Question

Assume a property has 200,000 SF. The existing rent is $70 SF/Yr. The market level rent is $77 SF/Yr. Operating expenses are $40 SF/Yr. Assume the existing lease has a month to month term, and a 3.5% cap rate for this property. What is the delta between the value based on the existing rent versus the value based on the market level?    

		$40 million
		$20 million
		$38 million
		None of the above

Answer 1

Answer: $ 40 million

Calculation:

Value of property = Net Operating Income /Cap Rate

Net operating income = Revenue from rent – operating cost

Value based on existing rate = 200,000 * ($ 70 – $ 40 ) / 3.5% = $ 171,428,571.43

Value Based on market level rent = 200,000 *( $ 77 - $ 40)/3.5% = $ 211,428,571.43

Delta between the value = value based on market rate – Value based on existing rate

                                             = $ 211,428,571.43 - $ $ 171,428,571.43

                                             = $ 40,000,000

Hence, delta between the values is $ 40 million