Question

A real estate development firm owns a fully leased forty-story office building. A tenant recently moved its offices out of two stories of the building, leaving the space temporarily vacant. If the real estate firm considers moving its own offices into this forty-story office building, what cost should it assign for the space? Is the cost of the vacant space zero because the firm paid for the building long ago, a cost that is sunk, or is there an incremental opportunity cost?

Answer 1

If the owner firm considers moving its own offices into that building then they should assign a cost equals to the profit they used to earn from the tenant. For if they would be at another building they would have to pay rent for that building too but now they have moved into their own building so they just have to assign amount equals to the profit they used to earn from tenant. That amount is surely less than what tenant used to pay them. Of course there is an incremental opportunity. But assigned cost can't be zero.