You are advising the owner of a 100k sf warehouse built in 2005 as to whether...

 

Transcribed Image Text:

You are advising the owner of a 100k sf warehouse built in 2005 as to whether they should Hold or Sell the property The property is fully occupied by a single tenant on 10yr lease from Jan 2015 Current rent is $8/sf gross is over market of $7/sf. There is no change in rental payment through the end of the current lease. (Note model from Jan. 2023) Rents fell a few years ago for similar properties in the vicinity due to local oversupply but are now growing at 2% pa and appear likely to be grow with no new supply in sight. Operating expenses (Utilities, Insurance, Repairs/Maintenance, Management) are $2/sf and expected to grow at 2% pa. Assume capex of $0.20/sf will grow at 2% pa The tenant wants to stay & has indicated they are willing to sign a new 10 yr lease in 2yrs time at the then market rent with 3.0% annual bumps with $50k of landlord capex during the first year of the new lease. Assume there is no risk to the new lease/associated terms not being signed and there are no other TI or LC costs The tenant knows about the overpayment but is willing to pay over the market for the next 2 yrs to get the $50k of TI's and the security of a new 10Y lease. The building has recently been appraised at $10.0m implying a going in cap rate of 6.0% (use as initial Discount Rate) based on 1Y NOI Calculate the IRR & NPV (assume sale at the end of Y10 based on Y11 NOI) to unlevered whole and IRR & NPV to levered equity assuming a 65% LTV IO (Interest Only) loan at 4.5% for 15yrs is in place with returns to equity required of 7%. You are advising the owner of a 100k sf warehouse built in 2005 as to whether they should Hold or Sell the property The property is fully occupied by a single tenant on 10yr lease from Jan 2015 Current rent is $8/sf gross is over market of $7/sf. There is no change in rental payment through the end of the current lease. (Note model from Jan. 2023) Rents fell a few years ago for similar properties in the vicinity due to local oversupply but are now growing at 2% pa and appear likely to be grow with no new supply in sight. Operating expenses (Utilities, Insurance, Repairs/Maintenance, Management) are $2/sf and expected to grow at 2% pa. Assume capex of $0.20/sf will grow at 2% pa The tenant wants to stay & has indicated they are willing to sign a new 10 yr lease in 2yrs time at the then market rent with 3.0% annual bumps with $50k of landlord capex during the first year of the new lease. Assume there is no risk to the new lease/associated terms not being signed and there are no other TI or LC costs The tenant knows about the overpayment but is willing to pay over the market for the next 2 yrs to get the $50k of TI's and the security of a new 10Y lease. The building has recently been appraised at $10.0m implying a going in cap rate of 6.0% (use as initial Discount Rate) based on 1Y NOI Calculate the IRR & NPV (assume sale at the end of Y10 based on Y11 NOI) to unlevered whole and IRR & NPV to levered equity assuming a 65% LTV IO (Interest Only) loan at 4.5% for 15yrs is in place with returns to equity required of 7%.

Answer rating: 100% (QA)

Answer To advise the owner on whether to Hold or Sell the property we need to calculate the Net Oper... View the full answer