Question 1 An office is held on a 15-year lease with 2 years unexpired; the contract rent is 1,275,000 p.a. Improvements were carried out 4 years ago at a current cost of 25,500,000, increasing the rent by 25%. The market rent, including improvements is 2,250,000 p.a. The RV is 1,750,000. The target rate of return is 6%, the capitalisation rate is 3.5% (implying rental growth of 2.7% p.a.). Assume construction cost inflation of 3% p.a. Value the landlord's interest in the property assuming four scenarios: a) the tenant vacates at the end of the existing lease; b) a new ten-year lease with a rent review in year 5 (with a clause stating that the value of improvements is disregarded) is granted to the existing tenant on expiry; c) d) the landlord repossesses the property for his own occupation; and the landlord repossesses the property for redevelopment, site value is estimated at 58,250,000.