Building B's Revenues
xoon
book1.xlsxProblem
| PROBLEM | |||||||||
| Given | Solution Legend | ||||||||
| Per Square Foot | Total Square Footage | = Value given in problem | |||||||
| A | B | A | B | = Formula/Calculation/Analysis required | |||||
| Building size (Sq. ft.) | 80,000 | 90,000 | = Qualitative analysis or Short answer required | ||||||
| Rent | $ 100 | $ 120 | $ 8,000,000 | $ 10,800,000 | = Goal Seek or Solver cell | ||||
| Maintenance (fixed cost) | (23) | (30) | (1,840,000) | (2,700,000) | = Crystal Ball Input | ||||
| Net Operating Income | $ 77 | $ 90 | $ 6,160,000 | $ 8,100,000 | = Crystal Ball Output | ||||
| % Change in NOI | |||||||||
| Selling Price Information | A | B | A | B | |||||
| Sales multiple for NOI/sq. ft. | 6 | ? | 6 | ? | |||||
| Capitalization rate (1/Sales multiple) | 16.67% | ? | 16.67% | ? | |||||
| Estimated property value | $ 462 | ? | $ 36,960,000 | ? | |||||
| Solution | |||||||||
| a. | |||||||||
| b. | |||||||||
| Per Square Foot | Total Square Footage | ||||||||
| Alternative Valuation Procedure | A | B | A | B | |||||
| Risk free rate | 5% | 5% | 5% | 5% | |||||
| Implied value of maintenance costs | |||||||||
| Implied revenue value | |||||||||
| Implied revenue multiple | |||||||||
| Implied revenue cap rate | |||||||||
| Property value/sq. ft. | |||||||||
| Implied multiple | |||||||||
| Implied cap rate | |||||||||
| Building A | Building B | ||||||||
| % Change in Revenues | -20% | 0% | 20% | -20% | 0% | 20% | |||
| Revenues | |||||||||
| Maintenance (fixed cost) | (1,840,000) | (1,840,000) | (1,840,000) | (2,700,000) | (2,700,000) | (2,700,000) | |||
| Net Operating Income | |||||||||
| % Change in Revenues | -20.00% | 0.00% | 20.00% | -20.00% | 0.00% | 20.00% | |||
| % Change in NOI | |||||||||
It can be seen from above that Building B is more sensitive to changes in revenues--i.e., it has a higher operating leverage. This situation occurs because it has higher fixed costs (as a percentage of revenue).
Alternative valuation procedure involves first assuming that the fixed cost/sq. ft. is known and can be valued using the risk free rate of interest. Next, given the value of comp building A we can calculate the value of the rental revenues per sq. ft. From this value of revenues we can estimate the value of Building B's revenues. Subtracting the value of Building B's maintenance costs (valued using the risk free rate) from the implied value of rent/sq. ft. yields a value estimate for Building B of $52/sq. ft.
