Reference no: EM132704951

You own an office building in downtown Los Angeles. Your tenants have not been using the space during the COVID-19 recession. Even when the pandemic is over, they expect that the space will not be as valuable anymore because they can work from home easier. Therefore, they want to renegotiate their leases. You expect that fixed operating expenses will be $40 per square foot in the first year, and then it will increase 3% per year in the future. You expect that variable operating expenses will be 10% of rent. You also expect to set aside 5% of rent in capital reserves every year. Your discount rate is 8%. You are considering the following scenarios.

1. You could charge $100 per square foot per year for the next 5 years with a triple net lease. What is the effective net rent?

2. You could charge $75 per square foot per year, increasing $10 per year for the next 5 years, with a gross lease. What is the effective net rent?

3. You could charge $90 per square foot per year, increasing at 2% inflation per year for the next 5 years, with a single net lease. What is the effective net rent?

4. You could charge $85 per square foot per year, increasing $5 per year for the next 7 years, with a double net lease. What is the effective net rent?

5. Which lease do you prefer? Why?