Please show work for each part of the problems in a logical manner so I know how you got the answer!

***Question 2 part a and b has been completed already.

FIR 4350 / 6350 Problem Set 2 - Abigail Chaney . 1) Dr. Dulbit Drillum, partner in the dental firm of Drillum, Fillum, and Billum, exchanged an office building (market value = $1,538,000) for an apartment building (market value = $1,450,000). Dr. Drillum owes $800,000 on a note secured by a mortgage on his office building, which has an adjusted tax basis of $1,100,000. The building he will receive in the exchange is encumbered with a mortgage that has a balance of $700,000. Dr. Drillum incurs transaction costs of $60,000. Each party agrees to take title subject to the existing mortgage on the substitute building. a. Assuming that cash will be tendered to balance the equities, how much cash is tendered and by whom? b. What is Dr. Drillum's realized gain on this exchange? c. What will be Dr. Drillum's substitute tax basis after the exchange? . 2) Arnold Benedict is thinking of buying an apartment complex that is offered for sale by the firm of Getabinder and Flee. 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 Sated Satyr Apartments Prior Year's Operating ResultsPresented by Getabinder and Flee, Brokers ----------------------------------------------------------------------------------------------------------30 Units, All Two-Bedroom Apartments, $975 per Month Washer and Dryer Rentals $351,000 10,000 Gross Annual Income $361,000 Less Operating Expenses: Manager's Salary $10,000 Maintenance Staff (one person, part time) Seedy Landscapers Property Taxes Net Operating Income 7,800 1,300 13,000 $32,600 $328,400 ----------------------------------------------------------------------------------------------------------By checking the electric meters during an inspection tour of the property, Benedict determines the occupancy rate to be about 80 percent. 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 7 percent. Moreover, these other apartments have pools and recreation areas that make their units worth about $35 per month more than those of the Sated Satyr, which has neither. The tax assessor states that the apartments were reassessed 12 months ago, and that current taxes are $76,374. Benedict learns that the resident manager at Sated Satyr, 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 of 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 . 25 percent of effective gross rent. Professional property management fees in the market area typically are about 5 percent of effective gross income. Based on this information that Benedict obtained and assuming typically competent, professional management, Benedict arrived at the following reconstructed operating statement as shown below: The Sated Satyr ApartmentsReconstructed Operating Statement ----------------------------------------------------------------------------------------------------------Potential Gross Rent (30 Units, at $860 per month) $309,600 Less: Allowance for Vacancies (7 percent) 21,672 Plus: Other Income (Laundry and vending Machines) 7,500 Effective Gross Income $295,428 Less: Operating Expenses: Management Fee (5% of effective gross income) Resident Manager (Salary Plus Free Rent) Utilities Property Insurance Workers' Compensation Insurance $14,771 20,320 1,140 11,700 140 Supplies and Miscellaneous (.0025 X $299,250) 748 Landscaping and Grounds Maintenance 3,300 Maintenance and Repairs 7,800 Property Tax 76,374 136,293 Net Operating Income (Annual) $159,135 ----------------------------------------------------------------------------------------------------------a. b. Based on the reconstructed net operating income and the current market value, determine the capitalization rate. = (Net Operating Income/Market Value of Property) x 100% = (159135/2250000) x 100% = 7.07% 2 Develop a five-year forecast of net operating income for the Sated Satyr Apartments , incorporating the following assumptions: Potential Gross Income Allowance for Vacancies Other Income Effective Gross Income Mgmt Fee Resident Manager Utilities Property Insurance Workers Comp Insourance Supplies and Miscellaneous Landscaping &Ground Maintanace Maintance and Repairs Property Tax Net Operating Income 1 309600 -21672 7500 295428 14771 20320 1140 11700 140 748 3300 7800 76374 159135 2 316566 -22160 7669 302075 15104 20777 1166 11963 143 765 3374 7976 76374 164434 3 323689 -22658 7841 308872 15444 21245 1192 12232 146 782 3450 8155 80048 166178 4 330972 -23168 8018 315821 15791 21723 1219 12508 150 800 3528 8338 80048 171718 Effective Gross Income = Potential Gross Rent + Allowances for Vacancy (negative) + Other Income Net Operating Income = Effective Gross Income Sum of All Expenses For the projection, Potential Gross Rent and other income is increased by 2.25% per year. Allowances for Vacancies is 7% of Potential Gross Rent. Management fee is 5% of Effective Gross Income 5 338419 -23689 8198 322927 16146 22211 1246 12789 153 818 3607 8526 80048 177383 All other expenses is increased by 2.25% per year except Property Tax. c. Develop a 5-year amortization schedule for Sated Satyr Apartments assuming that Benedict can obtain a $1,500,000 loan with terms of interest at 8.5 percent per annum 4 and level annual payments to amortize the loan over 20 years. There are no points or loan amortization fees anticipated. d. With information from (b) and (c) above, calculate the BTCFs for each of the 5 year holding period. e. Using the capitalization rate arrived at in (a), assuming that it will remain constant over the holding period, estimate the property's market value at the end of the 5 year holding period. Assuming that transaction costs (brokerage, legal and accounting fees, and so forth) equal 8 percent of the sales price, determine the BTER from the sale of the property. f. Using the information from (d) and (e) and the following assumptions, we next need to arrive at the ATCFs (from operation) and the ATER (from reversion). We can assume: . 1) Eighty percent of the purchase price is attributed to the buildings . 2) The taxpayer is in the 40 percent marginal income tax bracket and will incur no liability for the alternative minimum tax during the projected holding period. . 3) It is assumed that the property is put into service on January 1 st December 31 . 4) Assume the client is "active" in the property management. . 5) It is assumed that the client has an adjusted gross income of $95,000 and has no other passive income not offset by other passive losses (for each year of the anticipated holding period). st and sold on