Suppose your client owned a commercial parcel of land. His accountant advised him not to sell the land but rather to lease it on a long-term basis. He put a “for lease” sign on the property and received an offer within a few months. The lease he agreed to was for 75 years with payments of $40,000 per year for 50 years and $50,000 per year for the last 25 years. The tenant signed the lease and within hours signed a contract to build a two-story office building on that land. The tenant arranged for a mortgage to finance the construction of the building, which had a reproduction cost of $1,800,000. The lease rate appears to be at the market rate. 1. If the land lease has a 10% capitalization rate, what is the value of the owner’s interest in the land (the leased fee interest)? 2. What is the value of the tenant’s interest in the building? 3. As the building gets older and closer to the end of the 75-year lease, what will happen? 4. What about the reversion (i.e.,

Suppose your client owned a commercial parcel of land. His accountant advised him not to sell the land but rather to lease it on a long-term basis. He put a “for lease” sign on the property and received an offer within a few months. The lease he agreed to was for 75 years with payments of $40,000 per year for 50 years and $50,000 per year for the last 25 years. The tenant signed the lease and within hours signed a contract to build a two-story office building on that land. The tenant arranged for a mortgage to finance the construction of the building, which had a reproduction cost of $1,800,000. The lease rate appears to be at the market rate. 1. If the land lease has a 10% capitalization rate, what is the value of the owner’s interest in the land (the leased fee interest)? 2. What is the value of the tenant’s interest in the building? 3. As the building gets older and closer to the end of the 75-year lease, what will happen? 4. What about the reversion (i.e.,

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter2: The Domestic And International Financial Marketplace

Section: Chapter Questions

Problem 8P

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