Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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Lease Valuation
A building owner is evaluating the following alternatives for leasing space in an office building for
the next five years. Expenses are estimated to be $9 psf for the first year and
$1 psf per year thereafter.
Net lease with steps. Rent is $15 psf for the first year and will increase $1.50 per square foot for
each year until the end of the lease. All operating expenses are paid (reimbursed) by the tenant.
Net lease with CPI adjustments. Rent is $16 psf for the first year. After year 1, the rent will be
increased by any increase in the CPI which is expected to be 3% per year. Again, all the expenses are
reimbursed by the tenant.
Gross lease. Rent will be $28 psf each year with the lessor responsible for paying all of the operating
expenses.
Gross lease with an expense stop and CPI adjustment. Rent will be $24 psf the first year and increase
by the full amount of the CPI (3%) after the first year with an expense stop for the landlord at $9 psf.
The CPI and operating expenses are assumed to change as suggested above.
1. Calculate the
discount rate and determine which is the best deal for the landlord.
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Step 1: Calculate the effective rent for Net lease with steps as follows:
VIEW Step 2: Calculate the effective rent for Net lease with CPI adjustments as follows:
VIEW Step 3: Calculate the effective rent for gross lease as follows:
VIEW Step 4: Calculate the effective rent for Gross lease with no expense and CPI adjustments as follows:
VIEW Step 5: Decision:
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