The Minimum Compensation for Canceling a Lease Agreement

What would be the minimum compensation that the landlord should offer you to cancel your lease agreement? And why?

Assume r=6%.

Final Answer:

The minimum compensation that the landlord should offer to cancel the lease agreement is $2,219,887.05. This is calculated by comparing the present value of the remaining lease payments to the current market rent for a similar space.

To calculate the minimum compensation that the landlord should offer to cancel the lease agreement, we need to calculate the present value of the remaining lease payments and compare it to the current market rent for a similar space.

Given:

  • Annual rent of the lease: $1 million
  • Remaining lease term: 4 years
  • Current market rent for a similar space: $1.25 million per year
  • Discount rate: 6%

Step 1: Calculate the present value of the remaining lease payments:

Using the formula for present value, PV = CF / (1 + r)^n, where PV is the present value, CF is the cash flow, r is the discount rate, and n is the number of periods.

For each year of the remaining lease term:

  1. Year 1: PV = $1 million / (1 + 0.06)^1 = $943,396.23
  2. Year 2: PV = $1 million / (1 + 0.06)^2 = $890,998.88
  3. Year 3: PV = $1 million / (1 + 0.06)^3 = $841,396.19
  4. Year 4: PV = $1 million / (1 + 0.06)^4 = $794,095.75

Step 2: Calculate the total present value of the remaining lease payments:

Total PV = $943,396.23 + $890,998.88 + $841,396.19 + $794,095.75 = $3,469,887.05

Step 3: Calculate the difference between the total present value of the remaining lease payments and the market rent:

Difference = Total PV - Market rent = $3,469,887.05 - $1.25 million = $2,219,887.05

Therefore, the minimum compensation that the landlord should offer to cancel the lease agreement is $2,219,887.05.

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