This residential development includes 40 one-bedroom and 60 two-bedroom apartments of 750 and 925 square feet...
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This residential development includes 40 one-bedroom and 60 two-bedroom apartments of 750 and 925 square feet (Sqft), respectively. Rent will be $1.75 per Sqft/month for the first year and is expected to grow by 1% for the next year and then by an additional 0.5% every year before stabilizing at 3%. Vacancy and rent loss will be 10% in the first year of operation but will decrease by 1.5% annually before stabilizing at 5%. In addition to the rent and vacancy assumptions, the second table below shows the applicable variable and fixed operating expenses, and CAPEX allowance in the first year. The development is expected to cost $210 per rentable square foot. Apartment Building 1-bedroom apartments 2-bedroom apartments # Units Area (Sat) 40 750 60 925 Year 1 Annual Increase Rent ($/Sqft/month) $1.75 1.00%; +0.5% Vacancy and rent loss 10.00% -1.50% Minimum vacancy and rent loss after year 1 5.00% Other income - laundry (net) $7,850 5% Variable operating expense ($/Sqft/month) $0.35 3.00% Insurance Property taxes CAPEX allowance ($/Sqft/month) $55,000 2.50% $112,000 2.50% Other fixed expenses ($/Sqft/month) $0.10 2.50% $0.10 3.00% Total development cost ($/SqFt) $210.00 Holding Period (years) 10 Exit cap rate at end of Year 10 (NCF) 7.00% Sales commission 4.00% Questions 1. Develop the property's 10-year DCF after lease-up and compute net sales proceeds at the end of year 10 using the cap rate and sales commissions above. (30 points) 2. Should the developer sell the property at she is offered a cap rate of 6.125% on NCF at the beginning of year 1? If cap rates remain unchanged at 6.125%, when would be the best time for the developer to sell the property if she is willing to operate it for a few years until she recovers her investment? (10 + 10 points) (NPV calculation) 3. How much would an investor seeking an unlevered return of 8.25% (discount rate - IRR calculation) over 10 years be willing to bid for the property at the beginning of year 1? (10 points) (Using your NCF) 4. If the investor plans to fund $3.75 million of the purchase with equity and borrow the rest at an annual rate of 7%, what will be his return on equity? (8 points) Leverage Equation 5. If the investor requires a return on equity of 15%, how much debt should he use to fund the purchase if the interest rate remains at 7%? (8 points) (use goal seek) 6. If the investor wants to cap equity at 25%, what will be the maximum interest rate that will allow him to achieve a return of 15% if the unlevered return remains at 8.25%? (8 points) 7. What exit cap rate on NCF will allow the investor to achieve a 15% return on equity if he buys the property at the price found in question 3 and funds the purchase with 75% debt at 7%? (8 points) This residential development includes 40 one-bedroom and 60 two-bedroom apartments of 750 and 925 square feet (Sqft), respectively. Rent will be $1.75 per Sqft/month for the first year and is expected to grow by 1% for the next year and then by an additional 0.5% every year before stabilizing at 3%. Vacancy and rent loss will be 10% in the first year of operation but will decrease by 1.5% annually before stabilizing at 5%. In addition to the rent and vacancy assumptions, the second table below shows the applicable variable and fixed operating expenses, and CAPEX allowance in the first year. The development is expected to cost $210 per rentable square foot. Apartment Building 1-bedroom apartments 2-bedroom apartments # Units Area (Sat) 40 750 60 925 Year 1 Annual Increase Rent ($/Sqft/month) $1.75 1.00%; +0.5% Vacancy and rent loss 10.00% -1.50% Minimum vacancy and rent loss after year 1 5.00% Other income - laundry (net) $7,850 5% Variable operating expense ($/Sqft/month) $0.35 3.00% Insurance Property taxes CAPEX allowance ($/Sqft/month) $55,000 2.50% $112,000 2.50% Other fixed expenses ($/Sqft/month) $0.10 2.50% $0.10 3.00% Total development cost ($/SqFt) $210.00 Holding Period (years) 10 Exit cap rate at end of Year 10 (NCF) 7.00% Sales commission 4.00% Questions 1. Develop the property's 10-year DCF after lease-up and compute net sales proceeds at the end of year 10 using the cap rate and sales commissions above. (30 points) 2. Should the developer sell the property at she is offered a cap rate of 6.125% on NCF at the beginning of year 1? If cap rates remain unchanged at 6.125%, when would be the best time for the developer to sell the property if she is willing to operate it for a few years until she recovers her investment? (10 + 10 points) (NPV calculation) 3. How much would an investor seeking an unlevered return of 8.25% (discount rate - IRR calculation) over 10 years be willing to bid for the property at the beginning of year 1? (10 points) (Using your NCF) 4. If the investor plans to fund $3.75 million of the purchase with equity and borrow the rest at an annual rate of 7%, what will be his return on equity? (8 points) Leverage Equation 5. If the investor requires a return on equity of 15%, how much debt should he use to fund the purchase if the interest rate remains at 7%? (8 points) (use goal seek) 6. If the investor wants to cap equity at 25%, what will be the maximum interest rate that will allow him to achieve a return of 15% if the unlevered return remains at 8.25%? (8 points) 7. What exit cap rate on NCF will allow the investor to achieve a 15% return on equity if he buys the property at the price found in question 3 and funds the purchase with 75% debt at 7%? (8 points)
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Related Book For
Foundations of Financial Management
ISBN: 978-1259024979
10th Canadian edition
Authors: Stanley Block, Geoffrey Hirt, Bartley Danielsen, Doug Short, Michael Perretta
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