Industrial Lease Renewal vs. Re-Letting: Compare the Cash Flow

Compare an industrial lease renewal with re-letting over the same cash-flow period. Include downtime, free rent, tenant work, commissions and unrecovered owner costs alongside the stated rent. Keep each assumption and payment date visible. The higher asking rent can produce less cash within the chosen period without proving that renewal is the better long-term investment.

Define the decision and the comparison window

A lease renewal and a replacement tenant can create different costs before they create different rents. Set the review date, premises, area basis and comparison period first. State whether the proposals are signed, indicative or entirely hypothetical. A broker's expected rent belongs in an assumption field until the supporting proposal exists.

CBRE's U.S. Industrial Outlook 2026 discusses early-renewal incentives, including tenant-improvement allowances and free-rent periods. That provides market context for comparing the full package. It does not establish the achievable rent or incentives for your building.

Use the commercial lease audit checklist to establish the effective lease terms before the comparison. This article addresses the next question: how do the proposed options translate into a consistent cash schedule?

Put each cost and concession on the calendar

For each option, record the rent commencement date, contractual rent, escalation dates, free-rent terms, tenant-improvement contribution, commission basis and payment schedule. Identify which operating expenses the owner ultimately bears after recoveries. Do not treat the same cost as both fully reimbursed and an unrecovered deduction.

Downtime and free rent are separate. During downtime the space has no new occupier under the modeled arrangement. During a base-rent concession, occupancy may have begun while base-rent billing is waived. The lease may treat recoveries differently. Read the actual language rather than making “free rent” a universal waiver of every charge.

The OCC's Commercial Real Estate Lending handbook identifies re-leasing costs as relevant to cash-flow analysis even when they are outside NOI. Keep that distinction in the model: a landlord cash comparison after tenant work is a different subtotal from property NOI.

Worked example: a higher rent with a lower initial cash contribution

All premises, terms and amounts below are invented teaching assumptions. They are not market quotes, a client result or a recommendation. Compare the same 10,000-square-foot space over 24 months beginning at the current lease expiry. Both options are assumed collectible as scheduled, with no escalation or credit loss in this simplified exercise.

The commission amounts are fixed fictional quotes, not percentages. The owner expense is an assumed net unrecovered amount after any recoveries and remains the same during vacancy in this exercise. Real proposals may require different cost schedules. The upfront tenant-work payment is also a deliberate simplifying assumption, not an industry payment convention.

The renewal produces 24 × $10,000 = $240,000 of base-rent receipts. Deduct $20,000 of tenant work, $10,000 of commission and 24 × $2,000 = $48,000 of unrecovered expense. The resulting cash contribution is $162,000.

The re-letting case produces 19 × $12,500 = $237,500 of receipts within the same window. Deduct $60,000 of tenant work, $15,000 of commission and $48,000 of unrecovered expense. Its cash contribution is $114,500, or $47,500 less than the renewal within these 24 months.

These are undiscounted landlord cash contributions before financing, tax, sale proceeds and any capital work beyond the stated tenant improvements. They are not NOI, discounted values or whole-lease returns. No terminal value is included. Different remaining lease terms after month 24 could materially change a broader comparison.

Download the renewal versus re-letting practice pack. It contains the assumptions, monthly cash schedules, independent answer key and a blank proposal-comparison sheet.

Find the assumption that changes the comparison

Hold the re-letting costs and its 19 paying months constant. To match the renewal's $162,000 cash contribution within the window, re-letting needs $162,000 + $60,000 + $15,000 + $48,000 = $285,000 of receipts. Dividing by 19 gives $15,000 per paying month, equivalent to $18 per square foot annually on the assumed area.

That is an arithmetic break-even rent for this exercise. It is not evidence that $18 is achievable, that a tenant would accept it or that a lender would underwrite it. It also assumes that raising rent does not change downtime, concessions, commissions or tenant-work cost. Those relationships need separate scenarios in an actual negotiation.

Now extend downtime to six months while retaining two subsequent free-rent months. Paying months fall to 16. At the original $12,500 monthly rent, receipts become $200,000 and cash contribution becomes $77,000. The renewal's advantage within the comparison window becomes $85,000. Do not retain 19 paying months after changing the vacancy schedule.

Ask AI to compare the proposals without choosing the assumptions

Give the assistant the proposed terms, timing rules and common horizon. Ask it to identify which document supports each input, construct the monthly schedule and show all unresolved fields. Require separate columns for contractual base rent, concession, base-rent receipt, unrecovered cost, tenant work and commission.

Then test the output against the practice answer key. Change only the downtime and check which months move. Change only the commission payment date and confirm that total undiscounted cost stays the same while monthly liquidity changes. If the assistant introduces a discount rate or terminal value, it must identify that as an additional assumption requiring review.

Review the actual proposals with the appropriate leasing, legal and investment advisers. An executed renewal may have obligations absent from an indicative replacement proposal. A larger forecast cash amount cannot settle those differences or establish tenant credit quality.

Carry the open terms into the decision

The small-bay industrial acquisition guide helps organize bay-level turnover obligations and shared dependencies. Use it to identify missing premises, restoration and operating evidence before treating a vacancy period as priced.

The commercial underwriting Claude playbook supplies the broader document-review structure. Bring the dated proposals, monthly comparison and unresolved questions together so the team can challenge the rent assumption without losing the costs underneath it.

Frequently asked questions

Why can a higher re-letting rent produce less cash?

Downtime, concessions, tenant work and commissions can offset the higher monthly rent within a chosen comparison period. Use the same horizon and definitions, then examine the actual proposals and remaining lease terms.

Is the practice result net operating income?

No. It is an undiscounted landlord cash contribution after the specified unrecovered expenses, tenant work and commissions. It excludes financing, tax, sale proceeds and other capital costs. It is not a valuation or whole-lease return.

Should downtime and free rent be combined?

Keep them separate. They occur under different occupancy and contractual conditions, and recovery obligations may differ. In this exercise base rent begins after both periods; an actual lease needs its own clause-level treatment.

Does the break-even rent establish market rent?

No. It is the rent required to match the other scenario under fixed teaching assumptions. It does not establish achievable rent, tenant acceptance or the effect of different concessions, commissions or timing.