The calculation represents the typical time left on a gaggle of leases, adjusted to mirror the dimensions or worth of every particular person lease. As an illustration, think about a portfolio with two leases: one for $1 million with a remaining time period of 5 years, and one other for $2 million with a remaining time period of 10 years. A easy common could be 7.5 years. Nonetheless, the calculated determine would account for the truth that the second lease contributes extra considerably to the general worth, leading to a price nearer to eight.33 years ((($1M 5) + ($2M 10)) / $3M)).
This metric is essential in evaluating the chance and stability of revenue streams generated from leased property. A better quantity usually signifies a extra secure and predictable revenue stream, as revenues are secured for an extended interval. Conversely, a decrease quantity might sign a necessity for extra lively administration and renewal methods. Traditionally, this calculation has been utilized in actual property funding trusts (REITs) and different funding automobiles to offer buyers with a transparent indication of the portfolio’s revenue sustainability and publicity to lease rollover danger.
