In a 200,000 SF office building complex, the lease contracts are renewed every 5 years. The first

Fantastic news! We've Found the answer you've been seeking!

Question:

In a 200,000 SF office building complex, the lease contracts are renewed every 5 years. The first contract is just signed for $25/SF/year (current market rent) with rents paid in arrears (at the end of the year) annually. The rent is fixed during the contract period, but expected to be adjusted to the market rent between the leases. The market rent is expected to increase by 3% per year.1

The discount rate is 10%/year.

a. What is the value of this office building, assuming that the building is sold at the end of year 10 and the cap rate at that time is expected to be 10%? What is the implied cap rate at time 0?

b. What is the value of this office building, assuming that the building is sold at the end of year 10 and the cap rate at that time is expected to be the same as today? What is the implied cap rate at time 0 and 10?

c. What is the value of this office building, assuming that the building will be held and rented indefinitely (perpetually)? What is the implied cap rate at time 0?

d. What is the value if the rents are paid in advance (at the beginning of the year) and the building is rented perpetually?