Question

1a. A building owner is evaluating the following alternatives for leasing space in an office building for the next five years (using a 5% discount rate):

1. Net lease with steps. Rent will be $10/ square foot the first year and will increase by $1.50 per square foot each year until the end of the lease.
2. Net lease with CPI adjustments. The rent will be $12 /square foot in the first year. After the first year, the rent will be increased by the amount of any increase in the CPI. CPI is expected to increase by 4% per year.
3. Gross lease. Rent will be $28/square foot each year with the lessor responsible for payment of all operating expenses. Expenses are estimated to be $10 during the first year and increase by $1 per year thereafter.
4. Gross lease with expense stop and CPI adjustment. Rent will be $20 the first year and increase by the full amount of any change in the CPI after the first year with an expense stop at $10/square foot. The CPI and operating expenses are assumed to change by the same amount as outlined in II and III.

What is the effective rent to the owner (after expenses) for the Net lease with CPI adjustments?

A. 13.00/ square foot

B. 56.06/ square foot

C. 12.95/ square foot

D. 14.22/ square foot

1b. A building owner is evaluating the following alternatives for leasing space in an office building for the next five years (using a 5% discount rate):

1. Net lease with steps. Rent will be $10/ square foot the first year and will increase by $1.50 per square foot each year until the end of the lease.
2. Net lease with CPI adjustments. The rent will be $12 /square foot in the first year. After the first year, the rent will be increased by the amount of any increase in the CPI. The CPI is expected to increase by 4% per year.
3. Gross lease. Rent will be $28/square foot each year with the lessor responsible for payment of all operating expenses. Expenses are estimated to be $10 during the first year and increase by $1 per year thereafter.
4. Gross lease with expense stop and CPI adjustment. Rent will be $20 the first year and increase by the full amount of any change in the CPI after the first year with an expense stop at $10/square foot. The CPI and operating expenses are assumed to change by the same amount as outlined in II and III.

What is the effective rent to the owner (after expenses) for Gross lease with expense stop and CPI adjustment?

A. 12.23/ square foot

B. 50.15/ square foot

C. 11.58/ square foot

D. 11.67/ square foot

Answer 1

1a. effective rent to the owner (after expenses) for the Net lease with CPI adjustments is :

A. 13.00/ square foot i.e

yr		4%	rent	pvf	pv
1			12	1	12
2	12	0.48	12.48	0.952	11.88096
3		0.4992	12.9792	0.907	11.77213
4		0.519168	13.49837	0.864	11.66259
5		0.539935	14.0383	0.823	11.55352
total			64.99587		58.86921
effective		65/5	12.99917		11.77384

1b. effective rent to the owner (after expenses) for Gross lease with expense stop and CPI adjustment

D. 11.67/ square foot