Allen Benedict is thinking of buying an apartment complex that is offered for sale by the firm of Getz and Fowler. The price, $2.25 million, equals the property's market value. The following statement of income and expense is presented for Benedict's consideration:

The St. George Apartments Prior Year's Operating Results, Presented by Gertz and Fowler, Brokers

30 units, all 2-bedroom apartments, $975/month		$351,000
water & dryer rentals		10,000
gross annual income		$361,000
Less operating expenses:
Manager's salary	$10,000
Maintenance staff (1 person, part-time)	7,800
Seedy landscapers	1,300
Property taxes	13,500	32,600
Net operating income		$328,400

By checking the electric meters during an inspection tour of the property, Benedict determines the occupancy rate to be about 80%. He learns, by talking to tenants, that most have been offered inducements such as a month's free rent or special decorating allowances. A check with competing apartment houses reveals that similar apartment units rent for about $895 per month and that vacancies average about 5%. Moreover, these other apartments have pools and recreation areas that make their units worth about $20 per month more than those of the St. George, which has neither. The tax assessor states that the apartments were reassessed 12 months ago and that the current taxes are $71,400.

Benedict learns that the resident manager at St. George, in addition to a $10,000 salary, gets a free apartment for her services. He also discovers other expenses: insurance will cost $6.50 per $1,000 coverage, based on estimated replacement cost of about $1.8 million; workers' compensation ($140 per annum) must be paid to the state; utilities, incurred to light hallways and other common areas, cost about $95 per month for similar properties; supplies and miscellaneous expenses typically run about 0.25% of effective gross rent. Professional property management fees in the market area typically are about 5% of the effective gross income.

1) Develop a prior-year's reconstructed operating statement, assuming typically competent, professional management. Based on the reconstructed net operating income and the current market value, determine the capitalization rate.

Answer rating: 100% (QA)

1 The St George Apartments Reconstructed Operating Statement Potential Gross ... View the full answer