Understanding and Calculating the Equivalent Level Rate (ELR) for Property Leasing
Equivalent Level Rate (ELR) serves as a valuable metric for property landlords and investors by providing a standardized rate per square foot that reflects the anticipated cash flow from leasing space over a specified lease term. This flat, standardized rate ensures consistency and simplicity in the calculation of rental property values.
To calculate the Equivalent Level Rate for a property, follow these steps:
- Assess the Net Value: Begin by determining the net value of the property’s future cash flows. This is an estimate based on forecasted rental income minus expenses.
- Cash Flow Subtraction: Subtract the expected cash flows from the net value to find the redeemable value over the lease duration.
- Amortize the Value: Break down the total value over the life of the lease. This will require calculating the total redeemable value over a standard timeframe, typically the length of the lease.
- Calculate ELR by Square Footage: Finally, divide this value by the property’s square footage to obtain the ELR. This standard rate per square foot represents the normalized fee needed to achieve the forecasted returns from the rental property.
The ELR is most commonly applied by landlords when determining the overall rental potential of a property. By establishing a clear, standardized rate, property owners can compare different leasing opportunities based on a consistent metric, aiding in rational investment decisions.
For Example: Let’s consider a commercial property of 10,000 square feet. Suppose the projected cash flows over the lease term provide a net value of $120,000. After calculating and amortizing over the five-year lease term, you find that the overall cost equals ‘X’. Dividing this cost by the total square footage (10,000 sq. ft.), gives an ELR of ‘Y’ dollars per square foot.
The Equivalent Level Rate is invaluable for both new and seasoned landlords, serving as a guiding number to benchmark rental prices ensuring consistent profitability and competitive market positioning.
Related Terms: Net Operating Income (NOI), Capitalization Rate (Cap Rate), Rent Roll, Gross Scheduled Income.
