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Corporate Real Estate Decisions
- Valuing Leasehold Interests and Subleases
a) Consider the following situation: Three years ago you entered into a 10-year lease for 25,000 sf at $8.50 psf gross. Now market rent for this space is $10.00 psf. What is the value of your leasehold interest if your cost of capital is 10%?
Suppose your landlord wants to buy you out of your lease so that he can tear down the building and redevelop the land. How much must you be paid to be willing to give up this lease?
b) Suppose instead that current market rents are $8.00 psf.
What is the value of your leasehold interest in this case?
Suppose you would like to move to new space and terminate your lease. How much would the landlord insist on being paid to let you out of the lease?
What is the most you would be willing to pay?
What are non-financial factors that will affect your decision?
User alternatives in sublease analysis:
Alternatives: User Wants to Move Contract lower than market rent
Contract higher than market rent Owner
User
Alternatives: User Wants to Stay Contract lower than market rent
Contract higher than market rent Owner
User
