Question

1. You are currently analyzing the cash áows generated by an o¢ ce building in lower Manhat- tan. You see that the lease for one of the tenants is set to expire at the end of the year and want to allow for the possibility that the tenant may not renew. Based on your projections, Based on prior conversations with the tenant, you believe there is a 60% probability that they will renew their lease. If the tenant vacates, current market conditions suggest it will take 6 months to Önd a new tenant to occupy the space.

   1. (a) What is the expected vacancy rate for next year?

   2. (b) Market rent for the space will be $50/sf. What rent per square foot do you expect to receive for the space? What is the associated vacancy adjustment for the space? What is the expected rent per square foot and corresponding vacancy adjustment if it will take 9 months to Önd a new tenant

Answer 1

(a)Expected vacancy rate for next year = (1-60%)=40%

b.Expected rent per square foot ---if it takes 6 months to find a tenant

($ 50 /sq.ft.*60% full 100% occupancy rate)+(40%*50*50%Occupancy rate)

ie.(50*60%*100%)+(50*40%*50%)=

40

Associated occupancy/vacancy adjustment is

(60%*100%) & (40%*50%)

ie. 60 & 20

Expected rent per square foot ---if it takes 9 months to find a tenant

($ 50 /sq.ft.*60% full 100% occupancy rate)+(40%*50*25% Occupancy rate)

ie.(50*60%*100%)+(50*40%*25%)=                    (9/12=75% ,so.1-75%=25%)

35

Associated occupancy/ vacancy adjustment in this case=

(60%*100%) & (40%*25%)

ie. 60 & 12.5