Part 2 Case Problem (See the Syllabus for the Due Date)

James Baldwin is thinking of buying an apartment complex that is offered for sale by Lyn Realty, an investment brokerage firm. The listing price of $3,700,000 equals the propertys market value. The following statement of income and expense is presented for the buyer's consideration:

The Anchorage Apartments Prior Year's Operating Results, Presented by Lyn Realty

30 units, all two-bedroom apartments, $1500 per month: $540,000

Washer and dryer rentals:

Gross annual income

Less operating expense:

Manager's salary

Maintenance staff (part time) Landscaping and snow removal Property taxes

Net Operating Income

$35,000 13,000 3,000 24,000

12,000 $552,000

75,000 $477,000

By checking the electric meters during an inspection tour of the property, the buyer determines the occupancy rate to be about 80%. He learns, by talking to tenants, that most have been offered inducements such as a months' free rent or special decorating allowances. A check with competing apartment houses reveals that similar apartment units rent for about $1390 per month and that vacancies average about 6%. Moreover, these other apartments have pools and other amenities that make their units worth about $20 more than those of The Anchorage Apartments, which have neither.

The tax assessor states that the apartments were reassessed 12 months ago and that the current taxes are $90,500.

Baldwin learns that the super at the apartment complex, in addition to the $35,000 salary, gets a free apartment for her services. He also discovers other expenses: insurance will cost $7.00 per $1,000 of coverage, based on estimated replacement cost of about $2.4 million; workers' compensation ($155 per annum) must be paid to the state; utilities, incurred to light hallways and other common areas, cost about $175 per month for similar properties; supplies and miscellaneous expenses typically run about 0.30% of effective gross income. Professional property management fees in the market area typically are about 6.5% of effective gross income.

Assignments:

1. Develop a prior years' reconstructed operating statement, assuming typically competent, professional management. Based on the reconstructed NOI and current market value, determine the property's capitalization rate.

2. Develop a seven-year forecast of NOI for the The Anchorage Apartments, incorporating all the following assumptions:

a. The inflation rate is 2.xx%, where xx is the last two digits of your Hofstra ID. Potential gross rent and miscellaneous other income will grow at this inflation rate every year over the forecast period.

b. The vacancy rate in the market area will remain at a constant percentage over the forecast period.

c. Operating expenses other than management fees and property taxes will grow at the same inflation rate (see a. above) over the forecast period.

d. Management fees as a percent of effective gross income will remain constant over the forecast period.

e. Property taxes are expected to increase to $99,550 in the third year of the forecast and to $109,505 in the seventh year.

3. Assuming that the property's capitalization rate that you determined in #1, above is also the market rate, and assuming this market rate will remain constant, develop an estimate of the property's market value at the end of the projected holding period.

4. Suggest some reasons why the market capitalization rate might NOT remain constant. Why might it become larger or smaller than the currently prevailing market rate?

