Reference no: EM133120964

1. Suppose you are considering the acquisition of an income producing property. The building is currently leased for the next 5 years with annual (year-end) cashflows of $1,500,000.  At the end of the current lease, you expect rents to increase to $1,800,000 (annually) for the foreseeable future.  You anticipate selling the property ten years from today, at an expected multiple of 10.0 times the prevailing market rent.  Market rates (OCC) are currently 5%, but given the uncertainty surrounding future rental rates a 3% risk premium must be added to inter-lease rates.  What is the value of this property (to you) today?
2. Continuing from problem 1, now suppose we have the opportunity to extend our existing tenant lease for an additional two years (at the expected market rate of $1,800,000). How much would the property's value increase by signing this lease extension?
3. Continuing from problems 1 and 2, at what lease rate should we be indifferent between signing the extension and waiting for market conditions to continue evolving?
4. Continuing from problems 1, 2, and 3, if the landlord was able to capture 80% of the gains from enhanced certainty of cashflows through the negotiation process, at what annual rate/price would the lease be extended?
5. Suppose in a certain property market the typical lease term is 5 years, the cap rate (cash yield) is 8%, long term property value and rental growth rate is 2.0% per year, leases provide rent step-ups of 2.0% per year (per the expected growth rate), and the tenant borrowing rate (intra-lease discount rate) is 6%. What is the appropriate inter-lease discount rate?