Question

The law Örm of Saul Goodman and Associates must choose between two di§erent leases for their new space. The Örst lease, Lease A, is a 5-year gross lease with a base rent of $36.25/sf. If rents will increase by $1.00/sf each year and the cash áows from the lease are discounted at 6%, what is the corresponding e§ective rent when evaluated from the tenantís perspective?

Answer 1

I believe that this problem is about determining the equivalent annual cost of leasing option A:

lease cost year 1 = $36.25/sf

lease cost year 1 = $37.25/sf

lease cost year 1 = $38.25/sf

lease cost year 1 = $39.25/sf

lease cost year 1 = $40.25/sf

there are two ways to calculate this solution and the answer will vary significantly depending on which assumption you take:

a) lease payments are paid at the beginning of the year

the PV = $36.25 + $37.25/1.06 + $38.25/1.06² + $39.25/1.06³ +$40.25/1.06⁴ = $170.27

equivalent annual cost = ($170.27 x 6%) / [1 − (1 + 6%)⁻⁵ ] = $10.2162 / 0.2527 = $40.42/sf

b) lease payments are paid at the end of the year

the PV = $36.25/1.06 + $37.25/1.06² + $38.25/1.06³ + $39.25/1.06⁴ +$40.25/1.06⁵ = $160.63

equivalent annual cost = ($160.63 x 6%) / [1 − (1 + 6%)⁻⁵ ] = $9.6378 / 0.2527 = $38.13/sf