Question
You are a Real Estate Manager trying to fill a vacant space in your Center. You have three potential tenants to consider for the space.
You are a Real Estate Manager trying to fill a vacant space in your Center. You have three potential tenants to consider for the space. Details about the tenants and your requirements for investing in the space are depicted below:
Tenant 1: No upfront investment on your part. 3-year lease. Tenant will pay $24,000 for rent in Year 1, $26,000 in Year 2 and $28,000 in Year 3.
Tenant 2: $5,000 investment upfront on your part for paint and carpet. Tenant will pay a flat fee rent of $26,000 per year for 5 years.
Tenant 3: $20,000 upfront investment on your part for paint, carpet and a new small kitchenette. Tenant will only pay $10,000 in rent for Year 1 but rent increases to $20,000 in Year 2, $30,000 in year 3, $35,000 in Year 4 and $40,000 in Year 5.
Your company has a Cost of Capital of 12%. From this information and using whatever selection method you think is best (I do suggest the equivalent annuity methodology for this one!!), which of these tenants should you pursue?? To simplify things, assume the cash flows occur at the end of each year.
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