Office leasing costs can consume years of operating cash flow. Underwrite tenant improvements, leasing commissions, downtime, free rent, and building work as a coordinated funding schedule. Treating these costs as a small annual reserve can obscure the actual amount needed when a major lease expires.
The key output is the maximum cumulative cash deficit before the space becomes reliably rent-producing. A stabilized NOI can support value while the property still lacks the liquidity to get there. Investors need both the stabilized result and the path to reaching it.
Distinguish four separate periods
The leasing timeline begins before expiration. The current tenant may still be paying while the owner markets the suite, negotiates a renewal, or develops a replacement plan. After the space becomes available, a vacant marketing period may follow. Construction and tenant move-in create another period. Free rent can then continue after occupancy.
Do not compress those intervals into one “six-month downtime” input without defining what it includes. A suite can be leased but not delivered, delivered but not occupied, or occupied but not paying base rent. Each status has different cash consequences.
A signed lease improves certainty only to the extent its conditions are satisfied. Identify tenant contingencies, required approvals, financing conditions, delivery deadlines, and landlord work. A marketing pipeline is not a contracted rent stream.
Hypothetical rollover of a 10,000-square-foot suite
Assume a tenant leaves at expiration. The owner forecasts six months to sign a replacement, followed by three months of construction. The new five-year lease includes three months of free base rent after delivery. Base rent is $30 per square foot annually. Assume expenses and recoveries are modeled separately.
| Funding item | Assumption | Cash requirement |
|---|---|---|
| Vacant carry | Nine months × $8,000 | $72,000 |
| Tenant improvements | $60/sf × 10,000 sf | $600,000 |
| Leasing commission | 5% × $1,500,000 scheduled base rent | $75,000 |
| Free base rent | Three months × $25,000 | $75,000 foregone rent |
| Direct cash costs before free rent | Carry + TI + commission | $747,000 |
The $75,000 free-rent item is foregone contractual revenue relative to full rent, not another check written to a contractor. Keep it separate to avoid double counting. The owner nevertheless must fund operating costs and debt service during that period.
The $747,000 is also not a complete property-level funding requirement: include property debt service, other tenant cash flows, owner overhead, contingency, and building work. Commission is a hypothetical assumption; the actual brokerage contract determines the amount and payment milestones.
At $300,000 of annual base rent, $675,000 of TI plus commission equals 2.25 years of face rent before operating expenses. That ratio makes the leasing capital’s scale visible without claiming it is an industry norm.
Build the monthly liquidity model
Enter the incumbent’s last rent payment, expected surrender condition, deposit application only where supportable, vacant operating costs, construction progress payments, commission installments, and replacement cash receipts. Add other property receipts and debt payments to produce cumulative unrestricted cash.
If a lender reimburses approved work, model the reimbursement lag and requirements. A reserve balance is not necessarily available on the day a contractor must be paid. Identify approvals, leases, invoices, lien waivers, inspections, and minimum conditions for releases.
Track peak cash deficit rather than simply summing costs over a year. A property may generate enough total annual cash to fund a project but still run out of money before later rent arrives. Conversely, contributions drawn only when needed can change investor returns relative to all equity being funded at purchase.
Scope the building before pricing the tenant’s finishes
A TI quote is meaningful only after defining what the base building provides. Inspect HVAC capacity and zoning, electrical service, fire and life-safety systems, elevators, restrooms, plumbing, access, and telecommunications. A tenant’s layout can reveal deficiencies that were irrelevant to the former user.
Separate base-building repairs from tenant-specific improvements. Identify demolition, hazardous-material investigation where appropriate, design and engineering, permits, project management, after-hours work, and contingencies. Establish who pays for overruns and who owns or removes improvements at expiry.
DOE describes commissioning as verification of system performance. For acquisition and leasing, a qualified engineer can determine what tests are appropriate; a seller’s statement that the equipment works is weaker evidence than documented capacity and condition. DOE commissioning guidance.
Do not treat published savings from unrelated buildings as a guaranteed return. Price and scope the subject property’s work, then test any claimed savings after installation.
