Effective Rent

This project requires you to compute the effective rent for five alternatives for a five-year lease on 15,000 square feet of rentable space. Assume a discount rate of 8 percent. In your report, mention which rent type should be chosen to maximize the price per square foot.

Part 1: Gross lease

Rent will be $30.00 per rentable square foot each year. The lessor (owner) will be responsible for the payment of all operating expenses. Expenses are estimated to be $10.00 during the first year and will increase by $2.00 per year thereafter.

Part 2: Gross lease with expense stop

Rent will be $28.00 per rentable square foot per year with the lessor responsible for payment of recoverable operating expenses as identified in the lease, up to an expense stop of $10.00 per square foot. Lessee pays all expenses in excess of $10.00 per square foot. Expenses are estimated to be $10.00 during the first year and will increase by $2.00 per year thereafter.

Part 3: Gross lease with step up rents

Rent will be $15.00 per rentable square foot and will increase by $7.00 per square foot each year thereafter. Operating expense will be $10.00 per square foot and will increase by $0.50 per year.

Part 4: Gross lease with step up rents and expense stop

Rents will be $22.00 per square foot and will increase by $2 per year. Operating expenses will be $10.00, and will increase by $2.00 per year. The tenant will pay (the owner will recover) all increases in operating expense above a $10.00 expense stop.

Part 5: Gross lease with expense stop and CPI adjustment

Rent will be $20.00 per rentable square foot the first year and will increase by the full amount of any change in the CPI after the first year with an expense stop at $10.00 per square foot. The CPI is estimated to be 5% in year 2 and is estimated to increase at a rate of 25% per year (e.g. it will be 6.25% in year 3). Operating expenses are assumed to be $3 per square foot and will increase by $3 per year thereafter.