Question

Understanding Cap Rates, Sale Price, and Unleveraged Cash Flows. You wrap up the first part of your Stage 2: Discounted Cash Flow Analysis on a Mixed-Use Retail and Office Building assuming a three-year holding period below:

The asking price is $3.7 million.

You should feel free to use any Excel Spreadsheets provided in class (modified as needed) in answering this question

(a). What Project Capitalization Rate is implied by the asking price state above? Show your work.

(b). Market experts predict the capitalization rate for this type of property at the end of three years will be 9.0%. Brokers report that they typically charge 6% on a property.

What will the net sale price be if you sold the property at the end of year three? Show your work with the help of a table.

Note: After you've pasted your table below, please highlight your entire table and select 10pt Font Size from the formatting toolbar

p1.jpg

Answer 1

Part (a)

Ask Price = NOI of year 1 / Capitalization Rate

Hence, Capitalization Rate = NOI of year 1 / Ask Price = 326,000 / (3.7 x 10⁶) = 8.81%

Part (b)

Sale Price at the end of year 3 = NOI of year 4 / Capitalization rate = 384,000 / 9% = $ 4,266,667

Net Sale price = Sale price x (1 - Brokerage) = 4,266,667 x (1 - 6%) = $ 4,010,667