Question

3. (30 points) property owner is considering 2 alternatives for leasing space in his office building for the next three years The first alternative is a not lease agreement of S14 per square foot during the first year with $2.00 step provisions each of the following year. The lense is net and yearly expenses per square foot are as follows: $6.00, 56,65, and $7.05. As this is a netlease, the tenant will pay all expenses. If the lease term is three years and the discount rate is 10%, what is the effective rent per square foot? (14 points) The second alternative is a gross lease agreement with expense stops. The space is leased at $21.00 per square foot during the first year with $2.00 step-up provisions each of the following years. The lease is gross with an expense stop set at $6.65 per square foot, and yearly expenses per square foot are as follows: $6,00, S6,65, and $7.05. If the lease term is three years and the discount rate is 10%, what is the effective rent per square foot? (14 points) 200 sous NDA Which lease agreement is better for the property owner? Why? (2 points)

Answer 1

1. Net lease arrangement
Year	1	2	3
Lease amt.	14	16	18
Yrly. Exp.	6	6.65	7.05
Total yrly. cash ouflow / sq.ft.	20	22.65	25.05
NPV of 3 yrs.' rent /sq.ft.
(20/1.1^1)+(22.65/1.1^2)+(25.05/1.1^3)=
55.72126
Effective rent/sq.ft= equivalent annual rent /sq.ft
ie.NPV/Annuity Factor
ie.55.72126/((1-1.1^-3)/0.1)=
22.41
Effective rent /sq.ft under the net lease= $ 22.41

2.Gross lease arrangement
Year	1	2	3
Lease amt.	21	23	25
Yrly. Exp.	0	0	0.4	(7.05-6.65)
Total yrly. cash ouflow / sq.ft.	21	23	25.4
NPV of 3 yrs.' rent /sq.ft.
(21/1.1^1)+(23/1.1^2)+(25.4/1.1^3)=
57.18257
Effective rent/sq.ft= equivalent annual rent /sq.ft
ie.NPV/Annuity Factor
ie.57.18257/((1-1.1^-3)/0.1)=
22.99
Effective rent /sq.ft under the net lease= $ 22.99

3. Gross lease agreement is better for the property owner
as it fetches more effective $ rent . Sq. ft.($ 22.99> $ 22.41)