BUSI 422 Homework 4 Valuation of Income Properties Appraisal and the Assignment solutions answers

BUSI 422 Homework 4 Valuation of Income Properties Appraisal and the Market for Capital Assignment solutions complete answers 

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A property owner is evaluating the following alternatives for leasing space in his office building for the next five years:

Net lease with steps. Rent will be $15 per square foot the first year and will increase by $1.70 per square foot each year until the end of the lease. All operating expenses will be paid by the tenant.

Net lease with CPI adjustments. The rent will be $16 per square foot the first year. After the first year, the rent will be increased by the amount of any increase in the CPI. The CPI is expected to increase 5 percent per year.

Gross lease. Rent will be $32 per square foot each year with the lessor responsible for payment of all operating expenses. Expenses are estimated to be $9 during the first year and increase by $1 per year thereafter.

Gross lease with expense stop and CPI adjustment. Rent will be $24 the first year and increase by the full amount of any change in the CPI after the first year with an expense stop at $9 per square foot. The CPI and operating expenses are assumed to change by the same amount as outlined above.

a. Calculate the effective rent to the owner (after expenses) for each lease alternative using a 10 percent discount rate.

b. How would you rank the alternatives in terms of risk to the property owner?

 

As CFO for Everything.Com, you are shopping for 5,700 square feet of usable office space for 25 of your employees in Center City, USA. A leasing broker shows you space in Apex Atrium, a 10-story multitenanted office building. This building contains 342,000 square feet of gross building area. A total of 51,300 square feet is interior space and is nonrentable. The nonrentable space consists of areas contained in the basement, elevator core, and other mechanical and structural components. An additional 34,200 square feet of common area is the lobby area usable by all tenants. The 5,700 square feet of usable area that you are looking for is on the seventh floor, which contains 31,920 square feet of rentable area, and is leased by other tenants who occupy a combined total of 22,800 square feet of usable space. The leasing broker indicated that base rents will be $30 per square foot of rentable area.

a. Calculate total rentable area in the building as though it would be rented to one tenant.

b. Calculate the load factor and common area on the seventh floor only.

c. Calculate the rentable area, including the load factor for common areas on the seventh floor and the total rent per square foot that will be paid by Everything.Com for the coming year if it chooses to lease the space.

d. Calculate the load factor and common area on the seventh floor, assuming that the owner adjusts the load factor for other common areas in the building.

e. Calculate total rent per square foot, assuming that adjusted load factors are applied to usable area for both the common areas in the building lobby and on the seventh floor.

 

An owner of the Atrium Tower Office Building is currently negotiating a five-year lease with ACME Consolidated Corporation for 20,000 rentable square feet of office space. ACME would like a base rent of $12 per square foot with step-ups of $1 per year beginning one year from now.

a. What is the present value of cash flows to ATRIUM under the above lease terms? (Assume a 10% discount rate.)

b. The owner of ATRIUM believes that base rent of $12 PSF in (a) is too low and wants to raise that amount to $16 with the same $1 step-ups. However, now ATRIUM would provide ACME a $52,400 moving allowance and $124,000 in tenant improvements (TIs). What would be the present value of this alternative to ATRIUM?

c. ACME informs ATRIUM that it is willing to consider a $15 PSF with the $1 annual stepups. However, under this proposal, ACME would require ATRIUM to buyout the one year remaining on its existing lease in another building. That lease is $7 PSF for 20,000 SF per year. If ATRIUM buys out ACME’s old lease, ACME will not require a moving allowance or TIs. What would be the present value of this proposal to ATRIUM?

 

You have been asked to develop a pro forma statement of cash flow for the coming year for Autumn Seasons, a 200-unit suburban garden apartment community. This community has a mix of 40 studio, 80 one-, and 80 two-bedroom apartments with current monthly rents of $560, $610, and $810, respectively. Leases with tenants are usually made for 12-month periods. Current rents are expected to remain fixed for the next six months. After that time, monthly rents for each apartment type should increase by $20 per unit and remain at those levels for the remainder of the year. Ten studios were leased three months ago for $510, 20 one-bedroom units were leased two months ago for $590, and 10 two-bedroom units were leased last month for $815. All other units have been leased recently at current rents. All of the previously leased units also are on 12-month leases that do not face the $20 rate increase after the first 6 months. When those leases roll over, all are expected to be renewed at market rents upon rollover for an additional 12 months. Presently, 4 studios, 6 one-, and 6 two-bedroom units are vacant. This vacancy pattern should remain the same for the remainder of the year.

Autumn Seasons anticipates that during the coming year, it will earn other income from laundry facilities, the awarding of an exclusive cable TV contract, parking, plus fees from net deposits, late fees, and so on of $225,000. Autumn Seasons expect to pay total turnover and operating expenses of $410 per month, per occupied unit during the next year. However, it expects to recover some of these expenses for heating and central cooling that it provides to tenants in an amount totaling $110 per month, per occupied unit. During the next year, it is also anticipated that $125,000 will be required for recurring, make-ready expenses (carpet, paint, drywall repair, etc.), and another $275,000 will be required as an allowance for nonrecurring items including parking lot repairs, and so on. A total of $20,000 in fees will be paid to Apartment Locator Services, a company that provides marketing services and finds new tenants for Autumn.

a. Prepare a statement of operating cash flow (NOI) for the coming year.

b. Add to the (a) anticipated outlays for nonrecurring items and commissions. What will be net cash flow for the coming year?

 

You have been asked to develop a pro forma statement of cash flow for Betts Distribution Center, an Internet-based order fulfillment/distribution/office/warehouse property. In addition to recoverable operating expenses, the new tenant will be billed for pass throughs including insurance and property taxes, which will then be paid by the owner. The information given to you is listed below.

a. Develop a pro forma statement for the Betts property for a base year showing net operating income (NOI).

