# Case: Vacant office redevelopment needs more leasing capital

Canonical: https://commercialdebtadvisory.com/cases/vacant-office-redevelopment-needs-more-leasing-capital/
Status: Published
Publisher: Jaken Finance Group

**Hypothetical office redevelopment.** A vacant 100,000-square-foot property has completed its base-building work and is negotiating a 40,000-square-foot lease. The owner has $900,000 of unspent leasing cash and a conditional $2 million lender advance for an approved lease and eligible work. It also has a separate $400,000 operating carry reserve.

Assume the lender will approve either proposal below, all advances fund before eligible invoices are due, and the existing building can accommodate both scopes. Those simplifying conditions isolate the funding economics; they are not assurances that a real lease would qualify.

## Compare complete tenant packages

Both proposals have a ten-year term beginning at delivery, flat rent and no escalation. Proposal A pays $35 per square foot annually, requires $75 per square foot of tenant improvements and has twelve initial months free. Proposal B pays $30 per square foot, requires $50 per square foot of improvements and has six initial months free.

For this example, the commission agreement charges 6% of the full ten-year face base rent before the free-rent deduction. That is an invented negotiated fee base, not a standard brokerage convention. The actual commission agreement could produce a different amount.

| Lease component for 40,000 square feet | Proposal A | Proposal B |
|---|---:|---:|
| Annual face rent | $1,400,000 | $1,200,000 |
| Tenant improvements | $3,000,000 | $2,000,000 |
| Commission on stipulated gross contract rent | $840,000 | $720,000 |
| Upfront leasing capital | **$3,840,000** | **$2,720,000** |
| Initial free-rent period | 12 months | 6 months |

The owner cannot compare $35 with $30 and assume the higher number is easier to finance. Proposal A requires $1.12 million more upfront leasing capital and delays base rent by another six months.

The [OCC income and lease-monitoring discussion](https://www.occ.gov/publications-and-resources/publications/comptrollers-handbook/files/commercial-real-estate-lending/pub-ch-commercial-real-estate.pdf) provides context for examining supported lease terms and capital needs. None of the rent, commission or improvement assumptions comes from a market survey or is offered as a current benchmark.

## Test the capital account first

Available leasing sources total $2.9 million: $900,000 existing cash plus the $2 million conditional advance. Proposal A's $3.84 million capital requirement leaves a **$940,000 gap**. Proposal B leaves **$180,000 of unused leasing cash** after its $2.72 million requirement.

The $2 million advance is assumed to increase loan principal when funded. The annual debt-service amount used below already reflects the fully funded balance; interest on that same advance is not added a second time. If actual funding occurs in stages, replace the simplified debt-service assumption with the actual schedule.

A signed lease can establish a reason for the lender to advance, but it does not erase costs above the advance limit. The owner must identify the gap before promising the tenant a delivery scope that depends on unfunded work.

## Add carrying cash during free rent

Assume annual property operating cash costs are $500,000 and annual financing payments after the advance are $700,000. During the modeled free-rent period there is no other rent, recovery or operating cash inflow. The remaining 60,000 square feet stays vacant. These amounts are separate from the tenant improvements and commission.

Proposal A requires a full year of carry: $1.2 million, less the $400,000 carry reserve, leaving **$800,000 more cash needed**. Together with its $940,000 leasing gap, its additional funding requirement is **$1.74 million**.

Proposal B requires six months of carry: $600,000, less the $400,000 reserve, leaving **$200,000**. If the unused $180,000 leasing cash is legally unrestricted and the lender permits it to fund carry, the remaining gap is **$20,000**. If it cannot be transferred, the carrying gap remains $200,000 while the $180,000 stays in its designated account.

The timing assumption matters. This case begins free rent at delivery and assumes the scope is paid before then from the identified leasing sources. It does not include a separate pre-delivery construction period; an actual project must add its costs and cash needs.

## Normalize receipts before treating the face-rent premium as value

Over the stipulated ten-year term, Proposal A collects nine years of base rent after its free year: $12.6 million. Subtracting $3.84 million of initial leasing capital leaves **$8.76 million** before operating costs, financing and time value.

Proposal B collects 9.5 years of base rent, or $11.4 million. Subtracting $2.72 million of leasing capital leaves **$8.68 million** on that same incomplete measure. The difference is only **$80,000**, despite the $200,000 annual face-rent difference.

This is not an NPV, a property valuation or a complete recommendation. It excludes timing, credit, reimbursements, remaining vacant space, default, taxes and terminal conditions. Proposal A requires more money sooner and receives rent later, so discounting and financing can materially change the comparison. The simple reconciliation is useful because it prevents the headline rent from concealing the incentives needed to obtain it.

## Match the tenant decision with the funded business plan

The owner should obtain detailed delivery scopes, procurement dates, lender eligibility, the executed commission agreement and the exact rent commencement conditions. Confirm that the two proposals are commercially and legally feasible for the same space and that changing the buildout does not create a new delivery delay.

Under the stated funding permissions, Proposal A needs $1.74 million additional capital; Proposal B needs as little as $20,000. The stronger initial funding fit does not by itself make B the better long-term tenant. It establishes which capital commitments the owner must secure before selecting either package.

The investment committee can then compare a dated discounted cash-flow model and tenant credit alongside this funding test. A redevelopment is not fully financed merely because a prospective tenant offers attractive face rent. The obligations required to start collecting that rent must also fit the available capital and delivery calendar.


## Source references
- [OCC — Commercial Real Estate Lending, version 2.0](https://www.occ.gov/publications-and-resources/publications/comptrollers-handbook/files/commercial-real-estate-lending/pub-ch-commercial-real-estate.pdf) — Income-Generating Capacity, printed p.42; construction leasing monitoring, pp.46–47 · Checked 2026-10-21 · Bank supervisory context. March 2022 publication, with March 20, 2025 reputation-risk edits. All case amounts, thresholds and contractual conditions are invented teaching assumptions.