How to read this result
In the default example, lease scenario present cost is $906,016.04. Difference is lease present cost minus buy present cost. Annual cash costs occur at year-end; modeled sale proceeds occur at the horizon. Taxes and alternative uses of capital are excluded.
Change one assumption at a time to see how it affects the scenario. Compare periods and cost definitions consistently. Negative results show a modeled shortfall; an unavailable ratio needs a valid denominator.
Formula and methodology
Discount escalating lease costs at each year-end. For buying, add initial cash to discounted annual operating and debt-service costs, then subtract discounted modeled net sale proceeds at the horizon. The difference is lease cost minus buy cost.
Enter percentages as whole numbers: 5 means 5%. When used as a factor, the calculation divides a percentage by 100. Percentage outputs multiply the final ratio by 100. Calculations retain precision internally; displayed amounts and rates are rounded to two decimals.
Variables and input definitions
- Year-1 annual lease cost (USD/year)
- Year-1 rent + tenant occupancy cost. Minimum: 0.
- Annual lease escalation (%/year)
- Lease cost growth assumption.
- Purchase price (USD)
- Buy scenario property price. Minimum: 0.
- Initial cash/down payment (USD)
- Initial cash outlay. Minimum: 0.
- Annual ownership operating costs (USD/year)
- Taxes, insurance, maintenance paid by owner. Minimum: 0.
- Annual debt service (USD/year)
- User-entered debt service. Minimum: 0.
- Annual appreciation assumption (%/year)
- User scenario. Minimum: -100.
- Horizon (years)
- Comparison horizon. Minimum: 1. Maximum: 50.
- Discount rate (%/year)
- User-selected discount rate. Minimum: 0.01.
- Selling cost rate (%)
- Exit selling costs. Minimum: 0. Maximum: 99.9.
- Estimated ending loan balance (USD)
- User-entered ending payoff. Minimum: 0.
Worked example
This example uses the exact prefilled inputs above. Reset defaults to restore this scenario after making changes.
| Item | Default scenario |
|---|---|
| Year-1 annual lease cost | $120,000.00 |
| Annual lease escalation | 3.00% |
| Purchase price | $1,500,000.00 |
| Initial cash/down payment | $450,000.00 |
| Annual ownership operating costs | $40,000.00 |
| Annual debt service | $90,000.00 |
| Annual appreciation assumption | 2.00% |
| Horizon | 10 |
| Discount rate | 8.00% |
| Selling cost rate | 6.00% |
| Estimated ending loan balance | $900,000.00 |
| Item | Default scenario |
|---|---|
| Lease scenario present cost | $906,016.04 |
| Buy scenario present cost | $943,056.03 |
| Scenario cost difference | -$37,039.99 |
Assumptions and limitations
Illustrative DCF comparison only. Financing, taxes, depreciation, transaction structure and business-specific opportunity costs may materially change the result.
Difference is lease present cost minus buy present cost. Annual cash costs occur at year-end; modeled sale proceeds occur at the horizon. Taxes and alternative uses of capital are excluded.
The tool uses values you supply. It does not retrieve market prices, verify leases or inspect a property. Results exclude items outside the listed inputs. Review local requirements and the relevant contract when a payment, fee or allocation depends on them.
Common mistakes
Do not compare undiscounted lease totals with discounted buy costs. Estimated ending loan balance is supplied separately; the model does not amortize debt or include tax effects.
Sources and method references
These references provide context for the method and terminology. They do not endorse this tool or validate your property assumptions.
- Office of the Comptroller of the Currency — Comptroller's Handbook — Commercial Real Estate LendingNOI, direct capitalization, cap-rate valuation and DCF concepts for commercial real estate.
Frequently asked questions
What does a negative scenario difference mean?
Lease present cost is below buy present cost under these assumptions. It is a mathematical comparison, not a recommendation.
Does the lease cost grow before the first year?
No. First-year lease cost is the entered amount, paid at year-end. The growth rate begins affecting the second year.