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An owner of the Atrium Tower is currently negotiating a 5 year lease with ACME Corp....

An owner of the Atrium Tower is currently negotiating a 5 year lease with ACME Corp. for 20,000 rentable SF. ACME would like a base rent of $25/SF with step-ups of $1/year beginning one year from now. a) What is the present value of cash flows to Atrium (assume A 10% discount rate) b) The owner of ATRIUM believes that the Base rent of $25/SF in (a) is too low and wants to raise that amount to $29 with the same step-ups. If so, Atrium would provide ACME with a $50,000 moving allowance and $150,000 in tenant improvements. What is the PV of this alternative and the effective rent. c) ACME informs ATRIUM it will pay $23/SF but must buyout one year left on its existing lease ($15/SF on 20,000/SF); no moving allowance or tenant Improvements. What is the PV of this alternative and the effective rent.

Solutions

Expert Solution

Answer to part a)

Calculation of Present Value

Year Rate SF Cash Flow PV Factor PV
1 25 20000 500000 0.909 454500
2 26 20000 520000 0.826 429520
3 27 20000 540000 0.751 405540
4 28 20000 560000 0.683 382480
5 29 20000 580000 0.621 360180
2032220

So present value will be 2032220.

Answer to part b)

Year Rate SF Cash Flow
[(Rate x SF) - 200000]		 PV Factor PV Effective Rent
(Cash Flow/SF)
1 29 20000 380000 0.909 345420 19
2 30 20000 400000 0.826 330400 20
3 31 20000 420000 0.751 315420 21
4 32 20000 440000 0.683 300520 22
5 33 20000 460000 0.621 285660 23
Present Value 1577420

So, the present Value of this alternative will be $ 1577420

Effective Rent (Total) = Total Cash Flows/ Total SF

                                     = 2100000/100000 = 21 per SF

NOTE: It is assumed that $50,000 moving allowance and $150,000 in tenant improvements paid every year by Atrium to ACME. If assumed that they are one time payment then PV will be:-

Year Rate SF Cash Flow PV Factor PV
0 - - -50000 1 -50000
0 - - -150000 1 -150000
1 29 20000 580000 0.909 527220
2 30 20000 600000 0.826 495600
3 31 20000 620000 0.751 465620
4 32 20000 640000 0.683 437120
5 33 20000 660000 0.621 409860
Present Value 2135420

Answer to part c)

Year Rate SF Cash Flow PV Factor PV
1 23 20000 460000 0.909 418140
2 23 20000 460000 0.826 379960
3 23 20000 460000 0.751 345460
4 23 20000 460000 0.683 314180
4 15 20000 300000 0.683 204900
Present Value 1662640

Present Value = $ 1662640

Effective Rent (Total) = Total Cash Flows/ Total SF

                                     = 2140000/80000 = 26.75 per SF

jeff jeffy answered 2 weeks ago
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