complete an investment analysis of the following income producing office property
You are to complete
an investment analysis of the following income producing office property which
you are considering purchasing for $17.5 million, where the building is 73% of
the value and the land 27%. The property
currently has four tenants. An accounting
firm that signed a five year lease four years ago; a doctor, who signed a five
year lease three years ago; an insurance agency that signed a five year lease
two years ago and a retail store that signed a five year lease last year. The summary information is below.
Summary lease
information
Tenant
Square Ft
Rent /sq ft
Base Rent
Remaining lease term (yrs)
CPI adjustment (%)
Accounting Firm
50,000
13.50
$675,000
1
100%
Doctor
40,000
14
560,000
2
50%
Insurance Agency
70,000
15
1,050,000
3
100%
Retail Store
120,000
16
1,920,000
4
50%
Total
280,000
4,205,000
The current market rent is $16.00 per
square foot, the leasable square feet area is 280,000, market rents are
projected to increase by 3% per year, management costs are 4% of the effective
gross income and the estimated annual increase in the consumer price index is 3%
per year. The leases all have expense
stops which include all operating expenses, but the owner of the property will
incur property management expenses that will not be chargeable to the
tenants. All amounts in excess of the
expense stop must be paid by the tenant in addition to the base rent. No expense reimbursement is projected for
the year that leases are renewed and the stops included in the lease renewals
will be based on the actual expenses in that year. The expense stops in the existing leases are
listed below:
Lease
Stop
Accounting Firm
$4.25
Doctor
4.50
Insurance Agency
4.75
Retail Store
5.00
The current expenses and the estimated annual
increases for the expenses are listed below:
First-Year Reimbursable
Expenses and Projected Increases
Dollars
Dollars/sq. ft
Projected increases
Property tax
$672,000
2.31
Increase 2%/yr
Insurance
84,400
0.30
Increase 3%/yr
Utilities
350,000
1.25
Increase 2.5%/yr
Janitorial
280,000
1.00
Increase 2.5%/yr.
Maintenance
112,000
0.4
Increase 3.5%/yr.
Total
1,498,400
5.35
We assume no vacancy until the first
leaseis renewed at which time the projects vacancy will be 3% of the potential
rent. The leases will renew at the
current market rent for that year. The holding period will be 6 years and the
estimated sales price will be based on the 7th year NOI and a
terminal cap rate of 12. Assume the
building will be depreciated over 39 yearsstraight line and your tax rate is 28%.
Assume capital gains and recaptured
depreciation are all taxed at the same 28% and you have enough passive income
to take any passive losses.
Assume you can borrow 75% of the price
using a fully amortizing fixed rate mortgage at a5% rate of interest for 25
years.
Using a spread sheet develop the cash flow
before and after tax with no debt and with debt. A template is provided that matches the
example in the book. Remember the spread sheet should have all the inputs at
the top and the spread sheet itself should include all calculations. This way if any of the inputs change such as
the interest rate or price of the property all the calculations would change.
The only thing that will NOT change is the holding period.
What are the BTIRRs with debt and without
debt?
What is the first year debt coverage rate?
What’s the first year or going in capitalization
rate?
What’s the NPV on the BTCF without debt using
a 13% discount rate?
Should you accept the project based on a
required return of 13%?
What’s the ATIRR with debt and without
debt?
The format of the
title for anything submitted electronically is: Lastname. firstname. Course number.sec.nameassignment. For example,
if I were emailing me the first assignment the title of the file would be:
Donovan.Shannon.486.001.assignment3.docx
