FINES

Fines are regular lump sum payments paid by the lessee under the lease agreement but at a different period to that of the base rent

EXAMPLE

Under a 10 year lease agreement, the lessee is required to pay \$1000 every 3rd year over and above the base rent of \$8 000 pa. What is the annual rental equivalent using 12%pa?

The payments fall due as follows:

LEASE PERIOD YEARS
0========3=========6========9====>
base rent 20 000 pa
FINES:   \$1000               \$1000          \$1000

STEP 1

Convert the fine to an annual rental equivalent for the fine period only. Because the fine is paid at the end of the 3 year period, the FVPMT factor is used instead of PVPMT which was used for premiums:

FVPMT = (1.405  1)/(12/100) = 3.375
ARE(F) = F/FVPMT

Where:

ARE(F) = annual rental equivalent of the fine
F = fine
FVPMT = future value of 1 pa factor

ARE(F) = 1000/3.375 = \$296.3 pa

STEP 2:

ARE(F) is added to the base rent to find the ARE of the lease:

ARE(lease) = ARE(F) + base rent = 296.3 + 8000 = \$8296.3 pa