3. An owner of the Atrium Tower Office Building is currently negotiating a five-year lease with

ACME Consolidated Corp. for 20,000 rentable square feet of office space. ACME would like a

base rent of $20 per square foot with step-ups of $1 per year beginning one year from now.

a. What is the present value of cash flows to ATRIUM under the above lease terms? (Assume

a 10% discount rate.)

b. The owner of ATRIUM believes that base rent of $20 PSF in (a) is too low and wants to

raise that amount to $24 with the same $1 step ups. However, now ATRIUM would provide

ACME a $50,000 moving allowance and $100,000 in tenant improvements (TIs). What

would be the present value of this alternative to ATRIUM?

c. ACME informs ATRIUM that it is willing to consider a $23 PSF with the $1 annual stepups.

However, under this proposal, ACME would require ATRIUM to buyout the one year

remaining on its existing lease in another building. That lease is $15 PSF for 20,000 SF per

year. If ATRIUM buys out ACMEs old lease, ACME will not require a moving allowance

or TIs. What would be the present value of this proposal to ATRIUM? How does it compare

with the alternative in (b)?