Use market alternatives to support downtime
A broker’s opinion should identify actual competing suites and explain condition, size, building class, access, amenities, and concessions. A metropolitan vacancy rate does not tell an owner how long a particular 10,000-square-foot suite will take to lease.
Test subdivision if a single replacement tenant is unlikely. Subdivision may create more prospects but requires additional doors, metering, corridors, HVAC zones, life-safety work, and potentially different measurement assumptions. More tenant count can also increase leasing commissions and management demands.
In Chicago, downtown and suburban alternatives can have different transit, parking, service, and building-system requirements. The underwriting should identify the actual tenant decision set rather than assume every office suite competes across the entire metropolitan area. These are property-specific judgments requiring current local evidence, not claims about present market vacancy.
Compare renewal using the same investment horizon
A renewal often requires less capital and has less timing uncertainty, but that does not make it automatically superior. The existing tenant may be contracting, have weak credit, or demand concessions that reduce effective rent. Compare signed or realistically negotiable economics.
For illustration, suppose a renewal offers $280,000 annually for five years with $150,000 of TI and $35,000 of commission. Undiscounted base rent less those costs is $1,215,000. A replacement offering $300,000 annually with $600,000 of TI and $75,000 of commission produces $825,000 before vacancy and free rent. The replacement’s $20,000 annual face-rent advantage does not offset its additional capital under these assumptions.
Then incorporate the common hold period, cash timing, tenant credit, expense recoveries, renewal rights, and residual condition. A five-year renewal beginning today and a five-year replacement starting nine months later have different end dates. Comparing undiscounted totals alone is incomplete.
CCIM’s public financial-analysis outline connects cash flow, time value, leverage and investment risk. Those concepts support comparing the timing of each investment’s receipts and expenditures. The sample amounts here are original hypothetical calculations. CCIM financial analysis.
Reserve for probability without underfunding the event
Expected cost is useful for portfolio planning. Suppose renewal costs $185,000 and replacement direct cash costs are $747,000, with an assumed 60% renewal probability. Expected direct cost is $185,000 × 60% + $747,000 × 40% = $409,800.
That $409,800 does not fund the $747,000 nonrenewal case. A single-building owner should identify where the additional $337,200 would come from. Multiple tenants expiring together can make several replacement events correlated rather than independent.
Keep the probability assumption explicit and evidence-based. Update it as discussions progress. A tenant’s positive verbal feedback should not be counted as a signed renewal, and an option may belong solely to the tenant. Calendar the election date and understand the option’s economic terms.
Connect leasing costs to valuation and financing
A simple capitalization of forward NOI may not capture near-term leasing obligations. Evaluate an as-is cash-flow model that includes costs before stabilization and an exit that reflects the remaining lease term. Do not capitalize a fully leased year as if reaching it were free.
A future buyer may also deduct upcoming rollover costs. If a five-year hold ends immediately before a large expiration, the seller may not escape the cost merely because the construction check is written later. The residual buyer’s underwriting matters.
Public office-company reporting, including BXP’s filing, separates important capital and operating measures. Use original filings to understand categories and risks; a large owner’s portfolio spending is not a cost quote for a Chicago building. BXP 2025 Form 10-K.
Review financing maturity alongside lease expirations. A loan maturing during vacancy can create a proceeds gap as leasing capital is being spent. Ask lenders how they treat concessions, tenant-funded work, reserve requirements, and uncommenced leases.
Control execution after approving the model
Require an approved work letter, construction budget, responsibility matrix, schedule, and contingency. Update the forecast when the lease changes rather than waiting for the next annual budget. Tie allowance payments to the actual documents and retain completion evidence.
Track three separate measures: total committed cost, cash spent, and forecast cost to complete. A project with only half its budget paid may already be fully committed. Report rent-start conditions and any delay exposure with the capital forecast.
A completed rollover review should let an investor state the cash needed, the evidence supporting the timeline, the parties responsible for delivery, and the fallback if leasing takes longer. That is the difference between owning a projected NOI and having the capacity to create it.
The owner should also record which finishes and equipment can serve another tenant. Reusable improvements can improve residual economics, while highly specialized work may create removal costs. Keep that residual assumption separate from the cash budget so it cannot reduce the funds required before occupancy.