Reference no: EM132720704

Question -

a) WHY might a tenant prefer a lease with higher effective rent than an alternative with a lower effective rent?

b) Describe the most common method used to specify rent changes over time for a commercial lease?

c) What factor tends to make both owner and tenants prefer longer term leases all else being equal?

d) A prospect tenant has presented two lease proposal to the owner of the office building .The first alternative has a five years term and a contract rental rate of $ 16.00 per square foot in the first year of the lease. The rental rate then steps up 3 percent per year over the remainder of the lease term. So ,for example ,the rental rate in year 2 (13-24) would be $16.48. The second lease alternative is also a five year lease with an initial contract rate of 16.00 per square foot. However the rental rate on this lease is indexed to inflation with the adjustment made at the beginning of each year based on the actual rate of inflation in the previous year.

The owner of the office property project that inflation will run at a rate of 3 percent per year over the five -year lease term.

1) What are the owner's project payment over the five years term for the two alternative?

2) Which option in the owner likely to prefer and why?