What if sales are expected to increase by 20 percent

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Reference no: EM131327128

A retail lease for 10,000 square feet of rentable space is being negotiated for a five-year term. Option A calls for a base rent of $25 per square foot for the coming year with step-ups of $1 per year each year thereafter. CAM charges are expected to be $3 for the coming year and are forecasted to increase by 6 percent at the end of each year thereafter. Option B calls for a lower base rent of $23 per square foot with the same step-ups and CAM charges, but the tenant must pay overage rents based on a percentage lease clause.

The clause specifies that the tenant must pay 8 percent on gross sales over a breakpoint level of $900,000 per year. The owner believes that the tenant's gross sales will be $850,000 during the first year but should increase at a rate of 10 percent per year each year thereafter.

a. If the property owner believes that a 12 percent rate of return should be earned annually on this real estate investment, which option is best?

b. What if sales are expected to increase by 20 percent per year?

Reference no: EM131327128

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