Question 3 (10 points)

A retailer is presently leasing 12,000 sq. ft. of store space at 59.00 per sq. ft. per annum, His current lease expires in 5 years. His space is in immediate need of additional improvements at an estimated cost of $13,000. The landlord is offering the retailer two options for his continued occupation of the premises: Keep the existing lease but add an improvement amortization cost of $0,25 per sq. ft. per annum (2) Terminate the existing lease and enter into a new 10 year lease at a rate of $10.00 per sq. ft. per annum, plus an improvement amortization cost of $0.17 perso ft. per annum The retailer needs the space for at least 10 years and therefore, it he selects Option 1. he will have to enter into a new lease in 5 years (Years 6-10). The rate for the new lease will be fixed for the entire new lease term and is based on the current lease rate before addition for improvement amortization and the growth of the Consumer Price Index (CPI) during the previous 5-year period. It is expected the CPI will grow at a rate of 2 per year, compounded annually discount rate= 5.5% annually