Main content

## Finance and capital markets

# Back-of-envelope office space conundrum

Back of the envelope calculation of which office space to rent. Created by Sal Khan.

## Video transcript

What I want to do
in this video is kind of give a back
of the envelope way for thinking about a
conundrum that the Khan Academy is facing right now. And you could do
a little bit more of a precise way with present
valuing and all of that. But this will give you
a pretty good sense of how to make this decision. So we're seriously
looking at office space. I've changed these numbers to
simplify things a little bit. But there's a nice
office, and it's going for $2,000 per month. And then there's
this dingy office. It's really too dingy. It's a converted nightclub
and it's really too dingy to be a respectable place to
work, but it's going for $1,000 a month. And I talked to a contractor. And once again, I'm
simplifying these numbers. These numbers aren't
the exact numbers, but it makes the math
a little bit simpler. The contractor says it
would cost us about $10,000 to get this dingy office to the
condition of the nice office. And in either situation, we
are thinking about a 24 month lease, so a two year lease. And the contractor said it
would take one month of work to get the dingy office
space up to speed. So the nice office
space landlord he says, look, it'll be a 24 month lease. You could just occupy it. It's ready to go. The dingy office
space, I talked him about this idea of us investing
money in repairing it. He's like, OK, if you
need to repair it-- he's kind not the easiest
person to deal with-- he says, I'm going to charge you
an extra month of rent. So even while I'm repairing
it, I have to pay rent. So he'll say, I'm willing
to do a 25 month contract, a 25 month lease with you. So you could still, once
you repair it, you still get two years of service
from the dingy office. So which one should I do? And I'll tell you
my emotions, I want to do the nice one because I
don't want to spend $10,000 and make this all nice and then
two years later, the landlord could raise the rent. But let's just think
about it rationally. Which one makes sense? And the easiest way
to think about that is, what is the
effective amount of rent, in a very back of
the envelope way, that we're paying
for the dingy office? So if you think about it
over the entire lease, we're going to have 25 months. We're going to pay
$1,000 per month. So it's going to be $25,000
plus $10,000 to repair it. So plus $10,000. I'll just write 10k
like I did before. Plus 10k. And in terms of the useful
life, because over here when we're saying per month,
every month here is useful. So how many useful
months are here? Well we're going to spend
one month to repair it. We only get 24 useful months. So we only get 24 useful months. So if you view it this way,
not doing any fancy present valuing, just back
of the envelope, it is $35,000 over 24 months. And so let's get
our calculator out. I guess it's not pure
back of the envelope, but pretty close to pure
back of the envelope. 35,000 divided by 24
is equal to 1,458. So this is equal to
approximately $1,458 per month. So even though I don't want
to invest in this property, and I'm only going to
be able to use two years and this person's going
to be able to raise the rent after that, it actually
still makes a lot of sense. It still makes actually
almost $500 a month of sense or more than $500
a month of sense in this kind of back
of the envelope way to get the dingy
office and repair it.