The property consists of 10 office suites, 4 on the first floor and 6 on the second.
Question:
The property consists of 10 office suites, 4 on the first floor and 6 on the second.
- Contract rents: 2 suites at $1,500 per month, 2 at $3,600 per month, and 6 at
$1,560 per month.
- Vacancy and collection losses: 10% per year
- Operating expenses: 40% of effective gross income each year;
- Capital expenditures: 5% of effective gross income each year;
- Expected holding period: 5 years;
- PGI increasing 3 percent per year. Selling expenses are forecasted to be 4
percent of the expected sale price.
Using the DCF approach to estimate the value of the property.
| Comparable | Sale Price | NOI1 |
| A | $500,000 | $55,000 |
| B | $420,000 | $50,400 |
| C | $475,000 | $53,400 |
Note:
| Year | 1 | 2 | 3 | 4 | 5 |
| Debt Service | 125,000 | 125,000 | 125,000 | 125,000 | 125,000 |
| Mortgage balance | 1,250,000 | ||||
| Cost of sale | 4% of the sale price |
1. Using the information provided, calculate the overall capitalization rate by direct
market extraction assuming each property is equally comparable to the subject.
2. Using the cap rate in Question 1, compute a value for the property using direct capitalization.
3. Using the cap rate in Question 1, the property will be held by a buyer for five years, compute the value of the property based on discounting unlevered cash flows.
4. Using the cap rate in Question 1, the property will be held by a buyer for five years, what is the present value of the levered cash flows?
Expert Answer:
