REM Practices Q2&Q3 - As CFO for Everything.Com, you are shopping for 5,000 square feet of usable PDF

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As CFO for Everything.Com, you are shopping for 5,000 square feet of usable office space for 25 of your employees in Center City, USA. A leasing broker shows you space in Apex Atrium, a 10-story multitenanted office building. This building contains 300,000 square feet of gross building area. A total...

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QUESTION 2 As CFO for Everything.Com, you are shopping for 5,000 square feet of usable office space for 25 of your employees in Center City, USA. A leasing broker shows you space in Apex Atrium, a 10-story multitenanted office building. This building contains 300,000 square feet of gross building area. A total of 45,000 square feet is interior space and is nonrentable. The nonrentable space consists of areas contained in the basement, elevator core, and other mechanical and structural components. An additional 30,000 square feet of common area is the lobby area usable by all tenants. The 5,000 square feet of usable area that you are looking for is on the seventh floor, which contains 28,000 square feet of rentable area, and is leased by other tenants who occupy a combined total of 20,000 square feet of usable space. The leasing broker indicated that base rents will be $30 per square foot of rentable area. a. Calculate total rentable area in the building as though it would be rented to one tenant.

b. Calculate the load factor and common area on the seventh floor only.

c. Calculate the rentable area, including the load factor for common areas on the seventh floor and the total rent per square foot that will be paid by Everything.Com for the coming year if it chooses to lease the space.

d. Adjust (b) assuming that the owner adjusts the load factor for other common areas in the building.

e. Calculate total rent per square foot, assuming that adjusted load factors are applied to usable area for both the common areas in the building lobby and on the seventh floor.

QUESTION 3 An owner of the Atrium Tower Office Building is currently negotiating a five-year lease with ACME Consolidated Corp. for 20,000 rentable square feet of office space. ACME would like a base rent of $20 per square foot with step-ups of $1 per year beginning one year from now. a. What is the present value of cash flows to ATRIUM under the above lease terms? (Assume a 10% discount rate.) Year Rent per square feet Total annual rent NPV

0

1 $ 20

2 $ 21

3 $ 22

$

$

$

400,000

420,000

440,000

4 5 $ 23 $ 24 $ 460,000 $ 480,000

$ 1,653,550.74 b. The owner of ATRIUM believes that base rent of $20 PSF in (a) is too low and wants to raise that amount to $24 with the same $1 step ups. However, now ATRIUM would provide ACME a $50,000 moving allowance and $100,000 in tenant improvements (TIs). What would be the present value of this alternative to ATRIUM?

Year Rent per square feet Total annual rent

0

Moving allowance Tenant improvement NPV

($ 50,000) ($ 100,000) $ 1,806,813.68

1 $ 24

2 $ 25

3 $ 26

4 $ 27

5 $ 28

$

$

$

$

$

480,000

500,000

520,000

540,000

560,000

c. ACME informs ATRIUM that it is willing to consider a $23 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 $15 PSF for 20,000 SF per year. If ATRIUM buys out ACME’s old lease, ACME will not require a moving allowance or TIs. What would be the present value of this proposal to ATRIUM? How does it compare with the alternative in (b)? Year Rent per square feet Total annual rent

0

Old lease buyout ($ 15 x 20,000 SF) NPV

1 $ 23 $

2 $ 24 $480,00

3 $ 25

4 $ 26

5 $ 27

$

$

$

460,000

0

500,000

520,000

540,000

($ 300,000) $

1,580,997.94 * Alternative in (b) is better than alternative in (c) because the net present value of alternative in (b) is higher than the net present value of alternative in (c)....