Question

In: Finance

5.17. Consider two undeveloped land sites. At site 1, the highest and best use (HBU) is...

5.17. Consider two undeveloped land sites. At site 1, the highest and best use (HBU) is a warehouse that would cost $1 million to build (exclusive of land cost) and would then generate annual net rents of $150,000, which are expected to grow al 3% per year. At site 2, the HBU is an apartment building that can generate net rents of $800,000, projected to grow at 1% per year, with construction cost of $5 million. Suppose investors buying built properties (that is, properties already developed and in operation) require an initial annual return (in the form of current net income) of 12% minus the expected annual growth rate in the net income, as a percent of the investment cost. For example, they would want an initial yield or cap rate of 9% for the warehouse (12% -- 3% = 9%). Suppose the land value for site | is $1 million and the land value for site 2 is $2 million. On which of these sites (1, 2, both, or neither) is it currently profitable to undertake construction? Show your reasoning.

Solutions

Expert Solution

From the question above we can infer the following information:

Particulars

 Site 1 Site 2
Land value for site $1million $2million
Cost of build $1 million $5 million
Rent rents annual $150000 $800000
Growth rate 3% 1%
Required rate of return 12-3=9% 12-1=11%

Based on the above information we can calculate the cash flows as follows:

Particulars site1 Site 2
1. Cash flows in yeae 0 =cost of build and land value $(1+1=2) million $(5+2)=7million
2. Annual rent received $150000/year $800000/year
3. Present value of perpetual rent= annual rent/(rate of return-growth rate) 150000/(9-3)%=2500000$ 800000/(11-1)%=800000
4. Net cash flow (3-1) 500000$

1000000$

Site 2 is more profitable by difference between the net cashflows ($1000000-500000) =$500000.

If the sites are evaluated individually, both sites are profitable. If projects are mutually inclusive, site 2 is more profitable.

jeff jeffy answered 2 years ago
Next > < Previous

Related Solutions

1) Charlie owns a tract of undeveloped land held as an investment that has an adjusted...
1) Charlie owns a tract of undeveloped land held as an investment that has an adjusted basis to Charlie of $145,000. If Charlie sells the land to his son, Otis, for $105,000, the fair market value of the property, which of the following is a correct statement as to Otis’ basis in the land? a. Otis’ basis in the land is $105,000. b. Otis’ basis in the land is $105,000 provided that Otis does not sell the land within two...
Real Estate 1. What are the four criteria for Highest & Best Use? A) Legally permissible,...
Real Estate 1. What are the four criteria for Highest & Best Use? A) Legally permissible, physically possible, financially feasible and maximumly productive. B) Legally permissible, physically possible, financially feasible and minimally impactful on the environment. C) Bulk Density Limit, Height Restrictive, Landmark accessible, and Usage Specified. D) Tall, Qualitative Construction, Useful to the Community, and Impactful 2. Regarding Property Setups, they may show basic property data, including all of the following, EXCEPT: (A) Gross Rent and/or Gross Revenue (B)...
On July 1, 2011, Apache Company sold a parcel of undeveloped land to a construction company for $3,000,000.
On July 1, 2011, Apache Company sold a parcel of undeveloped land to a construction company for $3,000,000. The book value of the land on Apache's books was $1,200,000. Terms of the sale required a down payment of $150,000 and 19 annual payments of $150,000 plus interest at an appropriate interest rate due on each July 1 beginning in 2012. Apache has no significant obligations to perform services after the sale.  Requirements: a. How much gross profit will Apache recognize...
1- 24,000 shares reacquired by Pina Corporation for $50 per share were exchanged for undeveloped land...
1- 24,000 shares reacquired by Pina Corporation for $50 per share were exchanged for undeveloped land that has an appraised value of $1,389,000. At the time of the exchange, the common stock was trading at $58 per share on an organized exchange. (a) Prepare the journal entry to record the acquisition of land assuming that the purchase of the stock was originally recorded using the cost method. 2-Pina Company had the following stockholders’ equity as of January 1, 2017. Common...
On June 1, 2020, Sheffield Corporation approached Silverman Corporation about buying a parcel of undeveloped land....
On June 1, 2020, Sheffield Corporation approached Silverman Corporation about buying a parcel of undeveloped land. Silverman was asking $258,000 for the land and Sheffield saw that there was some flexibility in the asking price. Sheffield did not have enough money to make a cash offer to Silverman and proposed to give, in return for the land, a $305,000, five-year promissory note that bears interest at the rate of 4%. The interest is to be paid annually to Silverman Corporation...
On June 1, 2017, ABC Corporation approached 123 Corporation about buying a parcel of undeveloped land....
On June 1, 2017, ABC Corporation approached 123 Corporation about buying a parcel of undeveloped land. 123 Corp was asking $240,000 for the land and ABC saw that there was some flexibility in the asking price. ABC did not have enough money to make a cash offer to 123 Corp and proposed to give, in return for the land, a $300,000, five-year promissory note that bears interest at the rate of 4%. The interest is to be paid annually to...
On June 1, 2017, ABC Corporation approached 123 Corporation about buying a parcel of undeveloped land....
On June 1, 2017, ABC Corporation approached 123 Corporation about buying a parcel of undeveloped land. 123 Corp was asking $240,000 for the land and ABC saw that there was some flexibility in the asking price. ABC did not have enough money to make a cash offer to 123 Corp and proposed to give, in return for the land, a $300,000, five-year promissory note that bears interest at the rate of 4%. The interest is to be paid annually to...
9. The highest and best use of property includes all of the following EXCEPT:
Real Estate9. The highest and best use of property includes all of the following EXCEPT:(A) most productive use(B) economically viable.(C) possible within the physical limits of the property.(D) conformity to the surroundings.10. What is the amount of interest paid per year on a loan of $34,050 at an interest rate of 4.38%?(A) $1,491.39 (B) $1,284.33 (C) $1,309.21 (D) $1,118.4311) In order to complete the Due diligence for a rental property in NYC, you as the buyer may ask for the...
Consider that monitoring employees' web access, and restricting access to risky sites, is a best practice...
Consider that monitoring employees' web access, and restricting access to risky sites, is a best practice for most organizations. How far should monitoring go? For instance, consider the situations in which an employee is looking at job sites to look for a new job, or looking at weapons and terrorist sites, or researching cancer treatments. Does permitting access to risky sites pose a risk to the organization? Present a stance you would take from a leadership position in the U.S....
Stock Inc. has two sites in Pittsburgh that are four miles apart. Each site consists of...
Stock Inc. has two sites in Pittsburgh that are four miles apart. Each site consists of a large factory with office space for 25 users at the front of the factory and up to 50 workstations in two work cells on each factory floor. All office users need access to an inventory database that runs on a server at the Allegheny Street location; they also need access to a billing application with data residing on a server at the Monongahela...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT