Question
The owner of a strip mall is leasing out an empty 3,000 sq ft store-front. The owner is currently earning a 12% annual rate of
The owner of a strip mall is leasing out an empty 3,000 sq ft store-front. The owner is currently earning a 12% annual rate of return on a very similar property. Operating expenses on the unit are expected to be $3 per sq ft for the coming year and are forecasted to increase by 3% per year thereafter. There are no common areas. The owner has the following perspective tenants:
Old Fashioned Donuts: It is demanding a 7-year lease at below-market rent of $17 per sq ft. Rent will step up by $1 per sq ft each year after year 1. This tenant is offering to add an overage rent (also called a percentage rent) clause . The clause specifies that the tenant must pay 10% on gross sales over a breakpoint level of $300,000 per year. The tenants gross sales are expected to be $400,000 the first year, and increase 6% per year thereafter. The tenant is demanding a $20,000 move-in concession to defray their moving costs.
Mango Republic: This tenant sells clothing. It is demanding a triple net lease with a flat rent of $24 per sq ft over the 7 year lease term. There is no overage rent clause or move-in concession in this lease.
A. Referring to Scenario 3 above, what is the annual effective rent (per sq ft) on the Old Fashioned Donuts lease? Group of answer choices
$32.71
$26.90
$23.10
$19.12
$30.28 B. Referring to Scenario 3 above, what is the annual effective rent (per sq ft) on the Mango Republic lease?
(Canvas can't handle $ signs. If your answer is $12.40 per square foot, enter 12.40)
C. Referring to Scenario 3 above, which tenant should the owner of the strip mall choose? Group of answer choices
Old Fashioned Donuts
Mango Republic
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