Question

When calculating the return on investment for a new lease, which two specific cash outflows must be subtracted from the total lease revenue before determining the yield?

Accepted Answer

When calculating the return on investment for a lease, you must subtract the initial capital expenditure and the ongoing operating expenses from the total lease revenue. Initial capital expenditure refers to the total upfront costs required to prepare the asset for the tenant, such as property renovations, legal fees, or broker commissions. These are one-time costs incurred before the lease term begins. Ongoing operating expenses consist of the recurring costs necessary to maintain the asset throughout the lease period, including property taxes, insurance, maintenance, and management fees. By subtracting both the one-time capital outlays and the periodic operating costs from the total revenue generated by the lease, you arrive at the net cash flow. This net amount is then divided by the total investment to determine the yield, which represents the annual percentage return on the capital invested.

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When calculating the return on investment for a new lease, which two specific cash outflows must be subtracted from the total lease revenue before determining the yield?

When calculating the return on investment for a lease, you must subtract the initial capital expenditure and the ongoing operating expenses from the total lease revenue. Initial capital expenditure refers to the total upfront costs required to prepare the asset for the te....