Reference no: EM133069091

You are appointed by the owner of an office building, Monument Tower, as the property manager. You are currently negotiating a 5-year lease with an IT company, Extreme Vision, for 2,000 square metres of rentable space. After careful market/property analysis, you estimate that the base rent should be $250 per square metre per year. Monument Tower offers full service to all its tenants as a policy. Rent is due at the beginning of each year.

Extreme Vision indicates to you that they are willing to pay $220 per square metre with step-ups of $10 per square metre each year beginning one year from now. You think that a price of $220 is too low to degrade the reputation of Monument Tower. The owner will certainly reject this price. You come up with two alternative proposals.

• Option A: Monument Tower offers Extreme Vision a move-in allowance of $50,000 plus tenant improvements (fitouts) worth $50,000 subject to Extreme Vision signing the lease at a flat rent of $250 for a term of 5 years.

• Option B: Monument Tower offers Extreme Vision to buy out its existing lease in another building. The existing lease of Extreme Vision has 1 year remaining. Its space in the other building is 2,000 square metres and the price is $200 per square metre per year. The lease agreement between Extreme Vision and its existing landlord specifies that Extreme Vision should pay 50% of the remaining rent due in a buyout. Extreme Vision signs the new lease at $250 with step-ups of $5 per square metre each year starting one year from now.

(1) Using discounted cash flow method, calculate the present values and effective rents of the three options: the original proposed rent schedule from Extreme Vision, option A, and option B. The discount rate is 10%, which is the required return by the owner. Show your workings by copying the table here and state the formulas if necessary. Explain concisely.