How do you model lease rollover, TI and LC in office and retail?

The roll itself

Three inputs per expiration. The market rent you expect at that future date, which is today's market rent grown forward and not today's contract rent. The renewal probability, which is a judgment about the tenant and the space. And the term of whatever replaces the expiring lease.

A weighted blend of renew and re-tenant is the standard approach and it is fine for portfolio cash flow. It is not fine for a single large tenant, where the two outcomes are so different that an average describes neither. Model that one discretely and look at both branches.

Tenant improvements and leasing commissions

Tenant improvement allowances are quoted per square foot and paid near lease commencement, not spread over the term. New-lease allowances run materially above renewal allowances because a renewing tenant does not need the space rebuilt. Leasing commissions are a percentage of lease value and are usually split between the tenant broker and the listing broker, with renewals commissioned at a lower rate or not at all.

Both are real cash, both land in a year, and both sit below net operating income. A model that reports net operating income growing smoothly while quietly consuming several million dollars of tenant improvement and commission capital in year three is not lying, but it is not communicating either.

Downtime and free rent are not the same thing

Downtime is the vacancy between one lease ending and the next one paying. Free rent is abatement inside a signed lease. They both reduce collected rent and they behave differently: downtime also stops expense recoveries, while an abated tenant is often still reimbursing operating expenses.

Both should be explicit. Folding them into a single occupancy percentage destroys the timing, and timing is the entire point of modeling a roll.

Recoveries, expense stops and base years

The recovery structure determines who absorbs expense growth. Triple net passes essentially all operating expense through. A base year or expense stop structure passes through only the growth above a fixed level, which means the landlord keeps the base and the tenant takes the increases. Full service gross leaves the landlord with everything.

The trap is a base year that resets on a new lease. Re-tenanting a suite in a base year building hands the new tenant a fresh stop at current expense levels, which quietly removes several years of accumulated recovery income. It shows up nowhere in the rent comparison and everywhere in the cash flow.

Retail adds percentage rent, where the tenant pays a share of sales above a breakpoint. It is genuine income and it is also the most volatile line in a retail model.

Rollover concentration is a capital problem

Sort the expiration schedule and look for the year that holds a large share of income. That year needs a renewal assumption, a downtime assumption, and the balance sheet to fund the tenant improvement and commission bill if the assumption is wrong. Lenders look at this before they look at the going-in coverage.

Altyst rolls each tenant on its own expiration with tenant improvements, leasing commissions, downtime, and a renewal probability, and it re-rolls each generation across a long hold rather than stopping after the first cycle. Base-year expense stops reset at rollover the way they do in a real lease, percentage rent is computed over a natural or stated breakpoint, and free rent is booked as abatement with recoveries still billing. Two limits worth knowing before you rely on it: expirations resolve to annual periods rather than to a month, and renewal options and month-to-month tenancies are not modeled as such, so a lease that lives or dies on an option date is one to check by hand.