Question

First, BICA is considering the purchase of the Empty Arms hotel. Next year's NOI and cash flow is expected to be $2,000,000 and BIC's economic forecast of market supply and demand and vacancy levels indicated they will continue to be in balance. As a result NOI should increase by 1.5 percent each year based upon expected capital improvements, and BIC believes they should earn 9% total return on the investment.

What is the estimated value of the property?

What cap rate should be found from recently sold properties that are comparable to Empty Arms? NOTE how the cap rate reflects the growth in NOI.

Should they purchase this investment if the negotiated asking price is $27M?

Answer 1

The Value to purchase at year end (i.e. Y1) is $2,000,000. Value at Year begining is 2000,000*1/1.09 = $1,834,862.

So, estimated value of the property is $1,834,862.

Value of property after one Year = 1,834,862 + 1.5% = 1,862,385.

So, Rate will be 2000000 - 1862385 = 137615 , 137615/1862385*100 = 7.40%

No, they should not buy, because price very high.