Homework answers / question archive / A prospective tenant is interested in leasing the 1st floor office space in the Seward H

A prospective tenant is interested in leasing the 1st floor office space in the Seward H

Business

Share With

A prospective tenant is interested in leasing the 1st floor office space in the Seward H. Parks office building, amounting to 12,470 rentable square feet. Knowing that they will need to alter the space to fit their tenancy needs, three lease options are discussed:

Option 1 

The tenant pays a fixed rent amount of $33.48/sf/year for the first three years of their lease and $35.88/sf/year for the remaining two years. They will handle their own alteration expenses and no additional rent abatements/concessions will be provided. 

Option 2

The owner agrees to provide an up-front tenant alteration allowance of $10/sf. The tenant pays a fixed rent amount of $37.80/sf/year for the first two years; $39.60/sf/year for the next two years; and $41.40/sf/year for the final year. 

Option 3

The tenants agree to handle their own alteration expenses, but request that the owner abate the rent for the first six months of the lease to assist with their cash flow. The owner agrees provided that the tenants pay a fixed rent amount of $36.60/sf/year for the first three years and $39.60/sf/year for the final two years. 

1. Assuming the owner applies a discount rate of 6% to their money, which lease option would be most financially advantageous to them?