$1.$ Suppose you are considering the acquisition of an income producing property. The building is currently leased for the next $4$ years with annual $($year$-$end$)$ cashflows of $$1,500,000.$ At the end of the current lease, you expect rents to increase to $$1,800,000($annually$)$ for the foreseeable future. You anticipate selling the property ten years from today, at an expected multiple of $10\mathrm{.}0$ times the prevailing market rent. Market rates $($OCC$)$ are currently $5\%,$ but given the uncertainty surrounding future rental rates a $3\%$ risk premium must be added to interlease rates. What is the value of this property $($to you$)$ today?

$17858\mathrm{.}66$

$2.$ Continuing from problem $1,$ now suppose we have the opportunity to extend our existing

tenant lease for an additional two years $($at the expected market rate of $$1,800,000).$ How

much would the property$$s value increase by signing this lease extension?

$18328\mathrm{.}134$

$3.$ Continuing from problems $1$ and $2,$ at what lease rate should we be indifferent between signing the extension and waiting for market conditions to continue evolving?

$($Please answer$3,4,$ &$5$ only$)$

$4.$ Continuing from problems $1,2,$ and $3,$ if the landlord was able to capture $80\%$ of the gains from enhanced certainty of cashflows through the negotiation process, at what annual rate$/$price would the lease be extended?

$5.$ Suppose in a certain property market the typical lease term is $5$ years, the cap rate $($cash yield$)$ is $8\%,$ long term property value and rental growth rate is $2\mathrm{.}0\%$ per year, leases provide rent step$-$ups of $2\mathrm{.}0\%$ per year $($per the expected growth rate$),$ and the tenant borrowing rate $($intralease discount rate$)$ is $6\%.$ What is the appropriate inter$-$lease discount rate?