Suppose the Lease on a Certain Space Will Expire at the Beginning

question 10

Multiple Choice

Suppose the lease on a certain space will expire at the beginning of 2010. You believe that the probability of the existing tenant renewing is 75 percent. If they renew, you will need to spend only an estimated $5.00/SF to upgrade his space. If they do not renew, it will take $20.00/SF to modernize the space and there would be 4 months of expected vacancy in that case. What expected cash flow forecast should you put in year 2010 of your pro-forma for this space, if you expect triple-net market rents on new leases in 2010 to be $20/SF?

• A) zero.
• B) $7.92/SF.
• C) $9.58/SF. = PGI-VacAllow-E[TI] = $20 - 0.25*(4/12)*$20 - [0.75*$5.00+(1-0.25)*$20.00] = $20 - $1.67 - $8.75= $9.58.
• D) $11.25/SF.
• E) $15.00/SF.

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Definitions:

Monopsony Outcome

A market condition where there is only one buyer for many sellers, leading to lower prices and wages due to the buyer's market power.

Market Supply

The total quantity of a good or service that is available for purchase at a given price in a market.

Deadweight Loss

The decrease in economic effectiveness happening when a good or service does not reach or cannot reach its equilibrium state.

Monopsony Power

The market power held by a single buyer in a market, allowing them to influence prices and terms of trade.