Question

1 (a). Your client, a leading financial institution, is considering purchasing a prime office building in central Manchester. The property was let 19 years ago on a 25 year FRI lease with 5 yearly upward only rent reviews. The property is for sale at 20,000,000 (net of cots) and the current rent passing is 1,200,000. Your client is considering purchasing this property and requires an investment appraisal of this opportunity. The financial institution's target rate of return is normally 10%.

1 (b).The building is now 20 years old and after discussions with your client it is anticipated that the property will be refurbished when the lease ends. Refurbishment is expected to take 1 year at a current estimated cost of 2,000,000, although this figure is forecast to increase at 1.8% p.a. They anticipate that they will have to offer a one-year rent free period to attract a good tenant and their maximum holding period will be 10 years.