Question

1. What is the effective annual rent for Lease 1 and Lease 2? When you compute the answer, assume the annual discount rate is 7%. Also assume annual rents are paid once per year.

   1. Lease 1 is 5 years. The base rent in 2020 is $13.50 per square foot per year. Each year, the base rent increases by $0.50 per year.

Lease 2 is 6 years. The base rent in 2020 is $13.00 per square foot per year. Each year, the base rent increases by 5% per year.

1. You own a building with 100,000 leasable square feet. One tenant rents 60,000 square feet and the other 40,000 square feet are vacant. The utilities bill for the year was $80,000. The fixed cost of utilities is $25,000 per year.  

   1. A new tenant enters the building and rents 10,000 square feet. What is the new utilities bill of the building?  

The new tenant has a base stop of $0.80 per square foot. What are recoveries for utilities from this tenant?

Answer 1

Answer to Part 1 : Assuming that the lease payments are made at the start of the year the effective annual rate will be arrived as under :

LEASE 1 - Calculation of Effective Annual Rent
Year	Rent (A)	Discount Factor (1/(1+0.07)^n)(B)	Discounted Rent (A*B)
1	13.5	1	13.500
2	14	0.9346 (n taken as 1)	13.084
3	14.5	0.8734	12.665
4	15	0.8163	12.244
5	15.5	0.7629	11.825
Present value of cash out flow (A)			63.318
No of Years (B)			5
Effective Annual Rent (A/B)			$ 12.664
LEASE 2 - Calculation of Effective Annual Rent
Year	Rent (A)	Discount Factor (1/(1+0.07)^n)(B)	Discounted Rent (A*B)
1	13	1	13.000
2	13.65	0.9346 (n taken as 1)	12.757
3	14.3325	0.8734	12.519
4	15.04913	0.8163	12.285
5	15.80158	0.7629	12.055
6	16.59166	0.7130	11.830
Present value of cash out flow (A)			74.445
No of Years (B)			6
Effective Annual Rent (A/B)			$ 12.407

The new utilities Bill on renting the additional 10,000 sq. ft would be computed as under. The below calculation is on the premise that the fixed cost remains same irrespective of utilization of total 100,000 sq. ft and the the remaining cost is variable on the basis on area (sq.ft)

Sr.No	Particulars	Calculation	Amount($) / Square Feet
1	Total Utilities Bill	Given	$ 80,000.00
2	Less Fixed Bill	Given	$ 25,000.00
3	Variable Bill	1/2	$ 55,000.00
4	Occupied Space	Given	60000
5	Variable Bill per Sq.Ft	3/4	$            0.92
6	Additional Bill for next 10000 sq. ft	5*10,000	$   9,166.67
7	New Utilities Bill	1+6	$ 89,166.67

The Base Stop rate is a rate where the Landlord(owner) agrees to pay certain portion of operational expenses for the rented property.

Recovery of utilities from the new tenant renting 10,000 square foot will be computed as under

Sr.No	Particulars	Calculation	Amount($)
1	Recovery of Fixed Cost	$80000/100000*10000 Total Fixed cost/Total Area*Leased Area	$   8,000.00
2	Recovery of Variable Cost	$0.92*10000 Variable Bill per Sq.Ft*Leased Area	$   9,166.67
3	Total Utilities Cost	1+2	$ 17,166.67
4	Base Stop (Paid by landlord)	$0.8*10000 Base stop rate * Leased Area	$   8,000.00
5	Recoveries from Tenant	3-4	$   9,166.67

Above is assuming that the fixed utilities are charged to the tenant by the owner, which is usually the case.

Had fixed cost not been charged to the tenant the recoveries would be lower by $ 8000