An owner of the ATRIUM Tower Office Building is currently negotiating a five-year lease with ACME Consolidated Corporation for 20,000 rentable square feet of office space. ACME would like a base rent of $11 per square foot (PSF) with step-ups of $1 per year beginning one year from now. Required: a. What is the present value of cash flows to ATRIUM under the above lease terms? (Assume a 10% discount rate.) b. The owner of ATRIUM believes that base rent of $11 PSF in (a) is too low and wants to raise that amount to $15 with the same $1 step-ups. However, now ATRIUM would provide ACME a $53,000 moving allowance and $130,000 in tenant improvements (Tls). What would be the present value of this alternative to ATRIUM? c. ACME informs ATRIUM that it is willing to consider a $14 PSF with the $1 annual stepups. However, under this proposal, ACME would require ATRIUM to buyout the one year remaining on its existing lease in another building. That lease is $6 PSF for 20,000 SF per year. If ATRIUM buys out ACME's old lease, ACME will not require a moving allowance or Tls. What would be the net present value of this proposal to ATRIUM? Complete this question by entering your answers in the tabs below. Required A Required B What is the present value of cash flows to ATRIUM under the above lease terms? (Assume a 10% discount rate.) (Round your answer to 2 decimal places.) Present value of cash flows Required C
An owner of the ATRIUM Tower Office Building is currently negotiating a five-year lease with ACME Consolidated Corporation for 20,000 rentable square feet of office space. ACME would like a base rent of $11 per square foot (PSF) with step-ups of $1 per year beginning one year from now. Required: a. What is the present value of cash flows to ATRIUM under the above lease terms? (Assume a 10% discount rate.) b. The owner of ATRIUM believes that base rent of $11 PSF in (a) is too low and wants to raise that amount to $15 with the same $1 step-ups. However, now ATRIUM would provide ACME a $53,000 moving allowance and $130,000 in tenant improvements (Tls). What would be the present value of this alternative to ATRIUM? c. ACME informs ATRIUM that it is willing to consider a $14 PSF with the $1 annual stepups. However, under this proposal, ACME would require ATRIUM to buyout the one year remaining on its existing lease in another building. That lease is $6 PSF for 20,000 SF per year. If ATRIUM buys out ACME's old lease, ACME will not require a moving allowance or Tls. What would be the net present value of this proposal to ATRIUM? Complete this question by entering your answers in the tabs below. Required A Required B What is the present value of cash flows to ATRIUM under the above lease terms? (Assume a 10% discount rate.) (Round your answer to 2 decimal places.) Present value of cash flows Required C
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:**Lease Evaluation Problem**
An owner of the ATRIUM Tower Office Building is in negotiations for a five-year lease with ACME Consolidated Corporation. The lease covers 20,000 rentable square feet of office space. ATRIUM proposed an initial base rent of $11 per square foot (PSF) with step-ups of $1 per year starting from one year after contract initiation.
**Requirements:**
a. **Present Value Calculation** - Determine the present value of cash flows to ATRIUM under these lease terms with a 10% discount rate.
b. **Alternative Lease Proposal** - ATRIUM's owner believes the base rent of $11 PSF is undervalued and seeks to increase it to $15 PSF, maintaining the $1 step-up. Under these terms, ATRIUM will offer ACME a $53,000 moving allowance and $130,000 in tenant improvements (TIs). Calculate the present value of this alternative for ATRIUM.
c. **ACME's Counterproposal** - ACME is open to a $14 PSF with the $1 step-ups, provided ATRIUM buys out their current lease's remaining year in another building. ACME's current lease is $6 PSF for the same 20,000 SF per year. If ATRIUM accepts these terms, no moving allowance or TIs would be given. Calculate the net present value of ACME's proposal for ATRIUM.
**Interactive Section** - Users can input their answers for each requirement in the spreadsheet tabs provided.
**Details:**
- **Tab: Required A** - Focus on calculating the present value of cash flows at a 10% discount rate for the original lease terms. Follow instructions to round answers to two decimal places.
Complete the calculations based on the above scenarios and fill in your answers in the required sections.
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Step 1: Present value
VIEWStep 2: a. Computation of present value of cash flows to ATRIUM @ discounting rate of 10%.
VIEWStep 3: b. Computation of present value of cash flows to ATRIUM if the base rent is increased to $15
VIEWStep 4: c. Computation of net present value of cash flows to ATRIUM upon acceptance of proposal
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