Question

3. A property consists of 8 office suites, 3 on the first floor and 5 on the second floor. The contract rents are as follows: 2 suites at $1,800 per month, 1 at $3,600 per month and 5, at $1,560 per month. Annual market rent for all suites increase 3% per year after the first year. Vacancy and collection losses are estimated at 10% of potential gross rent per year. Operating expenses and reserve for replacement or capital expenditures are 45% of effective gross income each year. The expected holding period is 5 years. At the end of the holding period you are expecting to sell the property for $1,180,472.

A. Prepare the first year pro forma generating the NOI for year 1.

B. The information below represents the NOI and sales price for 5 comparable properties. Using the information provided from the market we can see that the average cap rate is 8.4%. Using this average cap rate obtained below and the NOI obtained in question A, what is your estimate of value via the direct capitalization approach?

Year 1 Sales

NOI Price   Ro

A 80000 / 919540 = 0.087

B 114000 / 1390244 = 0.082

C 100000 / 1250000 = 0.080

D 72000 / 808989 = 0.089

E 90000 / 1097561 = 0.082

Average = 0.084

C. With the growth rate in income, the expected holding period of 5 years and the sales price estimate at the end of the holding period, estimate the present value of the property via the discounted cash flow approach with a discount rate of 10%.

D. I obtained the following information on 3 sales that includes the sales price and the one year income. Using the income multiplier give your estimate of value for the subject property based on your Effective Gross Income calculated in question A.

A B C

Recent sales prices 1,044,120 1,151,720 904,050

Effective Gross Income   158,200 175,300 143,500

Income multiplier 6.60    6.57 6.30

Answer 1

Answer A:

Let us first calculate annual gross rent for Year 1:

First year pro forma generating the NOI for year 1 is as follows:

Answer B:

Average capitalization rate is 8.4%

NOI =$89100

Estimate of value via the direct capitalization approach = 89100 /8.4% = $1060714

Estimate of value via the direct capitalization approach = $1,060,714

Answer C:

Given:

Annual market rent for all suites increase 3% per year after the first year.

Hence annual operating income will also increase by 3% per year after the first year.

Estimated the present value of the property = $1,089,612

Answer D:

Average Income multiplier = (6.60 + 6.57 + 6.30) / 3 = 6.49

Effective Gross Income (answer A) = $162,000

Estimate of value for the subject property = 162000 * 6.49 = $1,051,380

Estimate of value for the subject property = $1,051,380