Question
A company is considering two possible locations to lease for their head offices. They have been presented with tow leases by the respective landlords and
A company is considering two possible locations to lease for their head offices. They have been presented with tow leases by the respective landlords and they need to consider the best option. The details of the two leases are as follows:
| Lease A | Lease B |
Lease term | 5 years | 7 years |
Rent | R1800/m2 | R2040/m2 |
Rent escalation rate | 3% per annum | 2% per annum |
Operating costs | R180/m2 | R240/m2 |
Operating cost escalation rate | 5% | 5% |
Concession | 1 year rent free | 2 years rent free |
Assuming that the tenant could borrow on a secured loan at 7% and at 8% on an unsecured loan, answer the following questions:
- Calculate the net present value and effective rent of lease A
- Calculate the net present value and effective rent of lease B
- Which lease would you advise the tenant to opt for and why?
- What other qualitative factors would you advise the tenant to consider when choosing between the two leases/premises that may not have been considered in your calculations above?
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