Estimate the market value of the following small office building. The property has 10, 500 square foot of leasable space that was leased to a single tenant on January 1, four years ago. Terms of the lease call for rent payments of $9, 525 per month for the first five years, and rent payments of $11,325 per month for the next five years. The tenant must pay all operating expenses. During the remaining term of the lease, there will be no vacancy and collection losses; however, upon termination of the lease it is expected that the property will be vacant for three months. When the property is released under short-term leases, with new tenants paying all operating expenses, a vacancy and collection loss allowance of 8 percent per year is anticipated. The current market rental for properties of this type is $11 per square foot when tenants pay all operating expenses, and this rate has been increasing at a rate of 3 percent per year. The market discount rate for similar properties is about 11 percent, the "going - in" cap rate is about 9 percent, and terminal cap rates are typically 1 percentage point above going - in cap rates. Required: Prepare a multiyear pro forma (perhaps using Excel) showing the annual rental income, NOIs, and net proceeds from sale of the property at the end of an eight-year holding period. Then use the information provided to estimate the market value of the property. Note: Round your final answers to nearest whole dollar amount. Do not round intermediate calculations.
Estimate the market value of the following small office building. The property has 10, 500 square foot of leasable space that was leased to a single tenant on January 1, four years ago. Terms of the lease call for rent payments of $9, 525 per month for the first five years, and rent payments of $11,325 per month for the next five years. The tenant must pay all operating expenses. During the remaining term of the lease, there will be no vacancy and collection losses; however, upon termination of the lease it is expected that the property will be vacant for three months. When the property is released under short-term leases, with new tenants paying all operating expenses, a vacancy and collection loss allowance of 8 percent per year is anticipated. The current market rental for properties of this type is $11 per square foot when tenants pay all operating expenses, and this rate has been increasing at a rate of 3 percent per year. The market discount rate for similar properties is about 11 percent, the "going - in" cap rate is about 9 percent, and terminal cap rates are typically 1 percentage point above going - in cap rates. Required: Prepare a multiyear pro forma (perhaps using Excel) showing the annual rental income, NOIs, and net proceeds from sale of the property at the end of an eight-year holding period. Then use the information provided to estimate the market value of the property. Note: Round your final answers to nearest whole dollar amount. Do not round intermediate calculations.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Estimate the market value of the following small office
building. The property has 10, 500 square foot of
leasable space that was leased to a single tenant on
January 1, four years ago. Terms of the lease call for
rent payments of $9, 525 per month for the first five
years, and rent payments of $11, 325 per month for the
next five years. The tenant must pay all operating
expenses. During the remaining term of the lease, there
will be no vacancy and collection losses; however, upon
termination of the lease it is expected that the property
will be vacant for three months. When the property is
released under short-term leases, with new tenants
paying all operating expenses, a vacancy and collection
loss allowance of 8 percent per year is anticipated. The
current market rental for properties of this type is $11
per square foot when tenants pay all operating
expenses, and this rate has been increasing at a rate of
3 percent per year. The market discount rate for similar
properties is about 11 percent, the "going - in" cap rate
is about 9 percent, and terminal cap rates are typically 1
percentage point above going - in cap rates. Required:
Prepare a multiyear pro forma (perhaps using Excel)
showing the annual rental income, NOIs, and net
proceeds from sale of the property at the end of an
eight year holding period. Then use the information
provided to estimate the market value of the property.
Note: Round your final answers to nearest whole dollar
amount. Do not round intermediate calculations.
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