An owner of a Downtown LA Office Building (“Lessor”) is currently negotiating a five-year lease with Chernobai Corporation (“Lessee”) for 30,000 rentable square feet of space. Chernobai Corporation would like a base rent of $30 per square foot per year with step-ups of $2 per square foot per year beginning the second year. Downtown LA Office Building owner would provide full service under the lease terms. The owner of Downtown LA Office Building believes that the $30 lease is too low and is trying to offer a counter-offer which includes a base rent of $35 per square foot per year with the same step-ups. Under this counter-offer the Downtown LA Office Building owner would also provide Chernobai Corporation with immediate $60,000 move-in allowance and $90,000 in tenant improvements (TIs) if the lease at $35 per square foot is signed.
Assuming that Downtown LA Office Building owner believes that his required rate of return on investment should be 13 percent per year, is the $35 in rents per square foot combined with the step-ups, move-in allowance and TIs a better proposal for the building owner?
Chernobai Corporation informs Downtown LA Office Building owner that it has 1 year remaining on its existing 30,000-square-foot lease in an older building at $17 per square foot per year. Chernobai Corporation is therefore proposing a counter-counter-offer: it is willing to pay Downtown LA Office Building owner $33 per square foot per year with the step-ups (same as above) on the new lease, but is demanding that the Downtown LA Office Building owner “buy out” the old lease in lieu of the moving allowance and TIs. Should Downtown LA Office Building owner agree to this lease buyout counter-counter-offer, or insist on the lease at $35 per square foot per year with the step-ups, move-in allowance and TIs? In other words, which one of the two is better for the building owner?