A property is leased for $24,000 per year although market rents are currently $27,500 per year and are expected to increase by 2% per year.The property is expected to be sold at the end of year 10 based on a 10% terminal cap rate applied to the eleventh year NOI.The current lease on the property will expire at the end of year 10 so the property can be leased in the eleventh year at market rates.What is the value of the leased fee estate based on an 11.5% discount rate?

Question

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The value of the leased fee estate is calculated by discounting the cash flows from the lease and the sale of the property at the end of year 10. The cash flows include the current lease income of $24,000 per year for 10 years and the sale price at the end of year 10, which is based on the market rent in year 11 capitalized at a 10% rate. The market rent in year 11 is $27,500 increased by 2% annually for 10 years. The present value of these cash flows, discounted at 11.5%, results in the value of the leased fee estate.

A Property Is Leased for $24,000 Per Year Although Market