Part 2 Case Problem (See the Syllabus for the Due Date James Baldwin is thinking of buying an apartment complex that is offered for sale by Lyn Realty, an investment brokerage firm. The listing price of 53.700.000 equals the proponys market value. The following statement of income and expenses presented for the buyers consideration The Anchorage, Apartment. Prior Years Operating Results Presented by La Realty 30 units, all two-bedroom apartments, S1500 per month Washer and dryer rentals Gross annual income Last party Manager's salary Maintenance staff part time) Landscaping and now removal Property taxes Net Operating income 335.000 13.000 3.000 75.000 By checking the electric meters during an inspection tour of the property. the buyer termines the occupancy rate to be about 80%. He learns by taking to enants that most have been offered inducements such as a month free rent or special decorating allowances Acheck with competing apartment houses reveals that similar apartment units rent for about 51390 per month and that vacancies average about 8%. Moreover, the other apartments to pools and other amenities that make their units worth about $20 more than those of The Anchorage Apartments, which have neither The tax assessor states that the apartments were reassessed 12 months ago and that the Currences are 590.500 Baldwin leams that the super at the apartment complex in addition to the $35.000 salary.get a tree apartment for her services. He also discovers other expenses insurance will cost 57.00 per $1,000 of coverage, based on estimated replacement cost of about $2.4 millions compensation ($155 per annum) must be paid to the state is incurred to light hay and other common areas, cost about $175 per month for similar properties, supplies and miscellaneous expenses typically run about 30% of effective gross income Professional property management fons in the market are typically rembout 6.5% of effective gross income Assignments 1. Develop a prior years' reconstructed operating statement, assuming typically competent professional management Based on the reconstructed Not and current market value determine the property's capitalization rate. period 2 Develop a seven-year forecast of Nol for the The Anchorage Apartments, operating the following assumptions a The inflation rate is 2.0, where is the last two digits of your Hotstra. Potentious rent and miscellaneous other income will grow at this inflation rate every year over forecast period The vacancy rate in the market we will remain at a constant percentage over the forecast Operating expenses other than management fees and property taxes will grow the same inflation rate (see a above) over the forecast period 4. Management fees as a percent of effective grous income will remain constant over the forecast period - Property taxes are expected to increase to $99.550 in the the year of the forecast and to $109.505 in the seventh year 3. Assuming that the property's capitalization rate that you determined in t. above is the markolate and assuming this market rate will remain constant develop an estimate of property's market value at the end of the projected holding period 4. Suggest some reasons why the market capitalization rate might NOT remain constant Why might it become larger or smaller than the currently prevailing market rate? Part 2 Case Problem (See the Syllabus for the Due Date James Baldwin is thinking of buying an apartment complex that is offered for sale by Lyn Realty, an investment brokerage firm. The listing price of 53.700.000 equals the proponys market value. The following statement of income and expenses presented for the buyers consideration The Anchorage, Apartment. Prior Years Operating Results Presented by La Realty 30 units, all two-bedroom apartments, S1500 per month Washer and dryer rentals Gross annual income Last party Manager's salary Maintenance staff part time) Landscaping and now removal Property taxes Net Operating income 335.000 13.000 3.000 75.000 By checking the electric meters during an inspection tour of the property. the buyer termines the occupancy rate to be about 80%. He learns by taking to enants that most have been offered inducements such as a month free rent or special decorating allowances Acheck with competing apartment houses reveals that similar apartment units rent for about 51390 per month and that vacancies average about 8%. Moreover, the other apartments to pools and other amenities that make their units worth about $20 more than those of The Anchorage Apartments, which have neither The tax assessor states that the apartments were reassessed 12 months ago and that the Currences are 590.500 Baldwin leams that the super at the apartment complex in addition to the $35.000 salary.get a tree apartment for her services. He also discovers other expenses insurance will cost 57.00 per $1,000 of coverage, based on estimated replacement cost of about $2.4 millions compensation ($155 per annum) must be paid to the state is incurred to light hay and other common areas, cost about $175 per month for similar properties, supplies and miscellaneous expenses typically run about 30% of effective gross income Professional property management fons in the market are typically rembout 6.5% of effective gross income Assignments 1. Develop a prior years' reconstructed operating statement, assuming typically competent professional management Based on the reconstructed Not and current market value determine the property's capitalization rate. period 2 Develop a seven-year forecast of Nol for the The Anchorage Apartments, operating the following assumptions a The inflation rate is 2.0, where is the last two digits of your Hotstra. Potentious rent and miscellaneous other income will grow at this inflation rate every year over forecast period The vacancy rate in the market we will remain at a constant percentage over the forecast Operating expenses other than management fees and property taxes will grow the same inflation rate (see a above) over the forecast period 4. Management fees as a percent of effective grous income will remain constant over the forecast period - Property taxes are expected to increase to $99.550 in the the year of the forecast and to $109.505 in the seventh year 3. Assuming that the property's capitalization rate that you determined in t. above is the markolate and assuming this market rate will remain constant develop an estimate of property's market value at the end of the projected holding period 4. Suggest some reasons why the market capitalization rate might NOT remain constant Why might it become larger or smaller than the currently prevailing market rate