BUSI 422 Homework 4 Valuation of Income Properties Appraisal and the Market for
Capital Assignment Liberty University updated answers
Problem 10-11
Refer to the highest and best use analysis in table below.
Use
(a)
Year
1NOI
(b)
(r−g)
(c)
R
(a÷c = d)
Implied
Property
Value (PV)
(e)
Constructio
n Cost of
Building
(d) − (e)
Implied Land
Value(Residua
l)
Office $
512,000
0.13−0.
03
0.1
0
$
5,120,000
$
4,000,000 1,120,000
Retail $
612,000
0.12−0.
04
0.0
87,650,000 $
6,750,000 900,000
Apartme
nt
$
417,000
0.12−0.
03
0.0
94,633,333 $
3,000,000 1,633,333
Warehou
se
$
412,000
0.10−0.
02
0.0
85,150,000 $
4,000,000 1,150,000
Required:
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?
multiple choice
Yes
No
b. What is the new implied land value?(Do not round intermediate
calculations. Round your final answer to the nearest dollar
amount.)
Problem 10-9
TheNOIfor a small income property is expected to be $155,700 for the
first year. Financing will be based on a 1.2DCRapplied to the first
yearNOI, will have a 10 percent interest rate, and will be amortized over 20
years with monthly payments. TheNOIwill increase 6 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-yearNOI. Investors require a 15 percent rate of return
onequity(equity yield rate) for this type of property.
Required:
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?
Problem 10-8
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 $612 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 $574 per month. Palms, a 90-unit
complex, is presently renting units at $674 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.
Required:
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.)
Problem 10-7
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:
Repairable physical depreciation $ 318,000 to repair
Functional obsolescence
(repairable) $ 212,000 to repair
Functional obsolescence
(nonrepairable) $ 26,500 per year rent
loss
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.
Required:
What would be the estimated value for this property?(Do not round
intermediate calculations. Round your final answer to the
nearest dollar amount.)
Problem 10-6
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 $7,400 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 arenow10 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 anIRR(required return) of at
least 11 percent.
Required:
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?
Problem 10-5
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 $102,000 next
year. However, because depreciation is expected to increase, Armor
expects cash flows to decline at a rate of 4 percent per yearindefinitely.
Armor expects to earn anIRRon investment return (r) at 13 percent.
Required:
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
produceNOIof $204,000 per year, grow at 3 percent per year, and cost $1
million to build. Investors currently earn a 10 percentIRRon such
investments. What is the profit to be earned?
Problem 10-2
Ace Investment Company is considering the purchase of the Apartment
Arms project. Next year’sNOIand cash flow is expected to be $2,190,000,
and based on Ace’s economic forecast, market supply and demand and
vacancy levels appear to be in balance. As a result,NOIshould increase at
4 percent each year for the foreseeable future. Ace believes that it should
earn at least a 13 percent return on its investment.
Required:
a. Assuming the above facts, what would the estimated value for the
property be now?
b. What going-in cap ratesshouldbe indicated from recently sold
properties that are comparable to Apartment Arms?
c. What would the estimated value for the property, if the required return
changes to 12 percent?
Problem 10-1
Zenith Investment Company is considering the purchase of an office
property. It has done an extensive market analysis and has estimated that
based on current market supply or demand relationships, rents, and its
estimate of operating expenses, annualNOIwill be as follows:
Year NOI
1$ 1,045,000
21,045,000
31,045,000
41,215,000
51,265,000
61,315,000
71,354,000
81,394,170
A market that iscurrently oversuppliedis expected to result in cash
flows remainingflatfor the next three years at $1,045,000. 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,NOIwill 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.
Required:
a. Assuming that the investment is expected to produceNOIin 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 expectedIRP= 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 1NOI?
Problem 9-8
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.
Property Information:
BETTS DISTRIBUTION CENTER
Age of Improvement 8 years old
Rentable Space 234,000 square feet
Single Tenant 10-year lease term, net, net
Financial Information:
Rent $7.00 per square feet (7-year
term), flat
Recoverable Expenses from
Tenant $3.20 per square feet, fixed
Operating Expenses $785,000
Property Taxes $53,400
Insurance $18,400
Other Cash Outlays:
Allowances for:
Recurring CAPEX/Improve Allowance$68,500
Required:
a. Develop a pro forma statement for the Betts property for a base year
showing net operating income (NOI).
Problem 9-6
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 $572, $622, and $822,
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 $32
per unit and remain at those levels for the remainder of the year. Ten
studios were leased three months ago for $522, 20 one-bedroom units
were leased two months ago for $602, and 10 two-bedroom units were
leased last month for $827. 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 $32 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
$255,000. Autumn Seasons expect to pay total turnover and operating
expenses of $422 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 $122 per
month, per occupied unit. During the next year, it is also anticipated that
$155,000 will be required for recurring, make-ready expenses (carpet,
paint, drywall repair, etc.), and another $305,000 will be required as an
allowance for nonrecurring items including parking lot repairs, and so on. A
total of $32,000 in fees will be paid to Apartment Locator Services, a
company that provides marketing services and finds new tenants for
Autumn.
Required:
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?
Problem 9-3
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 $14 per square
foot(PSF) with step-ups of $1 per year beginning one year from now.
Required:
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 $14 PSF in (a) is too
low and wants to raise that amount to $18 with the same $1 step-ups.
However, now ATRIUM would provide ACME a $53,600 moving allowance
and $136,000 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 $17 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 $9 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 net present value of this proposal to ATRIUM?
Problem 9-2
As CFO for Everything.Com, you are shopping for 5,500 square feet
ofusableoffice 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 330,000 square feet of gross building
area. A total of 49,500 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
33,000 square feet of common area is the lobby area usable by all tenants.
The 5,500 square feet of usable area that you are looking for is on the
seventh floor, which contains 30,800 square feet of rentable area, and is
leased by other tenants who occupy a combined total of 22,000 square feet
of usable space. The leasing broker indicated that base rents will be $30
per square foot ofrentable area.
Required:
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 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, assuming that adjusted load factors are applied to
usable area for both the common areas in the building lobby and on the
seventh floor.
Problem 9-1
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 $3.30 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 $18 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 7 percent per
year.
Gross lease. Rent will be $30 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.
Required:
a. Calculate the effective rent to the owner (after expenses) for each lease
alternative using a 11 percent discount rate.
b. How would you rank the alternatives in terms of risk to the property
owner?
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