Comparing rent on a per-square-foot basis can help you establish an initial measure of a property’s income potential, but it’s not enough to compare commercial real estate leases accurately.
Even when agreements look similar, differences in rent structure, operating expenses, or renewal clauses — no matter how small — can alter the true financial outcome of a deal.
Doing a comparative lease analysis lets you quantify these differences, so you can evaluate multiple leases side by side and measure their total economic impact over time.
How do you do that?
In this guide, we’re explaining how to perform that analysis step by step so you can make better, data-driven leasing decisions before signing or investing.
What is the purpose of comparative lease analysis in commercial real estate?
A comparative lease analysis can give both parties in a commercial real estate deal — tenants and landlords / CRE investors — a clearer picture of the financial implications behind each lease option.
Tenants can use this information to identify which lease provides the best overall value and matches their long-term budget.
And as a CRE investor, you can use the analysis to see which lease structure can provide stronger returns and more consistent income.
How do you do a comparative lease analysis for commercial real estate?
1. Calculate the present value of the lease:
Most commercial real estate leases last between three and five years, so you must:
- calculate the annual cash flows for each year of the lease, and
- discount them back to their present value using a selected discount rate.
Be sure to account for all cash flows and related costs — not just the base rent, but also upfront expenses like tenant improvement allowances. This helps you see the full financial picture of the lease.
2. Calculate the net effective rent.
This number tells you what you’re really earning on a CRE lease once you factor in concessions such as rent-free periods or fit-out contributions.
It’s essentially the average income you can expect over the lease term, not just what’s printed on the rent schedule.
Calculating this metric also helps you make apples-to-apples comparisons.
In some cases, a lease might look attractive on paper, but the actual yield could be much lower once you account for incentives.
Normalizing the numbers helps you see the full story and decide more objectively which lease performs better over time.
3. Determine the net present value (NPV).
Put simply, this number is the total cost or income of the lease over its entire term. That meaning depends on your position in the deal.
The lease with the lowest NPV generally indicates the most cost-effective option for tenants, but if you’re the property owner, the lease with the highest NPV often produces the greatest net income after accounting for all costs and incentives.
The summary above outlines the process in simple terms, but the reality is that completing a full comparative lease analysis is much more time-intensive and detail-heavy.
You must read each lease carefully to identify rental rates and the lease type (gross, net, or triple net), as well as all associated obligations that affect costs or income.
Each set of numbers must then be entered into the analysis model, so you can find the final comparison value.
It takes practice and a solid understanding of both financial modeling and lease structures to be adept at comparative analysis.
If you are new to lease evaluation, it’s often much more prudent to consult experienced professionals who can handle this part of due diligence for you.
What considerations should you look at before you do a comparative lease analysis?
1. Location of the properties
The property’s location can heavily influence its appeal to tenants, and therefore the potential returns for you.
Naturally, you can expect higher rents from spaces near main roads and transportation hubs, or those with convenient parking and easy access points.
They also deliver better exposure and stronger tenant demand — things that can increase your property’s long-term value.
While these prime locations may cost more upfront, they often justify the premium through greater visibility and foot traffic, which brings more business to your tenants. You’ll find them easier to maintain in terms of occupancy.
They tend to appreciate more quickly, too, making them stronger long-term investments.
2. Physical aspects of the properties
The property’s layout and physical condition often directly affects whether a tenant signs or walks away.
Different tenants look at different things when evaluating a space — for example, a retail tenant might care about how visible their signage will be and may expect flexible floor plans, while an office tenant may care more about high-speed connectivity and modern finishes.
But all tenants want to know if the space can meet the demands of their operations and reflect the identity they want their brand to convey.
You need to understand these preferences to assess how competitive your space really is and whether upgrades could improve lease performance.
3. Income potential of the properties
Comparing lease cash flows alone doesn’t always give the full picture.
Some tenants may willingly pay you more if your property perfectly suits their operational or branding requirements.
You should also consider the reliability of the income stream. Two seemingly similar properties can have vastly different values depending on tenant stability and risk.
For example, a fully occupied property leased to a long-term, creditworthy tenant will be valued higher than one that’s struggling with vacancies.
That difference will show up in key investment metrics — like a lower cap rate or a higher price per square foot — because buyers are willing to pay more for stable, predictable cash flow.
4. Transaction date
Using outdated data can skew your analysis because market conditions can change quite quickly, sometimes in a matter of a few months.
Was a neighboring building sold five years ago?
Those figures may no longer reflect the current market reality. The same goes for older leases.
Rates and terms from past years may not be relevant in today’s environment.
By focusing on recent transactions (lease agreements or property sales), you’re more likely to capture accurate benchmarks.
You might find it challenging to do detailed financial modeling on your own, and that’s not a shortcoming on your part.
Even seasoned CRE investors who are working solo often bring in external advisors or analysts.
It’s always more prudent to partner with a private equity firm that can extend their professional expertise and analytical tools, as well as industry experience, to evaluate leases and identify risk more effectively.
How do you apply comparative analysis information to the subject property?
Once you have identified two or more comparable properties, it’s time to apply the information you got from those comparables to the property you’re analyzing.
Understanding the property’s operational context
- It’s never a good idea to just accept the reported income figures at face value without checking how reliable those cash flows have been in the past. Take the time to review historical rent rolls and assess how stable the income has been over time.
- Don’t forget to estimate what kind of maintenance or upgrades might be necessary to keep the property competitive. It’s only when you factoring in those operational realities can you accurately judge whether your chosen comparable truly represents fair market value or whether you need to adjust it to reflect the property’s actual condition and performance risk.
- Don’t just look at the property itself — you should also look closely at who the tenant is and how long the lease lasts, as well as what special terms (if any) might be included. These details affect both the income potential and the likelihood of default/vacancy of each lease, so accounting for them helps ensure that your comparison reflects the real financial position of each property.
Valuation methods
Once you’ve assessed the qualitative and quantitative factors, you’ll have more confidence in making well-reasoned assumptions on how the property operates, and you can use those assumptions to estimate its value.
Depending on the nature of the property and available data, you can use several valuation methods.
- The DCF (discounted cash flow) estimates how much income the property will generate over a set holding period, and then discounts those future cash flows back to today’s value. It essentially shows you the present value of the property’s future income and can be especially useful when you want to capture the full picture of a property’s long-term returns.
- Income capitalization and price per square foot (or per unit) are based on the property’s current income and performance. They essentially give you a snapshot of what the property is worth today based on how much revenue it’s producing now.
We can help you invest in commercial real estate
At Private Capital Investors, we focus on direct private lending and take pride in delivering customized financing solutions to match your investment goals. Our approach goes beyond lending — we act as your financial advisor and partner in the commercial real estate market.
Let’s help you explore the best funding options for your commercial property investments. Call us at 972-865-6206 or email info@privatecapitalinvestors.com to get started on your next CRE project.
