CASE STUDY: PART ONE

BEFORE TAX CASH FLOWS

You have the opportunity $to$ invest $inan$ office building $in$ downtown Durham, $in$ which you would purchase $asa5-$year holding investment with $a10\%$ required rate $of$ return $(discount$ rate$).$ The building offers a total rentable area $of20,000$ square feet, and $100$ garage$-$parking spaces. You are provided the following information $on$ the property from the current owner:

$1.$ The owner $is$ asking $$3,500,000$ for the building.

$2.$ The owner has annual contracts from tenants $on$ the building for $18,000$ square feet $of$ the total space $at$ $$20\mathrm{.}00psf,$ gross. Additionally, $90$ parking spaces are leased $by$ annual contract for $$120\mathrm{.}00$ per month, per space. You expect this same office vacancy $to$ occur into perpetuity, and expect parking vacancy $to$ equally correlate with the office vacancy. These lease terms are found $tobein$ line with the downtown office market.

$3.$ Current annual operating expenses for the building follow:

$a.$ Management Fees: $5\%of$ EGI

$b.$ Annual Real Estate Taxes: $$9,000$

$c.$ Hazard Insurance: $$3,000$

$d.$ Maintenanc$\frac{e}{R}$epairs: $$11,000$

$e.$ Supplies $$4,000$

$f.$ Capital Replacement Allowance: $$8,000$

$g.$ Administrative Costs: $$4,500$

$h.$ Operating Costs $of$ the Garage: $$6,500$

Your mortgage lender has committed $to$ you a loan $to$ purchase the office building $(should$ you decide $to$ partake $in$ the investment$),$ which would offer the following terms:

Loan$-to-$Value: $$1,500,000Mtg$; $$2,000,000$ hard equity

Interest Rate: $6\%FRM$

Loan Duration: $25$ years, fully amortizing

Payment: $$115,974$ per annum

Prepayment Penalty: None

A study $of$ the office building market $in$ downtown Durham indicates the following trended increases $in$ incomes and expenses, which can safely $be$ assumed $in$ analysis forecasts:

$a.$ Office rents: $3\%$ per annum

$b.$ Parking rents: $3\%$ per annum

$c.$ Real Estate Taxes: $3\%$ per annum

$d.$ Other Operating Expenses: $2\%$ per annum

Assignment: Based $on$ the above information, prepare a reconstructed year$-$one income and expense statement, and a reconstructed income and expense statement forecasting returns for the $5-$year holding period $(six$ years analysis required$).$ For both statements, calculate through Before Tax Cash Flows.