Reference no: EM133032741

Question - A landlady is evaluating the following alternatives for leasing space in a shopping mall for the next five years:

(a) Net lease with steps. Rent will be Sh.17 per square foot the first year and will increase by Sh.1 per square foot each year until the end of the lease. All operating expenses will be paid by the tenant.

(b) Net lease with CPI adjustments. The rent will be Sh.18 per square foot the first year. After the first year, the rent will be increased by the amount of any increase in the CPI. The CPI is expected to increase 4% per year.

(c) Gross lease. Rent will be Sh.31 per square foot each year with the lessor responsible for payment of all operating expenses. Expenses are estimated to be Sh.8 during the first year and increase by Sh.1 per year thereafter.

(d) Gross lease with expense stop and CPI adjustment. Rent will be Sh.23 the first year and increase by the full amount of any change in the CPI after the first year with an expense stop at Sh.7 per square foot. The CPI and operating expenses are assumed to change by the same amount as outlined above.

Required -

(i) Calculate the effective rent to the landlady for each lease alternative using a 12% discount rate.

(ii) Which alternative should the landlady select?

(iii) Would your answer change if was a tenant doing the analysis?