Extra Credit Assignment # 5 You are considering a purchase of a multi-tenant, downtown office building, of which you would hold as a 5-year investment. The Seller is asking $3,500,000 for the building. Your analysis would assume a 5-year holding period, and based on your return requirements and the associated risk of downtown office space, you require a 10% rate of return (you will use discounting cash flow method). The building offers a total rentable area of 20,000 square feet, and 100 garage-parking spaces. You are provided the following information on the property from the current owner: 1. The owner has annual contracts from tenants on the building for 18,000 square feet of the total space at $15.00 psf, gross. Additionally, 90 parking spaces are leased by annual contract for $80.00 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. Your market rental study of the downtown office market indicates that these current terms of the subject property are accurately representative of the market. 2. Your market study and knowledge of the downtown office market indicates the following annual expenses as appropriate for the subject property: a. Management Fees: 5% of EGI b. Annual Real Estate Taxes: $9,000 c. Hazard Insurance: $3,000 d. Maintenance/Repairs: $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 market study and knowledge further 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 In an effort to benefit from positive financial leverage, you are able to secure financing with the following terms: Loan Amount: $2,000,000 ($1,500,000 equity investment / downpayment) Interest Rate: 9.0%, fixed fully-amortizing Terms: 25 Year, fully-amortizing To estimate the reversion (sale value) of the subject property after the holding period, you utilize a 12% capitalization rate to be used on your year-six cash flow. Conversations you have had with commercial real estate brokers and closing attorneys indicate that closing costs for the office building in which you are analyzing would run approximately 10% of the sales price. Your past purchases and sales of comparable property reflect this same estimate in closing costs. Assignment: Based on the above information, prepare a reconstructed income and expense statement for the 5-year holding period. For both statements, calculate through Before Tax Cash Flows (no need to calculate AFTCs). Also calculate the present values of the BTCFs from operations and sale, determine net present value, and determine if this is a good investment option for you at the Sellers $3.5M asking price, assuming an equity investment of $1,500,000. If its not, what is an appropriate price and equity requirement to make it a wise investment for you?