EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN: 9781337514835
Author: MOYER
Publisher: CENGAGE LEARNING - CONSIGNMENT
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Scenario:
Suppose that your client, a real estate investor, has asked you to evaluate an anchored retail shopping center that is for sale for $3,595,000 in Clearwater, Florida. You have been asked to perform an analysis of the property, including an estimate of cash flows and
The shopping center has 33,250 square feet of rentable space. Since detailed information is not available on existing leases, assume that the property will lease at the average rent for the Tampa/St. Petersburg market. The average asking rent for Tampa is $12.90, and the average vacancy rate is 6.5%. Assume that rents will increase by 5% per year.
Annual expenses are as follows:
- Insurance: $12,312
- Utilities: $14,500
- Real Estate Taxes: $34,200
- Cleaning: $4,500
- Landscaping: $9,400
- Repairs & Maintenance: $16,500
- Miscellaneous: $6,000
These expenses will increase at the same rate as PGI. Financing is available up to 80% LTV with a 5-year interest-only mortgage at 7.5%, with financing costs of 2% of the loan amount. The current overall cap rate (OAR) for this type of property is 8.7%. Apply it to year 6 NOI to calculate the sales price at the end of year 5. Assume sales costs of 5%.
Assume that the building value equals 20% of the purchase price and can be depreciated over 39 years. The investor’s marginal tax rate is 33%, and the
Essay Questions:
Using Excel, construct a five-year discounted cash flow
- What is the initial equity at "time 0"?
- What is the net sales price and after-tax equity reversion in year 5?
- What is the 1st year’s after-tax cash flow?
- What is the after-tax IRR for this investment?
- Would you recommend purchase of this property to your client?
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