During class, we looked at a property where the existing rent roll had in place rents that were substantially below market levels. We talked about using lease buy outs to create value in a property, and watched a video where an owner talked about a real lease buy out example in one of his buildings. For this problem, put yourself in the shoes of a landlord. You have a 2 bedroom unit in your building with a tenant that pays $3,100/month. The market rent for that unit is $7,000/month. Assume a prevailing cap rate is 4%. The unit has not been renovated and it requires $250,000 in improvements before you can lease it up at market standards. You are trying to figure out how much to offer the tenant to buy out his lease. What is your break even lease buy out amount? In other words, what is the amount where after the lease buy out payment and the costs of apt. improvements, the net value created is zero?

A. $800K

B. $920K

C. $500K

D. $1M