Does a higher market rent mean higher cash flow next year?
Forty percent of the warehouse rolls next year. The new rent is higher, but six months produce no rent.
“We’re now using AI and large language models to remove mundane tasks” (opens the source)
The question
Willow Industrial is an invented 100,000-square-foot U.S. warehouse. All amounts are in U.S. dollars. The hold lasts five years. No rent growth, tax, depreciation, promote or refinancing is modeled.
| Assumption | |
|---|---|
| Current annual rent per square foot | $12 |
| Space rolling at start of year 2 | 40,000 sq ft |
| Replacement annual rent per square foot | $14 |
| Downtime in year 2 | 6 months |
| Annual non-recovered operating costs | $200,000 |
The remaining 60,000 sq ft stays at $12. New rent starts after downtime. Operating costs continue during vacancy.
“Calculate year 2 NOI and stabilized NOI. Which belongs in the year 2 cash-flow forecast?”
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A strong answer, step by step
Open each step in turn. This is one strong answer, not the only one.
Step 1: Start with the leases that stay
What would you do here? Open the move you’d make.
Mark all space to $14.
Tempting, but it misses something. That assumes a lease reset that the packet does not give.
Use $12 on the retained space.
The strong move. Only the 40% roll gets the new rent.
See how a strong candidate says it
“$720,000 of annual rent remains: 60,000 square feet times $12.”
Why it works: Rent that is already in place does not reset just because market rent is higher.
Step 2: Apply downtime to the new lease
What would you do here? Open the move you’d make.
Collect $560,000 in year 2.
Tempting, but it misses something. That is a full year of replacement rent.
Collect six months of new rent.
The strong move. The first six months are vacant.
See how a strong candidate says it
“The rolling space produces $280,000 in year 2: 40,000 times $14 times one-half.”
Why it works: Annual rent and collected rent are different during a leasing gap.
Step 3: Deduct costs once
What would you do here? Open the move you’d make.
Reduce costs by the vacancy rate.
Tempting, but it misses something. No cost reduction is given.
Keep all $200,000 of costs.
The strong move. The scenario states they continue during vacancy.
See how a strong candidate says it
“Year 2 NOI is $800,000: $720,000 plus $280,000 less $200,000.”
Why it works: The costs remain while the property is partly empty.
Step 4: Keep the stabilized year separate
What would you do here? Open the move you’d make.
Use $1.08m every year.
Tempting, but it misses something. That erases the lease gap.
Use $800,000 for year 2 and $1.08m from year 3.
The strong move. The timing matches the leases.
See how a strong candidate says it
“Once the space pays for a full year, NOI is $1.08m. I use $800,000 for year 2.”
Why it works: A stabilized valuation input must not replace the actual annual cash forecast.
The answer, in short
- Decision
- Use $800,000 of year 2 NOI.
- Because
- $1.08m is the full-year run rate after lease-up, not cash earned during the gap.
- What would change it
- At three months of downtime, year 2 NOI rises to $940,000. A signed start date matters.
The new tenant now needs nine months before rent starts. What changes?
Common traps
- Applying market rent to leases that do not roll.
- Treating an annual rent quote as cash received during downtime.
Check your answer
- I separated retained and rolling space.
- I applied six months of downtime.
- I left operating costs in the vacant period.
- I kept year 2 and stabilized NOI separate.
Last reviewed Nov 10, 2026