Question

Frank found a "favorable lease" for his business two years ago at $10/sq.ft. per year. He ended up leasing a 20,000 sq.ft. space for 6 years to lock in that yearly lease of $200,000. Yesterday, Frank's business was struck by lightning and burned to the ground, forcing him to lease a new building. Unfortunately the going rate now is $15/sq.ft. and Frank still needs 20,000 sq.ft. of space. How much could Frank's Leasehold Interest Coverage pay for the additional costs of leasing a new space for the remaining 4 years?

A. $1,200,000
B. $100,000
C. $300,000
D. $400,000

Answer 1

D)Frank needs Leasehold Interest Coverage to pay for the increased leasing cost due to his business burning down. The difference in cost is $100,000 more per year, and for the remaining 4 years.

Step-by-step explanation:

Frank originally found a "favorable lease" for his business at $10 per sq.ft. per year, and leased a 20,000 sq.ft. space for 6 years. His yearly lease cost was $200,000.

After the unfortunate incident of his business burning to the ground, he is faced with a new rate of $15 per sq.ft. Since he still requires 20,000 sq.ft. of space, his new yearly lease cost would be 20,000 sq.ft. × $15/sq.ft. = $300,000.

The difference in leasing costs per year is $300,000 (new rate) - $200,000 (old rate) = $100,000. Since he has 4 years remaining on his original lease, the Leasehold Interest Coverage would need to cover this difference for each of the remaining years.

Therefore, the total additional cost is $100,000 × 4 years = $400,000.