The law firm of Saul Goodman and Associates must choose between two different leases for their new space. The first lease, Lease A, is a 5-year gross lease with a base rent of $36.25/sf.
If rents will increase by $1.00/sf each year and the cash flows from the lease are discounted at 6%, what is the corresponding effective rent when evaluated from the tenant's perspective?
The second lease, Lease B, is a 5-year net lease with a base rent of $25/sf with expenses expected to be $10/sf in the first year. If rents will increase by $1.00/sf each year and expenses by 5% a year, what is the corresponding effective rent from the tenant's perspecitive if cash flows are discounted at 6% annually?
Which lease is preferred by the law firm?