Koenig Capital, a real estate investment firm, hired the services of Bill Nichols, a financial analyst, for a unique lease renegotitations. Hasperat Inc., one of the Koenig’s tenants, had sixteen years left on its long-term lease of the Kelly Building located in downtown Cleveland. The building was a 165,000 square foot office. Although, Hasperat also had one of the options to purchase Kelly Building from Koenig, as mentioned in a clause of leasing.
Bill Nichols puts a mortgage on the property, in order to utilize the advantage of low interest rates, but he found that it would prevent lenders from offering their lowest rates to Koenig, according to the clause of a lease contract. Ultimately, the management gave the responsibility to Nichols to remove the option through renegotiation, which needed the Nichols to utilize his financial expertise. He had to determine the fair value of purchase option to derive the rate of compensation for his executives, which they would offer to Hasperat. The students are asked to put into the shoe of Bill Nichols in order to value the purchase option in this lease contract by applying real options modeling techniques.
