Present Value (PV)
Hello landlords and tenants I’m here to discuss “present value” and why is this important in commercial real estate leasing. My name is Jenna Zebrowski and I’m the attorney behind LawByJZ.com. Present value is important when calculating how much money is owed in the event of a lease default that isn’t cured. Tenants are usually the ones paying damages to landlord, so who wouldn’t want to minimize that amount?
Present value is how much future money is worth today. Paying today the value of something in the future is going to cost more. So discounting the future costs, such as the rent coming due and discounting those amounts to the present day value works to tenant’s advantage financially.
Commercial Real Estate Case Study
Present Value: Discounts on Damages!
Quincy got into a dispute with his landlord because he wanted the Landlord to fix the roof. The landlord wouldn’t do what Quincy wanted, so Quincy stopped paying his rent. The landlord defaulted him, and Quincy still wouldn’t pay rent. The landlord filed a lawsuit for the unpaid rent, Quincy countered with the fact that the roof still wasn’t repaired, and they went to mediation. The mediator concluded that both parties were in default of the agreement and that the landlord had to fix the roof and pay damages to Quincy for the inconvenience, and Quincy had to pay the amount of rent that was due under the entire remaining term of the lease. Quincy’s attorney did a good job representing him in the mediation, so Quincy did not have to pay brokerage costs, repair costs, or other penalties or interest, but with several years left on the lease, the amount of rent that he owed was still pretty significant.
After the reconciliation was done, the landlord was still owed money from Quincy. They had terminated the lease, but Quincy still had to pay the amount owed, and the landlord immediately demanded a lump sum payment of the entire amount. The landlord wanted to get a new tenant in the space and not worry about collecting from Quincy for the remaining term of the lease.
Quincy’s attorney helped him understand what this meant for his budget and why it was a good thing to get this matter settled out. The lease allowed the payments to be made as they became due, which meant that Quincy would still be paying rent to the landlord for years, or the remaining rent could be paid in one lump sum, which is what the landlord wanted. The
In the immediate-lump-sum scenario, the lease state that the amount would be discounted to present day value, which was to Quincy’s advantage. Money is worth more in the future than it is now, so by demanding future payments immediately, the landlord was basically taking a discount over the entire amount owed. Quincy was able to control his budget by making the payment immediately, because of the discount to the present day value amount.
He was able to pay less money right away and still settle out the lease! Quincy and the landlord both liked the idea of getting the debt paid off so they wouldn’t have to stay in contact for several more years.