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You are evaluating two alternative five-year lease opportunities for 8,000 sf2 office space. The first alternative...

You are evaluating two alternative five-year lease opportunities for 8,000 sf2 office space. The first alternative has first-year rent of $18 per sf2, and this will rise by $1.00 in each year thereafter. You will pay no expenses other than rent. The second alternative has first-year rent of $15 per sf2, which will increase by 3% per year in each year thereafter. The second alternative also requires you to pay a comman area charge of $2 per sf2 in year 1, which will increase by $0.16 in each year thereafter. Find the effective net rent for each of these alternatives, using a discount rate of 7%.

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Answer #1

Alternative 1

Year Rent Present value of rent

1. $18. 18/1.07 = 16.82

2. $19. 19/(1.07)^2 = 16.60

3. $20. 20/(1.07)^3= 16.33

4. $21. 21/(1.07)^4 = 16.02

5. $22. 22/(1.07)^5 = 15.69

Effective net rent = $ 81.46

Alternative 2

Year Rent. Present value of rent

1. 15+2=17. 17/1.07= 15.89

2. 15(1.03)+2.16=17.61. 17.61/(1.07)^2=15.38

3 15(1.03)^2+2.32=18.23. 18.23/(1.07)^3= 14.88

4.15(1.03)^3+2.48 = 18.87. 18.87/(1.07)^4=14.40

5. 15(1.03)^4+2.64= 19.52 19.52/(1.07)^5=13.92

Effective rent = $74.47

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