Problem
A 100,000-SF space is expected to rent in five-year fixed-rent leases successively in perpetuity (annual payments at the beginning of the years). You expect the first lease will be signed one year from now, with the first rent payment to be received at that time. The second lease will begin five years after that, and so on. The rent in each lease is constant, but between new lease signings the rent is expected to grow at a rate of 2% per year. The rent on the first lease is expected to be $20/SF per year. The intralease discount rate is 8% per year. However, prior to the signing of each lease, the amount of the rent for that lease is uncertain and risky, so a 12% rate is appropriate for discounting lease values back to present value prior to lease signings. What is the present value of this 100,000-SF space?