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Question 2 A tenant is holding a 9-year lease of a shop at an annual...

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Finance

Question 2

A tenant is holding a 9-year lease of a shop at an annual net rent of $600,000 for the first 3 years, $800,000 for the second 3 years, and $1,000,000 for the final 3 years. The tenant obtained this lease by paying the owner a premium of $1,200,000 at the beginning of the lease. The lease still has 4 years unexpired, and the tenant now desires to surrender his current lease and obtain a new term of 9 years at an annual net rent of $800,000 for the first 3 years, $1,000,000 for the second 3 years, and $1,200,000 for the final 3 years.

The current full market rental value of the shop is valued at $1,300,000 per annum net. What would be the amount of premium that may reasonably be expected by the parties, given that the market yield for this type of property for the owner is 6% per annum and the annul sinking fund for the leaseholder at 3% per annum?

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