Question

In: Finance

Total acquisition price: $3,200,000 Property consists of eight office suits, three on the first floor and...

Total acquisition price: $3,200,000

Property consists of eight office suits, three on the first floor and five on the second
Contract rents: two suits at $4,800 per month, one at $5,600 per month, and five at $2,200 per month
Annual market rent increase: 3.0% per year
Vacancy and collection losses: 5% per year
Operating expenses: 25% of effective gross income each year.
Capital expenditures: 6% of effective gross income each year.
Expected holding period: 5 years.
Expected selling price NOI capitalized at 6.75%.
Selling expense in year 5:0% of the sale price
Mortgage financing assumptions:
First mortgage loan: (75% LTV).
Annual mortgage interest rate: 6.25%
Loan term and amortization period: 30 years.
Total up-font financing costs: 1.75% of loan amount.
Discount Rate: 10%

Questions You Need to Answer

What is the going in cap rate?

What is the NOI for year five?

What is the selling price after the five year hold?

What is loan balance at sale?

What is the NPV for this project?

What is the IRR for this project?

What is the DCF for this project—(note BTCF)?

What is reversion amount?

*Make sure to show your work in the Excel file (provide excel equations as well).

Expert Solution

1. Going in cap rate :

Cap rate = Discount rate – Growth rate

10% - 3% = 7%

2. NOI For year 5 : $ 252,125

Rental income at full occupancy

+ Other income (such as parking)

= Potential gross income (PGI)

– Vacancy and collection loss

= Effective gross income (EGI)

– Operating expenses (OE)

= Net operating income (NOI)

Rental Income	$4800 /month * 2	1,15,200
	$5600 /month	67,200
	$2200/month * 5	1,32,000
		314400
		Year 1	Year 2	Year 3	Year 4	Year 5	comments
	Rental Income ($)	3,14,400	323832	333546.96	343553.369	353859.97	growing@3% per year
	Vacancy Loss @ 5%/year	15720	16191.6	16677.348	17177.6684	17692.9985
	Effective Gross Income	2,98,680	3,07,640	3,16,870	3,26,376	3,36,167
	Operating Expense @25%	74670	76910.1	79217.403	81593.9251	84041.7428
	NOI	2,24,010	2,30,730	2,37,652	2,44,782	2,52,125

3. Selling price in year 5 : NOI / Cap rate

= 252,125 / 6.75%

= $3,735,185.185

4. Loan Balance at sale :

Loan amount = 75% Selling Price

0.75 * $3,735,185.185 = $ 2,801,388.89

	Date	Beginning Balance	Interest	Principal	Ending Balance
1	10/19 - 9/20	$2,801,388.89	$279,437.99	$15,572.29	$2,785,816.57
2	10/20 - 9/21	$2,785,816.57	$277,807.38	$17,202.90	$2,768,613.62
3	10/21 - 9/22	$2,768,613.62	$276,005.98	$19,004.30	$2,749,609.30
4	10/22 - 9/23	$2,749,609.30	$274,015.98	$20,994.30	$2,728,614.98
5	10/23 - 9/24	$2,728,614.98	$271,817.62	$23,192.66	$2,705,422.28

NPV, IRR, DCF



discount rate		10%	10%	10%	10%	10%
time	0	1	2	3	4	5
cash flows	-32,00,000	224010	230730.3	237652.209	244781.775	3987310.23
Discount Factor	1	0.90909091	0.82644628	0.7513148	0.68301346	1
PV	-3200000	203645.455	190686.198	178551.622	167189.246	3987310.23
NPV	1527382.75
IRR	9%

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