Velocity LLC (“owner”) owns a brand new 100 unit Luxury Apartment project at 1100 Broadway Street. The owner’s leasing agents are trying to lease the luxury apartments for $3,700 a month. Prospective tenants are resisting that rent price. The owner tells the leasing agents to quote a rent of $3,700 a month to prospective tenants; but to also offer the tenants the option of a one year lease at $3,700 a month with a move in cash bonus of $245 and seven weeks free rent (owner’s lease). The leasing agent are instructed to explain to the tenants that their effective rent will be $3,140 a month for the first year. Assume operating expenses for 1100 Broadway Street are $1,400 a month per unit and that prevailing luxury apartment project cap rate are 4%. Also assume that a unit with a negative cash flow is considered to have no value. 1. If the tenant accepts the owner’s lease, what is the value of the unit in the first, second and third month of the owner’s lease? 2. If the tenant insists on a one year lease at $3,140 a month (tenant’s lease) and the owner accepts, What is the value of the unit in the first month of the tenant’s lease? 3. Which is the better deal for the owner? (the owner’s lease or the tenant’s lease) 4. Explain your answer to question 3
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