Commercial Lease Site Analysis
All the three options are 60,000 rentable square feet; however, the Option #3 is practically the largest by 3,000 square feet since its useable square feet is 53,098 compared to the Option #1 as 50,400 square feet and the Option #2 as 50,600 square feet.
In the nominal total cost analysis, Option #1, the Present Location is more expensive than the other options #2 and #3. Compared to Option #2, the Present Location is over $600k more expensive, and to Option #3, it is over $700k more expensive during the ten-year lease term. It represents 4% difference between the Present Location and the Option #3, and 3% difference between the Present Location and the Option #2. The nominal total cost reflects the increases based on the property level, CPI, Porter’s Wage projection, and Taxes by municipality. The Present Location’s nominal total cost shows $18,498,968, the Option #2 accordingly shows $17,888,143, and the Option #3 does $17,796,167. In the observation at the factors that affect to the total nominal cost include first, the average base rent is the highest for the Present
Location as $22.30 per square foot, and accordingly $22.98 for the Option #3 and $22.28 for the Option #2. Besides the base rent difference, the factors of Real Estate Tax and Porter’s Wage, and Electricity are more expensive than the other alternatives.
In the net present value analysis, the Option #3’s spread is the most expensive as $11,320,422, which is over 4% more expensive than the Present Location at $10,857,968 because the initial construction cost at $2,600,000 does not amortize over the lease period.
Both properties will be renovated, and the construction and renovation costs for the Present Location will be able to be fully covered by the work allowance. Since the cost is time valued basis, the initial major cost for the Option #3 affected the total NPV, meanwhile the Present Location’s cost factors of Tax, Porter’s Wage, and Electricity are significantly discounted. In addition, going along with the NPV analysis, the Option #3’s initial cost is $2.6 million, which is a significant amount of funds needed before the lease commencement. Compared between the Present Location and the Option #2, the Present Location is 3% more expensive by $276,772.
The Option #2’s cost factors are overall less expensive than the Present Location; however, CPI increases account for Option #2, which can be the most fluctuating variable among all factors.
Moreover, the Present Location is fully set up and equipped with the drive-in and ATM facilities, while the Option #2 needs to build those facilities, which will require additional upfront construction cost. However, the Option #2’s location is excellent, close to other professional offices and located in the main business area as well as the available ample customer parking lots and for freestanding signage for the office. The great location advantage needs to be considered although there will be both initial tenant improvement cost of $936,000 and facility construction fee will be required. Both the Option #2 and #3 offers a great location that the Option #3 is located in close proximity to Interstate 95 and professional and business offices as well as having been equipped with drive-in and ATM facilities. Additionally, the Option #3 offers a 20,000 square feet of office contiguous to the premises that can be used for expansion space when that lease expires in 4 years. The expansion rights is a such a great opportunity when a business is based on a perishable position such as restaurants and hotels. Since the business is a bank, and the expansion feasibility is after four-years of the lease commencing, this additional benefit or opportunity is less than the first factor to be considered. Both the Option #2 and #3 require a significant amount of initial cost on the tenant improvement as both of the options’ NPV analysis does not standout compared to the Present Location. The Present Location has been doing business over fifteen years in the same location, and its brand recognition on the specific location and reputation during the long period of time are one of the most valuable assets. Even though current space is tight, and needs to be renovated or expanded, the work allowance from the landlord is enough to cover the entire construction ($2,520,000) to be competitive with other banks in the area. The Option #3 seems the best alternative to the Present Location due to its location, space, and additional facilities; however, the initial cost from the tenant can be burden as it requires $2.6 million as well as its NPV is the highest.
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