Question

You consider buying an investment commercial property in New York. This property is 100% occupied and has three tenants, whose leases have 10 years remaining until the end of the lease term. 1st tenant occupies 5,000 SF and pays the base rent of $10,000/month. 2nd tenant occupies 1,500 SF, paying the base rent of $2,500/month. 3rd tenant occupies 3,000 SF, paying the base rent of $5,000/month. All three tenants have the absolute Triple Net lease and 3% annual increase in the base rent. During the due diligence, you’ve found out that the building requires an annual payment of $9,000 insurance, $35,000 property tax, and $11,000 common area maintenance (CAM) expenses.

A)   What is the base rent and additional rent (i.e., insurance, tax, & CAM) per square foot (PSF)

B)   If similar properties in the area have been sold at an average of 6.5% CAP, what would be the estimated value of this property using the CAP approach?

Answer 1

Anticipated holding period:		10	(may be from 2 to 10 years)
	Potential Gross Rent inputs:			Units		Monthly Rent			Input in yellow cells only.
Type 1:	Two-Bedroom			5,000		$5,000			(input for purchase price is on the Sale worksheet)
Type 2:	One-Bedroom			1,500		$2,500
Type 3:	Studio Units			3,000		$5,000
				Square Feet		Annual Rent / SF
	Non-residential input:											Annual gross rent estimate:	$525,000,000
				0*	1	2	3	4	5	6	7	8	9
	Increase in rents:			3.0%	3.0%	3.0%	3.0%	3.0%	3.0%	3.0%	3.0%	3.0%	3.0%
	(to the following year)			* fill in this box only if monthly rents above are current and need to be adjusted for the first year of operations

Potential Gross Rent Estimate for first year:

$540,750,000

Utilities(common area)					$              11,000			11,000
Insurance					$                9,000			9,000
Supplies					$                       -			0
Advertising					$                       -			0
Maintenance & Repairs					$                       -			0
Property Taxes					$              35,000			35,000			55,000
Net rent required											$         540,805,000

	Year Per SF	Month (per SF)
Base rent	$56,921.05	$4,743.42
Additional rent	$        5.79	$      0.48

Answer B)

Operating Forecast
CAP rate	6%
Rent increament rate	3%
	1	2	3	4	5	6	7	8	9	10
Potential Gross Rent	540750000	556972500	573681700	590892200	608619000	626877600	645683900	665054400	685006000	705556200
Other Income	0	0	0	0	0	0	0	0	0	0
Effective Gross Income	540750000	556972500	573681700	590892200	608619000	626877600	645683900	665054400	685006000	705556200
Operating Expenses
Utilities(common Area)	11000	11000	11000	11000	11000	11000	11000	11000	11000	11000
Insurance	9000	9000	9000	9000	9000	9000	9000	9000	9000	9000
Property Taxes	35000	35000	35000	35000	35000	35000	35000	35000	35000	35000
Total Expenses	55000	55000	55000	55000	55000	55000	55000	55000	55000	55000
Net Operating Income	540695000	556917500	573626700	590837200	608564000	626822600	645628900	664999400	684951000	705501200
Discounted Value of Income	510089622.6	495654592.4	481628038.6	467998402.1	454754422.7	441885198.9	429380092.7	417228850.5	405421444.5	393948185.2
Total value	4497988850