Question

5. Assumed that the annual discount rate is 10% and a five-year term gross lease with the following rent and expenses per sq. ft. What is the effective rent per sq. ft. for this lease? Year1 Year2 Year3 Year4 Years $17.50 $17.50 $17.50 $17.50 $17.50 Gross rent ($/sq. ft.) Less expenses ($/sq. ft.) $4.00 $4.50 $5.00 $5.50 $6.00 (A) $17.50 per sq. ft. (B) $12.50 per sq. ft. (C) $12.59 per sq. ft. (D) $13.85 per sq. ft.

Answer 1

The effective per square feet is equal to present value of the future cash flows divided by the present value annuity factor:

Solve as follows:

A B с D Ε Year Gross rent Expenses Income =Rent - Expenses Annuity Factor Present value 2 1 3 2 4 3 5 4 6 5 17.5 17.5 17.5 17.5 17.5 =B2-C2 =B3-C3 =B4-04 =B5-C5 =B6-C6 PVAF =1/1.1"A2 =1/1.1^A3 =1/1.1^A4 =1/1.1^A5 =1/1.1^A6 =SUM(E2+E3+E4+E5+E6) =D2*E2 =D3*E3 =D4*E4 =D5*E5 =D6*E6 SUM(F2+F3+F4+F5+F6) Effective rent=Present value of future cashflows/PVAF =F7/E7

The result will be as follows:

F Present value 2 3 4 5 6 7 A B C D Income Year Gross rent Expenses |=Rent - Annuity Factor Expenses 1 17.5 13.5 0.909090909 2 17.5 4.5 0.826446281 3 17.5 12.5 0.751314801 4 17.5 5.5 10.683013455 5 17. 5 6 0.620921323 PVAF 3.790786769 12.27272727 10.74380165 9.391435011 8.196161464 7.140595215 47.74472062 11.5 Effective rent=Present value of future cashflows/PVAF 12.59493702

The correct answer is $12.59