Question

You are the owner of a 65,000 square foot office building. You purchased the building five years ago for $11,500,000. During that entire time the building was triple net leased to a tenant who was also responsible for all maitenance and capital upkeep. The net rent the tenant paid was flat at $12.50 per square foot per year. You have just negotiated a lease extension which will raise the rent to $14.00 per square foot for the next 10 years. You believe that you can sell the building now for the same cap rate as when you purchased it. 1) What is your anticipated selling price? 2) If the sales is successful, what is the unleveraged return you achieved on your five year long investment? 3) What was the unleveraged investment multiple? (Ignore taxes and selling costs.)

Answer 1

	Cap Rate = Net Yearly Income /Cost of Asset
a	Here Cost of Asset =	$    11,500,000
b	Yearly income for first five years @$12.5/Sqft/Yr for 65000 Sq ft ==	$          812,500
	Cap Rate for first five years =b/a=	7.065%
	The cap Rate remains unchanged
	New Rent /Sqft/Year =	$                   14
	New Tearly Income for 65000 sq ft=	$          910,000
	Assume selling price =x
	so , 910000/x=7.065%
	x=$12,880,000
Ans 1.	So Anticipated selling price now =	$    12,880,000

Ans 2.	Return on Sale
c	Total Rental Income in first 5 years=	$      4,062,500
d	Total Capital Gain on Sale	$      1,380,000
e	Total Returb in 5 years =c+d	$      5,442,500
f	Average return per year =e/5	$      1,088,500
g	Purchase cost of office space=	$    11,500,000
h	Unleveraged Annual Return on Investment=f/g=	9.47%

Ans 3.
i	Total Rental Income in first 5 years=	$      4,062,500
j	Anticipated Selling Price =	$    12,880,000
k	Investment in Office space =	$    11,500,000
	Ulevered Investment Multiple=(i+j)/k	1.47