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 10.0 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?

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 propertys value increase by signing this lease extension?

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?