Input 12 in the Years to Report or End Date Box

Now! Onto Area Measures

Timing- Reporting Start Date

OK great! You've created a new file and are staring at the Timing Tab under Property Description, right?! If not and you're confused, go HERE first!

Otherwise, if you've somehow gotten away from the timing tab, it's easy to find again. In left hand corner, select Property > Timing...

Voila! Back on the timing page. 

First we're going to talk about Reporting Start Date (the second Box on the screen) 

Now, All this knowledge I'm throwing down... 65% of it comes from my time working in the Capital Markets group of a brokerage firm. Other companies/professionals have different needs/desires/wants from argus. This is just my experience. Property management almost certainly approaches argus different than an aggressive brokerage house coming in and trying to sell a property. 

For brokerage, typically when we are using argus it is because a client has come to us and is considering selling their property. All our assumptions are based on this, and the first assumption we usually make is about timing. Real estate transactions take a long time. It's the nature of the multi-faceted, one-of-a-kind, sometimes headache-inducing beast. 

If we set up a model in September, most likely we're looking at a Year End Close. Hopefully, cross your fingers, before Christmas. The timing of your cash flows should reflect that. Our argus therefore, will have a Reporting Start Date, (if it's September, 2014) of January 2015. 

Why January 2015? Because we're trying to tell Buyers, "Hey look! If you purchase this fabulous property, and own it starting January 1, 2015, look how much money you can make! 

Typically you want to look 3/4/5 months out, but it all depends on what the client wants. Real estate is weird. Each property has different needs. 

Now, a January 2015 timing is fabulous. It feels so good. It's on the calendar year. Seriously, so great. Maybe too simple for us though. Let's say we have a client that is superstitious about closing around the holidays or they want the sale to be in Q1 2015 and they want to close around the end of January. In this tutorial for the Sparkle Palace we'll have a Reporting Start Date of 2/15 (February 2015). This goes in the SECOND BOX. Put it in there! 


NOW! Onto Analysis Start Date.....

Start a New Argus

First things first. My advice- always start a new argus file. 

Too many buttons. Too many things to forget to check. 

SO! Open argus. Not gonna help you with that one. 

Something to be aware of: Argus automatically saves every thing you do immediately. Delete a tenant? It's gone. (unless you Ctrl-Z before exiting screen) 

So duplicate your file often! We'll get there. 

But for now....your screen should look like this. 

Just like any office product, click in the left hand corner, File > New > From Scratch

I don't know what "from template"/"ARGUS Wizard" are, and I don't trust them. You don't need them! YOU Will be the Argus Wizard when we're done. 

It will have you input a File Name. Usually I make it the Property's Name/Address and the date. 

I've made up a fictitious property and it's called the Sparkle Palace. So my file name is: 

Sparkle Palace 092814 (Since its Sept 28, 2014) 

Click Save. Now we have our very own argus file!!!! 

Automatically a screen will pop up called "Property Description" 

There's only one thing you have to be really cognizant of on this page: Property Type. 

This is about the only thing in Argus that can't be changed. Argus will warn you when you leave the page. I work with mostly office, and often in an office building you'll want to have the option to put in retail so I usually pick "Office & Retail" in the drop down box. Best to give yourself as many options as possible. There really isn't that much difference as far as I'm concerned, but if you're working on an industrial building, pick industrial. Or Office/Industrial. Argus isn't that great for Multifamily, so if that's what you're working in... why are you here? Just use excel. 

SO starting at the top: Put in the Property Name. If you want, put in the address/city/state. I'm lazy so I'm not going to. 

Pick your Property Type: I'm picking Office & Retail

If you look above Property Name, you'll see there are lots of Tabs. Currently the Property Description tab is selected. Directly to the right is a tab called Timing. Click that tab. 

A screen will pop up warning you "You cannot change the base property type after exiting this screen. Is this one OK?" and you tell argus, Yes. I know that. 

Woohoo! You have an argus file set up! NOW... Onto Timing!