Commercial Lease Buyout Calculator
How a Commercial Lease Buyout Works
A commercial lease buyout occurs when a tenant wishes to terminate their lease agreement before the official expiration date. Since leases are legally binding contracts, landlords typically require a lump-sum payment to offset the loss of guaranteed income and the costs associated with finding a new tenant.
This calculator uses the Present Value (PV) method, which is the standard in professional commercial real estate. Instead of simply paying all remaining rent, you calculate what those future payments are worth today, minus a discount rate, then add any penalties specified in your "Early Termination" clause.
Key Factors in Your Calculation
- Remaining Liability: This is the simple sum of all unpaid rent until the end of the term.
- Discount Rate: This represents the "Time Value of Money." A dollar today is worth more than a dollar in two years. Landlords often use their cost of capital or current market interest rates (typically 5% to 10%).
- Buyout Penalty: Most commercial leases include a penalty ranging from 1 to 6 months of rent, or a percentage of the remaining balance, to cover re-leasing commissions and tenant improvements (TI).
Imagine you have a boutique office with $4,000 monthly rent and 12 months remaining. Your lease has a 10% penalty fee and you use a 5% discount rate.
1. Gross Liability: $48,000
2. Present Value: ~$46,920
3. Penalty (10% of Gross): $4,800
Total Buyout: ~$51,720
When Should You Consider a Buyout?
Tenants usually seek buyouts when the business is downsizing, expanding beyond the current space's capacity, or relocating to a more strategic area. It is often cheaper than "walking away," which can lead to lawsuits, personal liability hits, and damaged credit scores. Always review your "Surrender" and "Default" clauses before initiating negotiations with your landlord.