commercial lease npv
Why do NPV and total lease cost differ?
Why do NPV and total lease cost differ?
Total lease cost adds every year at face value. NPV shrinks later years, so two equal sums can still name different winners.
This page belongs to a validation / pilot concept. It is not generally available. Payment is not collected.
Questions this page also answers
Can two totals match while NPV differs?
Yes. Earlier cash is worth more.
Which number is the budget?
Total cash is what you write. NPV is what you compare.
Should both sit on the memo?
Yes. Finance will ask for both.
Does effective rent replace this?
No. Effective rent is a yearly level, not a lump sum.
Plain-language definition
Total lease cost is the raw sum of rent, extras, and credits.
NPV is that same list after waiting is priced.
The two numbers answer different questions.
A treasurer cares about both the cash they write and when they write it.
Use both on the page. Do not pick one in secret.
This page sits under Commercial lease NPV.
Need the next step? Open Why use NPV?.
See Effective rent vs NPV when you want the nearby walk.
Open What is NPV? if this page is not the last step.
Investopedia defines net present value as later cash brought back to today. See Investopedia on NPV.
Why it matters
A 15-year deal can look equal in aggregate and worse up front.
Whoever holds cash earlier can invest it.
Clients mix the two words and then fight the rank.
Showing both stops that fight.
How it works
- Build one cash list.
- Add the face-value total.
- Discount the same list at one rate.
- Place both numbers on one slide.
- Explain the gap in a short sentence.
Formula in words. Total cost = sum of cash. NPV = sum of cash / (1 + rate)^year.
| Input | Meaning |
|---|---|
| Start rent | First-year rent before extras |
| Extras | CAM, tax, or insurance the tenant still pays |
| Credits | Free rent or build-out money |
| Term | How many years the cash list runs |
| Discount rate | How hard later cash is shrunk |
Worked example
Here is a teaching sample. It is not customer data and not a result from a live client.
| Metric | Path A | Path B |
|---|---|---|
| Start rent | $39,000 | $36,270 |
| Year-1 extras | $7,800 | $8,346 |
| Year-1 credit | $9,000 | $4,950 |
| Sample NPV | $345,010 | $332,270 |
| Year | Rent | Extras | Credit | Cash out | Value today |
|---|---|---|---|---|---|
| Year 1 | $39,000 | $7,800 | $9,000 | $37,800 | $35,000 |
| Year 2 | $40,170 | $8,034 | $0 | $48,204 | $41,327 |
| Year 3 | $41,375 | $8,275 | $0 | $49,650 | $39,414 |
| Year 4 | $42,616 | $8,523 | $0 | $51,139 | $37,589 |
| Year 5 | $43,895 | $8,779 | $0 | $52,674 | $35,849 |
| Year 6 | $45,212 | $9,042 | $0 | $54,254 | $34,189 |
| Year 7 | $46,568 | $9,313 | $0 | $55,881 | $32,606 |
| Year 8 | $47,965 | $9,592 | $0 | $57,557 | $31,096 |
| Year 9 | $49,404 | $9,880 | $0 | $59,284 | $29,657 |
| Year 10 | $50,886 | $10,176 | $0 | $61,062 | $28,284 |
| Sample NPV | — | — | — | — | $345,010 |
Sample NPV for Total-versus-NPV sample is about $345,010. A second path lands near $332,270.
Year 1 of Total-versus-NPV sample has rent of $39,000.
Shared building cost is $7,800.
A credit of $9,000 lowers the cash you pay that year.
Cash out this year is about $37,800. Year one carries the Total-versus-NPV sample credit.
Later cash gets a shrink for time. At 8 percent, year 1 is worth about $35,000 today.
Next, year 2 rent is $40,170.
Assumptions
- The Total-versus-NPV sample uses one visible 8 percent rate.
- Credits hit in year one unless the page says otherwise.
- Both options share the same extra basis.
- No percentage rent sits in this teaching walk.
Edge cases
A mid-year start needs a stub period, not a fake full year.
A credit that pays later must move to that later year.
A cap on extras changes the later risk, not the first sticker.
Common mistakes
- Calling the raw sum NPV.
- Hiding the rate so the two numbers look like twins.
- Dropping later years from the raw sum.
- Using total cost to pick between different terms without a note.
Decision implications
Total lease cost adds every year at face value. NPV shrinks later years, so two equal sums can still name different winners.
If the gap is thin, show a second rate before anyone picks.
If one path wins only from a mistimed credit, rebuild the list.
This page answers one question. Nearby pages cover the next step.
See Why use NPV? when you need that next step. Open Effective rent vs NPV for the nearby walk. Use What is NPV? if you want a second path.
Limits
- The number does not score daylight, transit, or floor plate.
- The number does not replace a legal read.
- Do not let one metric pick a space the team cannot use.
- Do not use this page as a clone of a nearby question.
U.S. BLS describes how brokers advise clients on property deals. See BLS broker occupation data.
Next step
This site is a validation / pilot concept. It is not generally available. Payment is not collected.
Ready for a bounded next step? Request Pilot Access or see how it works and compare commercial leases.
What is NPV in a commercial lease? · What discount rate should be used for commercial lease NPV? · When is NPV the wrong metric? · How is lease NPV calculated? · What costs belong in commercial lease NPV? · What is the difference between NPV and present value in a lease? · How should you explain lease NPV to a client? · Why use NPV when comparing commercial leases?
Trusted sources
These are public references. They are not endorsements and not client results.