BUSI 422 Homework 5 Income-Producing Property Fundamentals Assignment solutions complete answers

BUSI 422 Homework 5 Income-Producing Property Fundamentals Assignment solutions complete answers 

 

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You are an employee of University Consultants, Limited, and have been given the following assignment. You are to present an investment analysis of a small retail income-producing property for sale to a potential investor. The asking price for the property is $1,310,000; rents are estimated at $167,680 during the first year and are expected to grow at 2.5 percent per year thereafter. Vacancies and collection losses are expected to be 10 percent of rents. Operating expenses will be 35 percent of effective gross income. A fully amortizing 70 percent loan can be obtained at 8 percent interest for 30 years (total annual payments will be monthly payments × 12). The property is expected to appreciate in value at 3 percent per year and is expected to be owned for five years and then sold.

a. What is the first-year debt coverage ratio?

b. What is the terminal capitalization rate?

c. What is the investor’s expected before-tax internal rate of return on equity invested (BTIRR)?

d. What is the NPV using a 12 percent discount rate?

e. What is the profitability index using a 12 percent discount rate?

 

Small City currently has 1,032,000 square feet of office space, of which 774,000 square feet is occupied by 3,000 employees who are mainly involved in professional services such as finance, insurance, and real estate. Small City’s economy has been fairly strong in recent years, but employment growth is expected to be somewhat lower during the next few years, with projections of an increase of just 128 additional employees per year for the next three years. The amount of space per employee is expected to remain the same. However, a new 142,800 square foot office building was started before the recession and its space is expected to become available at the end of the current year (one year from now). No more space is expected to become available after that for quite some time.

a. What is the current occupancy rate for office space in Small City?

b. How much office space will be absorbed each year for the next three years?

c. What will the occupancy rate be at the end of each of the next three years?

d. Based on the above analysis, do you think it is more likely that office rental rates will rise or fall over the next three years?

 

The ABC Corporation is considering opening an office in a new market area that would allow it to increase its annual sales by $2.5 million. The cost of goods sold is estimated to be 40 percent of sales, and corporate overhead would increase by $303,000, not including the cost of either acquiring or leasing office space. The corporation will have to invest $2.5 million in office furniture, office equipment, and other up-front costs associated with opening the new office before considering the costs of owning or leasing the office space.

A small office building could be purchased for sole use by the corporation at a total price of $5.1 million, of which $900,000 of the purchase price would represent land value, and $4.2 million would represent building value. The cost of the building would be depreciated over 39 years. The corporation is in a 21 percent tax bracket. An investor is willing to purchase the same building and lease it to the corporation for $540,000 per year for a term of 15 years, with the corporation paying all real estate operating expenses (absolute net lease). Real estate operating expenses are estimated to be 50 percent of the lease payments. Estimates are that the property value will increase over the 15-year lease term for a sale price of $5.6 million at the end of the 15 years. If the property is purchased, it would be financed with an interest-only mortgage for $3,210,000 at an interest rate of 4.5 percent with a balloon payment due after 15 years.

b. What is the return from opening the office building under the assumption that it is owned?

c. What is the return on the incremental cash flow from owning versus leasing?