Problems

A property owner is evaluating the following alternatives for leasing space in his office building for the next five years:

Net lease with steps. Rent will be $$15$ per square foot the first year and will increase by $$1\mathrm{.}50$ per square foot each year until the end of the

lease. All operating expenses will be paid by the tenant.

Net lease with CPI adjustments. The rent will be $$16$ per square foot the first year. After the first year, the rent will be increased by the

amount of any increase in the CPI. The CPI is expected to increase $3$ percent per year.

Gross lease. Rent will be $$30$ per square foot each year with the lessor responsible for payment of all operating expenses. Expenses are

estimated to be $$9$ during the first year and increase by $$1$ per year thereafter.

Gross lease with expense stop and CPI adjustment. Rent will be $$22$ the first year and increase by the full amount of any change in the CPI

after the first year with an expense stop at $$9$ per square foot. The CPI and operating expenses are assumed to change by the same

amount as outlined above.

a$.$ Calculate the effective rent to the owner $($after expenses$)$ for each lease alternative using a $10$ percent discount rate.

$b.$ How would you rank the alternatives in terms of risk to the property owner?

$c.$ Considering your answers to parts $(a)$ and $(b),$ how would you compare the four alternatives?