Question

In: Finance

You have one apartment to lease, and the quoted rent is $750 per month. The lease...

You have one apartment to lease, and the quoted rent is $750 per month. The lease term is 12 months. A concession of one month’s free rent is being given in the market, and you are concerned about how this will affect property revenues if one month’s free rent is needed to seal the lease deal.

  1. What would the effective rent be for the year if no concession is granted?
  2. What would the effective rent be for the one-year term of the lease if the concession is granted?
  3. What is the average rent/month for the 12-month period if the concession is granted?
  4. What would be the impact on effective rent if the rent is reduced to the average rental rate found in #3?
  5. How much income is lost (what percentage) from lowering the quoted rent in this way?
  6. Suppose it is necessary to increase rents by 6% when leases are renewed. How would this change impact effective rent for the year if the concession is granted but the rental rate is unchanged? What would be the effect if the rent had been reduced as in #4?
  7. How much additional potential income would be lost in the second year due to the rent reduction?
  8. How much of an increase (percentage) would be necessary to bring the reduced rent up to the required new level?

Solutions

Expert Solution

Months W/o concession W/Concession If average rate of rent
1 750 750 687.5
2 750 750 687.5
3 750 750 687.5
4 750 750 687.5
5 750 750 687.5
6 750 750 687.5
7 750 750 687.5
8 750 750 687.5
9 750 750 687.5
10 750 750 687.5
11 750 750 687.5
12 750 0 687.5
Total 9000 8250 8250
Rent if no concession granted 9000
Rent if concession granted 8250
Average rent per month for 12month period 687.5
Impact on effective rent if the rent is reduced to the average rental rate 750 (9000-8250=750)- It is not clear with the question if average rental rate for 11 months or 12 months, So calculated for 12 months.
% of loss from lowering the quoted rent 8.33% (750/9000*100)-" Lowering quote" meaning should be cleared. If it mean 1 month concession lowering, answer should be 8.33%
If 6% increased the impact in total rent 8745 (8250*6%=495+8250=8745)
If 8.33% decresed the impact in total rent 7562.50 (8250*8.33%=687.50-8250=7562.50)
Potention income lost if 1st year rent is with concession 687.50 (8250-7562.50)
Potention income lost if 1st year rent is with out concession 1437.50 (9000-7562.50)
Increase percentage necessary to bring the reduced rent up to the required new level 15.64% (8745/7562.50-1) Increase 15.64% would be necessary to bring the reduced rent 7562.50 up to the required new level 8745

jeff jeffy answered 1 year ago
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