An owner of the Atrium Tower Office Building is currently negotiating a five-year lease with ACME Consolidated Corp. for 20,000 rentable square feet of space. ACME would like a base rent of $20 per square foot with step-ups of $1 per year beginning one year from now. Atrium would provide full service under the lease terms. The owner of Atrium Tower believes that the $20 lease is too low and is trying to negotiate $24 per square foot with the same step-ups. However, Atrium would provide ACME with a $50,000 move-in allowance and $100,000 in tenant improvements (TIs) if the lease at $24 psf is signed. a. Assuming that Atrium’s owner believes that the required rate of return on investment should be
10% per year, is the $24 in rents per square foot combined with the move-in allowance and TIs
justified?
b. Acme informs Atrium that it has 1 year remaining on its existing 20,000-square-foot lease in an
older building at $15 per square foot. ACME is willing to pay Atrium $23 per square foot with
step ups on the new lease, but is demanding that Atrium “buy out” the old lease in lieu of the
moving allowance and TIs. Should Atrium agree to the lease buyout or agree to the lease at $24
per square foot with move-in allowance and TIs?