A real estate firm is evaluating an office building using the income approach. The real estate firm has compiled the following information for the office building. All information is on an annual basis.
Gross potential rental income..................................... $350,000
Estimated vacancy and collection losses*....................... 4%
Insurance and taxes................................................. $26,000
Utilities................................................................ $18,000
Repairs and maintenance............................................ $23,000
Depreciation.......................................................... $40,000
Interest on proposed financing..................................... $18,000
*As a percentage of gross potential rental income
There have been two recent sales of office buildings in the area. The first building had a net operating income of $500,000 and was sold at $4 million. The second building had a net operating income of $225,000 and was sold at $1.6 million.
a. Compute the net operating income for the office building to be valued.
b. Use the income approach to compute the appraisal price of the office building.