Question

Office Problem (Use the attached spreadsheets as a guide)

Property:             Office One, Anytown, U.S.A.

Acquisition date:         December 31, 1999

Purchase Price:           2000 NOI @ 10% CAP RATE

Deal Terms:                65% financed with debt, 9% interest-only, 10-year term

35% equity ownership

Base Year 1999:         Rental Income                   $1,600,000

Escalation Income             $              0

Less:         Janitorial & Cleaning       $   330,000

Labor                    $   215,250

Utilities                         $     60,000

Management Fee         $     80,000

Real Estate Taxes         $     80,000

Assumptions:              Vacancy Rate :        9%

                                   Growth Rates:          Rental      Income            5% Annually

                                                             Janitorial & Cleaning       3% Annually

Utilities                     3% Annually

                                                             Management Fee              3% Annually

In 2001, Labor and Real Estate Taxes escalate by 13.07 and 10%, respectively, and remain at those levels for the remainder of the holding period. Tenant pays the increase over the stated Base Year.

Sell on December 31, 2004

Selling Expenses- 5% of sale price (2005 NOI @ 10% Cap Rate)

Depreciable Basis = 80% of cost (calculate depreciation using straight-line method)

Owner’s Ordinary Tax Rate: 39.6%

Use Post-1997 capital gains & recapture tax rates (20% & 25% respectively)

REQUIRED:

9A) Pro-forma Analysis for both Pre-Tax and After- Tax scenarios

9B) Calculations for:

Adjusted Basis

Capital Gains and Recapture Taxes

Net Sales Proceeds

Break Even Occupancy (2000 & 2004)

Cash-on-Cash Returns (annually)

Gross Rent Multiplier ((2000 & 2004)

Debt Service Coverage (2000 & 2004)

Before and After Tax IRR

Before and After Tax NPV @12%

Answer 1

Statement showing net income discounting @ 10%

Year	2000	2001	2002	2003	2004	Total
Rental income	16,80,000	17,64,000	18,52,200	19,44,810	20,42,051	92,83,061
Vacancy rate	1,51,200	1,58,760	1,66,698	1,75,033	1,83,785	8,35,475
Janitorial & cleaning	3,39,900	3,50,097	3,60,600	3,71,418	3,82,560	18,04,575
Labor	2,43,383	2,75,193	3,11,161	3,51,830	3,97,814	15,79,382
Utilities	61,800	63,654	65,564	67,531	69,556	3,28,105
Management fee	82,400	84,872	87,418	90,041	92,742	4,37,473
Real estate taxes	88,000	96,800	1,06,480	1,17,128	1,28,841	5,37,249
Net income	7,13,317	7,34,624	7,54,279	7,71,830	7,86,752	37,60,802
Discounting factor @ 10%	0.9091	0.8264	0.7513	0.683	0.6209
Discounting net income @ 10%	6,48,476	6,07,093	5,66,690	5,27,160	4,88,494	28,37,914