Question

You have been asked to provide an estimate for the net operating income (NOI) of the Shared Office Space Building. The building consists of 16 suites evenly distributed in 4 floors (4 suites per floor). Today, the offices in the first-floor lease for $2,100 per month, while the rest of the offices lease for $1,600 per month. The market study reveals that the average vacancy in the market is 8% per year; the expected operating expenses are 41% of the effective gross income(EGI); and, the expected capital expenditure are 5% of the EGI each year. The annual market rent increases 3% per year. What is the estimated building’s Potential Gross Income, EGI and NOI for next year? If market caprate for this building is 7%, what is the building's value today?

Answer 1

Solution			Fig in ($)
	Calcuation for Current Year
	There is 16 Suits out of which 4 suits ( i.e first floor rent is high then other rented office)
	Rent of First floor Office	=2100*4*12
			100800
	Rent for rest of floor	=1600*12*12
			230400
		Total Rent income/ Potential Gross income	331200
	Less	Effective Expense	135792
		=331200*41%
		Effective Gross Income	195408
		NOI = Rental Income + Other Income – Vacancy Losses – Total Operating Expenses
		Since there is no Vacany loss
		Net operating income	195408
	Calculation of value of Building
		Cap rate is 7%
	As we Know Cap rate	CAP RATE '=Net opearting income /Value
		=195408/7%
		value =2791542.85714286
	Calculation for next year
	There is 16 Suits out of which 4 suits ( i.e first floor rent is high then other rented office)
	But this year Rent is Increased by 3%			Revised Rent
	For First floor Office rent is	=2100*3%	63	2163
	For Rest of the floor Office rent is	=1600*3%	48	1648
	Now	Calculation of NOI
	Rent of First floor Office	=2163*4*12
			103824
	Rent for rest of floor	=1648*12*12
			237312
		Total Rent income/ Potential Gross income	341136
	Less	Effective Expense	139865.8
		=341136*41%
		Effective Gross Income	201270.2
	Less	Vacancy Loss
		=341136*8%	27290.88
		NOI	173979.4
	Calculation of value of Building
		Cap rate is 7%
	As we Know Cap rate	CAP RATE '=Net opearting income /Value
		=173979.4/7%
		value =2485420
	Note :- cap Expenditure is not allowed while calcuation of NOI so it is not Considered