Real Estate Finance - Case Problem

Capitalization rate = Net operating income/ current market value

l. Develop prior reconstructed operating assuming typically competent, professional management. Based on the reconstructed net operat- ing income and the current market value, determine the capitalization rate. 2. Develop a seven-year forecast of net operating income for the St. George Apartments, incorporating the following assumptions: a. Potential gross rent and miscellaneous other income will grow at 2.5 per- cent per annum over the forecast period. b, Vacancies in the market area will remain constant over the forecast period. c. Operating expenses other than management fees and property taxes will grow at 2.5 percent per annum over the forecast period. d. Management fees as a percent of effective gross income will remain con- stant over the forecast period. e. Property taxes are expected to increase to S76,048 in the third year of the forecast and to $85,039 in the seventh year. 3. Assuming that the capitalization 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 capitalization rate might not remain constant. Why might it become larger or smaller that the currently prevailing rate? l. Develop prior reconstructed operating assuming typically competent, professional management. Based on the reconstructed net operat- ing income and the current market value, determine the capitalization rate. 2. Develop a seven-year forecast of net operating income for the St. George Apartments, incorporating the following assumptions: a. Potential gross rent and miscellaneous other income will grow at 2.5 per- cent per annum over the forecast period. b, Vacancies in the market area will remain constant over the forecast period. c. Operating expenses other than management fees and property taxes will grow at 2.5 percent per annum over the forecast period. d. Management fees as a percent of effective gross income will remain con- stant over the forecast period. e. Property taxes are expected to increase to S76,048 in the third year of the forecast and to $85,039 in the seventh year. 3. Assuming that the capitalization 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 capitalization rate might not remain constant. Why might it become larger or smaller that the currently prevailing rate