Hi,
How do we calculate the monthly lease for build-to-suite project. My thinking is the project includes 2 portions : land and building

Land : based on ground lease comp ?

Building : Let’s say if I put in $300K to improve the property. Can I use the annuity formula to recapture the $300K at let’s say 10% interest for 20 years.
Therefore, the total lease cost is the combination of monthly landlease + building monthly recapture amount. Can someone share with me if this is the right approach ? Is 20 year recapture the right number ? 10% interest reasonable at this time ?

Hey, if you’re looking to calculate the monthly lease for a build-to-suit project, here’s how you can approach it.

First, split it into two parts: the land and the building.

For the land, you’ll want to check out what similar ground leases are going for in the area. This will give you a good idea of what you should charge monthly just for the land use.

Now, for the building: let’s say you’ve put in $300K for improvements. You can definitely use the annuity formula to get that money back over time. Think of it like you’re giving yourself a loan. If you want to recapture that $300K at 10% interest over 20 years, you’d use the annuity formula to figure out the monthly payment. This payment would cover both your principal and the interest.

So, your total monthly lease cost would be the sum of the monthly land lease and the monthly building recapture amount.

As for the 20-year period and the 10% interest rate, these numbers are quite common, but they depend on the market and your goals. Twenty years is a standard timeframe for recapturing real estate investments. However, 10% is a bit on the high side for interest, which could be reasonable depending on the current market conditions and the risk you’re willing to take. It might be worth checking current interest rates or talking to a financial advisor to make sure your numbers are realistic.