 

Zenith Investment Company is considering the purchase of an office property. It has done an extensive market analysis and has estimated that based on current market supply or demand relationships, rents, and its estimate of operating expenses, annual NOI will be as follows:

A market that is currently oversupplied is expected to result in cash flows remaining flat for the next three years at $1,075,000. During years 4, 5, and 6, market rents are expected to be higher. It is further expected that beginning in year 7 and every year thereafter, NOI will tend to reflect a stable, balanced market and should grow at 3 percent per year indefinitely. Zenith believes that investors should earn a 12 percent return (r) on an investment of this kind.

a. Assuming that the investment is expected to produce NOI in years 1 to 8 and is expected to be owned for seven years and then sold, what would be the value for this property today? (Hint: Begin by estimating the reversion value at the end of year 7. Recall that the expected IRP = 12% and the growth rate (g) in year 8 and beyond is estimated to remain level at 3%.)

b. What would the terminal capitalization rate (RT) be at the end of year 7?

c. What would the going-in capitalization rate (R) be based on year 1 NOI?

 

Ace Investment Company is considering the purchase of the Apartment Arms project. Next year’s NOI and cash flow is expected to be $2,130,000, and based on Ace’s economic forecast, market supply and demand and vacancy levels appear to be in balance. As a result, NOI should increase at 4 percent each year for the foreseeable future. Ace believes that it should earn at least a 13 percent return on its investment.

a. Assuming the above facts, what would the estimated value for the property be now?

b. What going-in cap rates should be indicated from recently sold properties that are comparable to Apartment Arms?

c. What would the estimated value for the property, if the required return changes to 12 percent?

 

Armor Investment Company is considering the acquisition of a heavily depreciated building on 10 acres of land. It expects to rent the building as a storage facility and expects to collect cash flows equal to $103,000 next year. However, because depreciation is expected to increase, Armor expects cash flows to decline at a rate of 4 percent per year indefinitely. Armor expects to earn an IRR on investment return (r) at 13 percent.

a. What is the value of this property?

b. Assume that after five years the building could be demolished and the land could be redeveloped with a strip retail improvement. The latter would produce NOI of $206,000 per year, grow at 3 percent per year, and cost $1 million to build. Investors currently earn a 10 percent IRR on such investments. What is the value of this property now?

 

Athena Investment Company is considering the purchase of an office property. After a careful review of the market and the leases that are in place, Athena believes that next year’s cash flow will be $100,000. It also believes that the cash flow will rise in the amount of $8,400 each year for the foreseeable future. It plans to own the property for at least 10 years. Based on a review of sales of properties that are now 10 years older than the subject property, Athena has determined that cap rates are in a range of 0.10. Athena believes that it should earn an IRR (required return) of at least 12 percent.

a. What is the estimated value of this office property (assume a 0.10 terminal cap rate)?

b. What is the current, or going-in, cap rate for this property?

 

An investor is considering the purchase of an existing suburban office building approximately five years old. The building, when constructed, was estimated to have an economic life of 50 years, and the building-to-value ratio was 80 percent. Based on current cost estimates, the structure would cost $5 million to reproduce today. The building is expected to continue to wear out evenly over the 50-year period of its economic life. Estimates of other economic costs associated with the improvement are as follows:

The land value has been established at $1 million by comparable sales in the area. The investor believes that an appropriate opportunity cost for any deferred outlays or costs should be 12 percent per year.

What would be the estimated value for this property? (Do not round intermediate calculations. Round your final answer to the nearest dollar amount.)

 

ABC Residential Investors, LLP, is considering the purchase of a 120-unit apartment complex in Steel City, Pennsylvania. A market study of the area reveals that an average rental of $628 per month per unit could be realized in the appropriate market area. During the last six months, two very comparable apartment complexes have been sold in the same market area. The Oaks, a 140-unit project, sold for $9 million. Its rental schedule indicates that the average rent per unit is $606 per month. Palms, a 90-unit complex, is presently renting units at $706 per month, and its selling price was $6.6 million. The mix of number of bedrooms and sizes of units for both complexes is very similar to that of the subject property, and both appear to have normal vacancy rates of about 10 percent annually. All rents are net as tenants pay all utilities and expenses.

a. Based on the data provided here, how would an appraiser establish an estimate of value? (Round intermediate calculations and final answers to the nearest dollar amount.)

b. What other information would be desirable in reaching a conclusion about the probable value for the property? (You may select more than one answer. Single click the box with the question mark to produce a check mark for a correct answer and double click the box with the question mark to empty the box for a wrong answer.)

 

The NOI for a small income property is expected to be $150,600 for the first year. Financing will be based on a 1.2 DCR applied to the first year NOI, will have a 10 percent interest rate, and will be amortized over 20 years with monthly payments. The NOI will increase 5 percent per year after the first year. The investor expects to hold the property for five years. The resale price is estimated by applying a 9 percent terminal capitalization rate to the sixth-year NOI. Investors require a 12 percent rate of return on equity (equity yield rate) for this type of property.

a. What is the present value of the equity interest in the property?

b. What is the total present value of the property (mortgage and equity interests)?

c. Based on your answer to part (b), what is the implied overall capitalization rate?

 

Refer to the highest and best use analysis in table below.

Suppose that the warehouse income would grow at 3 percent per year instead of 2 percent.

a. Does this change the highest and best use of the site?

b. What is the new implied land value? (Do not round intermediate calculations. Round your final answer to the nearest dollar amount.)