Question

You are considering the purchase of a 35,000-square-foot apartment complex located in the Inland Empire. The building is about 50 years old. It has obviously depreciated, but it has been well-maintained with the owner spending approximately 7% of NOI each year in capital improvements. The building has 48 apartments. The owner has presented you with the following rental information:

• 10 studio apartments @ $1,200 each

• 30 1-bedroom apartments @ $1,450 each

• 8 2-bedroom apartments @ $1,650 each

  Your research shows that such rents are realistic in this market and also that rents have been increasing at about 3% per year. Although there are no vacancies now, you estimate a 4% allowance for uncollectible rent. You combine the owner’s representations with your knowledge of similar buildings and come up with the following estimate of first-year operating expenses (all paid by the owner, not the tenants):

• Accounting

• Insurance (fire and liability)

• Lawn/Snow

• Legal

• Miscellaneous

• Property Management

• Repairs and Maintenance

• Supplies

• Real Estate Taxes

• Trash Removal

• Electricity

• Sewer and Water

• Telephone

5,000 58,600 14,800 12,400

6,400 76,800 58,600 14,800 85,200 37,200 24,400 59,000

1,600

You believe that each of these expenses will increase at 3% per year except insurance (5%) and real estate taxes (4%). The seller’s asking price is $4.25 million.

1. Please construct a pro forma to calculate NOI for the next five years. Given your projected NOI and the average cap rate for this type of property in this region, does the asking price seem realistic? How is your NOI changing over time? Why?

Answer 1

Property land area=35000 sqft

Repairs & Maintence =7% of NOI

TOtal partments in the building=48

Studio apartment=10@$1200 each

1 bedroom apartments 30$1450

two bedroom apartments 8 @$1650

Operating expenses heads paid by owner

• Accounting

• Insurance (fire and liability)-

• Lawn/Snow

• Legal

• Miscellaneous

• Property Management

• Repairs and Maintenance

• Supplies

• Real Estate Taxes

• Trash Removal

• Electricity

• Sewer and Water

• Telephone

Now calculating the NOI for 5 years for all the data given in excel(image attached)As

As you can see the above NOI calulation tells that the NOI growth is decreasing as expenses are increasing at faster pace then growth of rent:, at some in time after 6 years the decrese in rent growth reduces but still it reduces but the effect of expenses will be there always.

An as you can see Total NOI for 5 years is $1.765 Mn dollars, and simple payback will come after 11 years, so it's not wise to go for the purchase,

I am attching formula shhet for your reference also,please let me know if you understood the whiole picture.