Question

Givner Apartments were acquired five years ago by an investor for $10MM. The investor decided not to lever the investment (use debt), and annual adjusted NOI is stable at $1MM. If the investor sells the property at an 8% cap rate, what would be the investor’s net sales proceeds? Assume the following: • accumulated depreciation on the property is $1MM • the Tenant Improvements and Capital Improvements over 5 years have been $300,000 • 25% tax rate on accumulated depreciation • 15% tax rate on capital gains • 2% selling costs.

Answer 1

Calculating Net sales price

Annual NOI = 1 million = $1000000, Cap rate = 8%

Gross sales price = Annual NOI / Cap rate = 1000000 / 8% = 12500000

Selling costs = 2% of Gross sales price = 12500000 x 2% = 250000

Net sales price = Gross sales price - Selling costs = 12500000 - 250000 = 12250000

Calculating Adjusted Cost basis

Acquisition cost = 10 million = $10000000, Tenant improvement and capital improvement over 5 years = 300000,

Accumulated depreciation = 1 million = 1000000

Adjusted cost basis = Acquisition costs + Tenant improvement and capital improvement over 5 years - Accumulated depreciation = 10000000 + 300000 - 1000000 = 9300000

Calculating taxes

Gain on sale = Net sales price - Adjusted cost basis = 12250000 - 9300000 = 2950000

Accumulated depreciation = Depreciation recapture = 1 million = 1000000

Property appreciation = Gain on sale - Accumulated depreciation = 2950000 - 1000000 = 1950000

Tax on accumulated depreciation or depreciation recapture = 25% x Accumulated depreciation = 25% x 1000000 = 250000

Capital gain tax on property appreciation = 15% x Property appreciation = 15% x 1950000 = 292500

Total tax liability = Tax on accumulated depreciation or depreciation recapture + Capital gain tax on property appreciation = 250000 + 292500 = 542500

Calculating net sale proceeds

Net Sale proceeds = Net Sales price - Total tax liability = 12250000 - 542500 = $11707500

Hence Net sale proceeds = $11707500