How it works
The cash flow is the list of money in and out by year. Write that list first.
- Write a row for each year. Put rent and extras in. Put credits in the year they land.
- Choose one rate. Write it next to the table so no one can hide it.
- Divide later cash by one plus the rate, raised to the year number.
- Add the year values. Compare that sum to the other option on the same rate.
Formula in words. For each year: cash that year divided by (1 + discount rate) to the power of the year. Then add the years.
| Input | Meaning |
|---|---|
| Base rent | The contract rent before extras |
| Operating extras | CAM, tax, and insurance if the tenant pays them |
| Incentives | Free rent and tenant improvement allowance |
| Term length | The years you will actually occupy |
| 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.
Lease A start rent$40,000
Lease B start rent$37,200
Discount rate8%
Sample NPV A$364,469
| Metric | Lease A | Lease B |
|---|---|---|
| Start rent | $40,000 | $37,200 |
| Year-1 extras | $9,000 | $9,630 |
| Year-1 credit | $15,000 | $8,250 |
| Sample NPV | $364,469 | $353,746 |
| Year | Rent | Extras | Credit | Cash out | Value today |
|---|---|---|---|---|---|
| Year 1 | $40,000 | $9,000 | $15,000 | $34,000 | $31,481 |
| Year 2 | $41,600 | $9,270 | $0 | $50,870 | $43,613 |
| Year 3 | $43,264 | $9,548 | $0 | $52,812 | $41,924 |
| Year 4 | $44,995 | $9,835 | $0 | $54,830 | $40,302 |
| Year 5 | $46,794 | $10,130 | $0 | $56,924 | $38,742 |
| Year 6 | $48,198 | $10,434 | $0 | $58,632 | $36,948 |
| Year 7 | $49,644 | $10,747 | $0 | $60,391 | $35,238 |
| Year 8 | $51,133 | $11,069 | $0 | $62,202 | $33,606 |
| Year 9 | $52,667 | $11,401 | $0 | $64,068 | $32,050 |
| Year 10 | $54,247 | $11,743 | $0 | $65,990 | $30,566 |
| Sample NPV | — | — | — | — | $364,469 |
How to read the sample
Sample NPV for the teaching lease is about $364,469. A second path lands near $353,746. That gap is a talking point, not a promise.
A build-out check arrives while rent is still low. If one path wins only because a credit sat in the wrong year, start over.
Year notes for the teaching lease
- Year 1 of the teaching lease has rent of $40,000.
- Shared building cost is $9,000.
- A credit of $15,000 lowers the cash you pay that year.
- Cash out this year is about $34,000. A build-out check arrives while rent is still low.
- Later cash gets a shrink for time. At 8 percent, year 1 is worth about $31,481 today.
- Next, year 2 rent is $41,600.
- CAM, which is a shared building cost, is $9,270.
- There is no credit in this year.
- You pay about $50,870 this year after extras and credits. The step-up starts. The credit is gone.
- Time shrinks later cash. At 8 percent, year 2 is worth about $43,613 today.
- Then year 3 rent is $43,264.
- Extras for the building come to $9,548.
- Credits skip this year.
- The net cash this year is about $52,812. Escalation is now the main story.
- Waiting has a price. At 8 percent, year 3 is worth about $41,924 today.
- After that, year 4 rent is $44,995.
- The shared building cost this time is $9,835.
- No extra credit shows up this year.
- Cash out this year is about $54,830. Later rent is bigger, but we shrink it more.
- Later cash gets a shrink for time. At 8 percent, year 4 is worth about $40,302 today.
- In year 5 of the teaching lease, rent is $46,794.
- Shared building cost is $10,130.
- There is no credit in this year.
- You pay about $56,924 this year after extras and credits. The last year still belongs in the sum.
- Time shrinks later cash. At 8 percent, year 5 is worth about $38,742 today.
- Year 6 of the teaching lease has rent of $48,198.
- CAM, which is a shared building cost, is $10,434.
- Credits skip this year.
- The net cash this year is about $58,632. Keep this later year in the sum for the sample.
- Waiting has a price. At 8 percent, year 6 is worth about $36,948 today.
- Next, year 7 rent is $49,644.
- Extras for the building come to $10,747.
- No extra credit shows up this year.
- Cash out this year is about $60,391. The row still belongs in the sum for the long path.
- Later cash gets a shrink for time. At 8 percent, year 7 is worth about $35,238 today.
- Then year 8 rent is $51,133.
- The shared building cost this time is $11,069.
- There is no credit in this year.
- You pay about $62,202 this year after extras and credits. Keep this later year in the sum for the long path.
- Time shrinks later cash. At 8 percent, year 8 is worth about $33,606 today.
- After that, year 9 rent is $52,667.
- Shared building cost is $11,401.
- Credits skip this year.
- The net cash this year is about $64,068. The row still belongs in the sum for the long path.
- Waiting has a price. At 8 percent, year 9 is worth about $32,050 today.
- In year 10 of the teaching lease, rent is $54,247.
- CAM, which is a shared building cost, is $11,743.
- No extra credit shows up this year.
- Cash out this year is about $65,990. Keep this later year in the sum for the long path.
- Later cash gets a shrink for time. At 8 percent, year 10 is worth about $30,566 today.
Add those year values. The sample NPV for the teaching lease is about $364,469. This is a teaching sample, not a client result.
Trusted sources
These are public references. They are not endorsements and not client results.